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DOF: Incoming government must raise taxes

Outgoing Finance Secretary Carlos Dominguez III wants the incoming Marcos administration to raise taxes, defer personal income tax reductions and expand the value-added tax coverage to pay for the debts incurred under President Rodrigo Duterte’s watch.

Dominguez said the new measures are “critical” as the presumptive president Ferdinand Marcos Jr. prepares to take over a country whose sovereign debt hit a record P12.68 trillion in March.

The new measures include a carbon tax, taxes on motorcycles, single-use plastics, and cryptocurrencies, aiming to reverse in 10 years the additional P3.2 trillion in debt incurred by the Duterte administration to deal with the COVID-19 pandemic, Dominguez said.

“Pursuing the fiscal consolidation and resource mobilization program as proposed will help us continue to spend on socioeconomic programs, maintain our credit ratings, and grow out of our debt,” he said in a statement.

Without these measures, the government may need to cut spending on socio-economic programs or to finance debts by borrowing more.

Dominguez warned this could lead to “cascading effects on interest payments that could also ultimately force budget cuts and stifle economic growth.”

“Not pursuing a fiscal consolidation and resource mobilization program may likely lead to serious and spiraling consequences to our financial and economic health,” he added.

“We are optimistic that the incoming administration and our next set of legislators will recognize the importance and urgency of these measures and implement them at the soonest time possible,” Dominguez said.

Dominguez said the plan “is doable and is designed to secure the gains that we have made under the Duterte administration and to ensure that the government can continue to make economic investments and pursue programs for recovery, maintain its high credit ratings, grow out of its debt faster, and cushion the Philippine economy from future external shocks.”

Dominguez said the 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 health care for economic growth and recovery.

“The next administration is coming in with a strong mandate. We are confident that the soon-to-be President will put it to good use by pursuing critical reforms such as this much-needed program,” Dominguez said.

OIC Undersecretary Valery Joy Brion, who heads the DOF Domestic Finance Group, said that by the end of 2022, the government will have borrowed P3.2 trillion more than initially planned in December 2019, before the outbreak of the COVID-19 pandemic.

“Our debt-to-GDP (gross domestic product) level stands at 63.5 percent, slightly higher than the internationally prescribed best practice of 60 percent of GDP. As early as next year, the Philippine government will begin principal payments for loans incurred over the past two years,” she said.

Brion said the country’s high debt level arising from these expenditures has put a strain on the country’s finances, prompting the need for the implementation of a fiscal consolidation and resource mobilization plan starting next year.

Brion said that the new administration has three options. These are borrowing more, cutting spending, or raising revenues and improving tax administration to maintain productive spending in infrastructure, health, education, and other investments for the future.

Borrowing more cannot be a viable option as this would further push up the country’s debt level and risk downgrading its investment-grade credit ratings, she said. Interest payments would also balloon, reducing the resources available for productive spending.

Cutting spending, except for wasteful expenses, is also not a recourse because it will imperil the country’s economic recovery and lead to reduced budgets on education, health, infrastructure, and other socioeconomic priorities.

Both widespread budget cuts and financing debts with borrowing would lead to slower economic growth, spiraling debt levels, and eventually, fiscal and economic crises.

Thus, Brion said the best way is “to raise more revenues and improve tax administration and for the government to channel resources from unnecessary and non-priority expenses to productive spending.”

Bureau of the Treasury data show that to prevent having to use borrowings to pay the country’s P3.2 trillion in incremental debt, the government needs to raise at least P249 billion every year in incremental revenues for the next 10 years.

The measures proposed by the DOF are estimated to yield an average of roughly P284 billion every year for the national government.

 

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