DAVAO CITY: With the Philippines “nearing its demographic sweet spot,” the government needs to sustain its economic overdrive to create enough jobs for the ever-increasing ranks of young Filipinos joining the work force, Finance Secretary Carlos Dominguez 3rd said.
Under the Duterte administration, the government is spending big not only on infrastructure and social protection for the poorest families, but also on education, health and skills training in order to prime the country’s youth for the challenges of a globally competitive job environment, Dominguez said.
Speaking at The Manila Times 5th Business Forum held at the Marco Polo Hotel, Dominguez stressed the urgency for government to improve the job-related skills of young Filipinos because our ever-expanding labor force is one comparative advantage that can make the Philippines catch up with its more vibrant Southeast Asian neighbors and best compete with them for foreign investments.
“Investment-led growth creates meaningful employment. It draws our younger workers into jobs that require globally competitive skills. It allows us to optimize assets that are scarce such as land. It draws us to our advantages such as a young labor force capable of learning and doing new things,” Dominguez said.
“Our population is nearing a demographic ‘sweet spot’ where millions of young Filipinos will be joining the workforce. We need to train them in the high skills required for a 21st century economy,” he said.
To fulfill President Duterte’s pledge of sustaining high growth and making it truly inclusive, especially for those at society’s fringes, the government must spearhead efforts to make growth investment-led rather than consumption-led, the Cabinet official said.
The Duterte administration’s unmatched spending on these three areas–infrastructure, human capital development and social protection–would help realize its inclusive-growth agenda and reduce the rate of poverty incidence from the current 22 percent to 14 percent by 2022.
“To produce investment-led growth, however, we need to rapidly upgrade our infrastructure. After many years, of spending less than our neighbors on quality infra, we now face a huge backlog that this administration aspires to close in the medium-term,” Dominguez said.
But to achieve that, “the government must be armed with ample revenues to do a groundbreaking public investments program. This is where the Finance Department comes in and where its role becomes absolutely critical,” he added.
Dominguez said that to collect enough revenues needed for this unprecedented public investments program, the government must institute reforms not only in tax administration but in tax policy as well, which is why it is vigorously pushing the swift approval of a Comprehensive Tax Reform Program (CTRP) in the Congress.
The first package under the CTRP fulfills President Duterte’s campaign pledge to cut personal income tax rates, Dominguez said. “We are going to do that not only because it was a campaign promise but, more important, because it makes good economic sense.”
The succeeding package under the CTRP aims to lower corporate income tax rates, he said.
“We cannot hope to attract investment flows into our economy if our tax rates are substantially higher than in neighboring economies. We seek to bring income taxes from the top rate of 32 percent to a more reasonable 25 percent,” he said.
But the reductions in income taxes should also be accompanied by a corresponding set of revenue compensating measures, which, under the new bill now pending in the Congress, seeks to adjust the excise taxes on fuel and automobiles and expand the Value Added Tax (VAT) base, while retaining the exemptions enjoyed by seniors and persons with disabilities, among other measures, Dominguez said.
“Apart from removing a disincentive to investment, lower income tax rates reduce the incentive to evade taxation. Combined with a program to overhaul our tax system to make it simpler for the taxpayers to comply, we hope to broaden the tax base. It is difficult to imagine that an economy as complex and as dynamic as ours has a large taxpayer base of less than 3,000 individuals and companies,” Dominguez said.
He said “those resisting the tax reform package argue that the government should just focus on implementing reforms in tax administration to improve the collection efficiency of its revenue agencies. But the reforms put in place in the Bureaus of Internal Revenue (BIR) and of Customs (BOC) are already yielding over 97 percent of their respective targeted collections.”
Even if the BIR and BOC accomplish 100 percent of their targets, these would still not be enough to fund the government’s public investments program, which for infrastructure alone would require, according to Budget Department estimates, between P8 trillion and P9 trillion over the medium-term, he said.
Moreover, Dominguez noted that the Philippines’ tax effort continues to remain one of the lowest in the region.
“This reflects in the low investment rate that is due to small public investments as much as it is due to chronically low savings rates. While we are seeking to grow our capital market, broaden the reach of our banking system to reach the 86 percent of Filipinos who remain unbanked, public investments must be raised.
The infra gap raises costs all around and prevents our economy from being fully competitive. That further compounds the poor investment rate,” he said.
Dominguez pointed out, though, that as one of Asia’s fastest-growing economies, the Philippines is poised to bring in more private investments, especially with an inflation rate that has remained benign and an investment-grade credit rating that has kept the cost of money low.
“The only uncertainty on the horizon is the direction the Trump administration will take the US economy on. Many fear a sharp rise in protectionism should Trump translate his rhetoric to actual trade policies,” Dominguez noted. “The rise in protectionism should sharpen the chances of populist parties in winning key European elections happening this year.”
Protectionist policies, Dominguez pointed out, “will dampen trade and probably have an adverse impact on our
BPO (business process outsourcing) sector, our economy’s second highest dollar-earner.
But Dominguez added that fortunately for our country, the initial dividend from President Duterte’s foreign policy rebalancing, particularly the almost P1 trillion in loans and grants from China and Japan alone, will enable the economy to weather whatever market uncertainties arise from the protectionist policies of the Trump presidency.
“The President is due to visit Russia this year and that should further encourage stronger trade and investment ties and open new markets. All these gains should more than offset whatever protectionist policies the Trump administration might decide to institute,” Dominguez said.