At a press briefing at the Department of Finance (DoF) on May 25, Finance Secretary Carlos Dominguez III said that the implementation of a fiscal consolidation and resource mobilization plan is imperative to “ensure that the government can continue to effectively manage its increased budget deficit while spending on investments in infrastructure, education, and healthcare for economic growth and recovery.”
Fiscal consolidation is a purposeful and directed reduction of the fiscal deficit, which reached 8.6% in 2021 from the pre-pandemic level of 2% to 3%. “Our borrowings were necessary. At a time when government revenues were low, they allowed us to purchase much-needed vaccines and boosters, increase our healthcare capacity, provide ayuda (help) and other forms of support to vulnerable sectors, and keep the economy afloat during the most critical periods of the pandemic. We borrowed at least P3.2 trillion more than we expected due to the pandemic. In December 2019, prior to the pandemic, we expected our debt by end-2022 to reach only P9.9 trillion. As per the latest projection by the Development Budget Coordination Committee (DBCC), we now expect our debt to reach P13.1 trillion. The first principal payment will fall due as early as 2023,” the DoF said at the briefing.
According to the Bureau of the Treasury, to prevent having to use borrowings to pay P3.2 trillion in incremental debt, we need to raise at least P249 billion every year in incremental revenues for the next 10 years. Otherwise, using borrowings to service past debts will lead to increasing interest costs, which will eat into fiscal space for socioeconomic programs. For the first quarter of 2022, our debt-to-GDP stood at 63.5%, higher than the internationally prescribed best practice of 60% of GDP.
“The second option to cut (government) spending by P249-billion debt service per year is equivalent to forgoing the following: more than 140,000 public school classrooms; or more than 8,000 kilometers of paved roads; or free irrigation for more than 600,000 hectares of land; or almost 180,000 kilometers of temporary bridge upgrades; or almost 14,000 rural health units; or more than 110,000 barangay health stations; or 302 provincial hospitals,” the DoF estimates.
What to do now? The DoF under Dominguez offers this detailed fiscal plan to the economic managers in the term of the proclaimed President Ferdinand R. Marcos, Jr., who is to be formally inaugurated on June 30 for a term of six years (until 2028):
PACKAGE 1 (TO BE IMPLEMENTED IN 2023):1. The second tranche reduction in Personal Income Tax scheduled in 2023 under the Tax Reform for Acceleration and Inclusion (TRAIN) Law is to be deferred to 2026. This will save around P97.7 billion per year for three years until 2026 when fiscal conditions are hopefully more permissive to the reduction.
2. Limit VAT zero-rating to direct exports, and repeal VAT exemptions except for education, agricultural products, health, financial sector, and raw food. This measure is estimated to generate an average of P142.5 billion in additional revenues every year.
Consider repealing the immediate expending of input VAT on capital goods under TRAIN Law and reimposing the 60-month limit to credit input VAT on capital goods.
3. Impose VAT on digital service providers to cover online advertisement services, digital services, and supply of other electronic and online services, with an average annual revenue impact of P13.2 billion. (There is a pending House bill on this.)
4. Reform the Motor Vehicle Users’ Charge (MVUC) to impose a single and unitary rate based on the gross vehicle weight of all motor vehicles. This measure alone is estimated to generate an average of P38.3 billion every year.
Repeal the excise tax exemption of pickups and impose an excise tax on motorcycles. The repeal of the excise tax exemption on pickups will result in P19.2 billion on average in annual incremental revenues.
5. Establish a single and rationalized fiscal regime applicable to all mining agreements. Consider imposing an export tax on mineral ore to encourage domestic value-added on mineral products. All this is estimated to generate P11.4 billion on average per year.
6. Impose more taxes and charges on gaming: first, a mandatory admissions charge at a flat rate of P3,500 will be imposed in casinos. Second is on Philippine Amusement and Gaming Corp. (Pagcor)-licensed electronic betting activities such as e-bingo and electronic sports betting, which do not have a separate tax yet. Impose a 5% tax on gross gaming receipts, or the gross bets less payouts. Together, the preliminary revenue impact of the proposed taxes and charges on gaming is estimated to be around P13.1 billion on average every year.
7. Impose an excise tax on single-use plastic bags, like P20 per kilogram — estimated to generate around P1 billion incremental tax revenues every year. (This measure has been approved by the House of Representatives and is at the Senate Committee on Ways and Means.)
8. Impose excise taxes on luxury goods, expanding the tax on non-essential goods to include all watches, cellphones, vintage cars, and semi-essential goods, among others. (This measure has an existing bill.)
The outgoing DoF also has two packages of the Comprehensive Tax Reform Program pending in the Senate.
9. The first is the Passive Income and Financial Intermediary Taxation Act, which aims to simplify and harmonize the taxation of passive income, financial services, and transactions.
10. The second is the Real Property Valuation and Assessment Reform Act, which aims to adopt internationally accepted valuation standards and professionalize real property valuation.
Overall, Package 1 will generate an average of P247.8 billion per year for measures with ready estimates.
PACKAGE 2 HAS AN ESTIMATED ANNUAL REVENUE IMPACT OF AROUND P126.8 BILLION.1. Reform health taxes, particularly for alcopops, cigarettes, e-cigarettes, sweetened beverages, and non-nutritious food. These health-related tax measures have an average annual revenue impact of P91.4 billion.
2. Increase petroleum excise taxes by P1 per unit of taxation (liter, kilogram, or metric ton) for a minimum of three years and index the rates thereafter.
3. Increase and index excise tax rates on both domestic and imported coal. This is estimated to generate an average of P35.4 billion in additional revenues per year.
4. Study the tax treatment of cryptocurrency transactions and the prevention of its use for tax evasion.
5. Firm up proposed administrative issuance on transfer pricing, or the shifting of profits and expenses as a scheme to reduce tax obligations, to strengthen the capacity of the Bureau of Internal Revenue (BIR) to perform transfer pricing audits.
PACKAGE 3 IS THE PROPOSED MEASURE ON CARBON TAXATION, DEFERRED TO 2025; THIS MEASURE IS CURRENTLY UNDERGOING FURTHER STUDY.All in all, the average annual revenue impact for all proposals with ready estimates stands at around P349.3 billion, before the earmarking provisions for certain revenue segments under the law. These deductions total an average of P41.6 billion per year. The balance then available for the National Government amounts to an average of about P307.7 billion additional collections per year, to comfortably pay for above P249-billion debt service estimated by the DBCC. “This new series of measures aims to reverse in a span of 10 years the additional P3.2-trillion debt incurred by the Philippine government due to the COVID-19 pandemic,” the DoF says.
The DoF adds: “We propose pursuing these packages in addition to the following reforms:
“First, there must be further improvements to tax administration and enforcement. These improvements include 1.) capturing transactions that migrated to the digital space, 2.) implementing the tax administration reforms in the enacted packages of the Comprehensive Tax Reform Program, and 3.) sustaining the digitalization efforts of the BIR and BoC (Bureau of Customs).
“Second, we recommend government reengineering or rightsizing to control personnel services spending, which has reached almost 30% of National Government expenditures; and,
“Third, we recommend pursuing the Military and Uniformed Personnel (MUP) pension reform to ensure that the pension system is sustainably funded, partly through mandatory contributions. We also emphasize that despite the proposed reform, the MUP pension system will remain the most generous pension system in the public sector.
“Lastly, we recommend pursuing the Capital Market Development Act to build a sustainable corporate pension system that will ensure our workers can depend on adequate benefits for a comfortable and dignified retirement, and not have to rely solely on the strained resources of the Social Security System.”
Finally, a grave warning from the outgoing DoF:
“If we do not pursue fiscal consolidation and resource mobilization, there are serious and spiraling consequences to our fiscal and economic health. If no reforms are introduced or the reforms are diluted, there will be two scenarios ultimately leading to the same outcome: a fiscal and economic crisis, as a result of higher debt, lower socioeconomic spending, and fewer investments.”
Mr. Dominguez and his team of economic managers must be thanked and commended for their candid and unabashed acknowledgement of our fearsome fiscal deficit attributed to the more than two years of the COVID pandemic. The incoming economic managers under the newly elected chief executive should benefit much from the very detailed fiscal consolidation and resource allocation plan with its even more detailed expected results of incremental revenues, if only to set some impersonal, detached benchmarks for self-evaluation of their efforts in the still-unstable local and world political, economic and health situation.
But for an ordinary reader, the tangled knot of detailed prescriptions and expectations in a critical plan that must be followed — “or else” — can only bring bewildering helplessness. Or perhaps stoic cynicism. How can we count on “at least P249 billion every year in incremental revenues for the next 10 years” to cover the incremental COVID debt and contribute to the rising total debt service on the present level of debt “which may still go up to P13.1 trillion by year-end 2022,” according to the DBCC?
Thank you for saying it as it really is, Secretary Dominguez.
Amelia H. C. Ylagan is a doctor of Business Administration from the University of the Philippines.