‘Political instability may hamper tax reform’ – BMI

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The Fitch Group’s research arm said the Philippine government’s tax reform plan should help drive growth in the real economy to beyond 6 percent annually in the years ahead.

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However, BMI Research warned that heightened political instability in the country poses downside risk to this view.

Earlier, BMI downgraded the short-term political risk index score for the Philippines to 63.5 out of 100, from 64.6, to reflect the heightened risk of political instability in the country.

Revenue boost

In a report released on Thursday, BMI Research said the Comprehensive Tax Reform Package (CTRP) proposed by the Department of Finance (DoF) will support its revenue targets and allow for bigger infrastructure spending without putting the country’s economic stability at risk.

“We believe that the proposed Comprehensive Tax Reform Package introduced by the Philippine Department of Finance in February will be positive for revenue growth and should enable the government to push through its expansionary fiscal plans without putting too much downside pressure on macroeconomic stability,” it said.

The CTRP will also help the administration progress toward its fiscal objectives set in the Philippine development Plan (PDP) for 2017-2022, it added.

BMI maintained its forecast for the Philippines’ fiscal deficit as a share of GDP to stand at 2.7 percent in 2017, versus 2.4 percent in 2016, and for the shortfall to be capped below the statutory limit of 3 percent over the coming years.

“We also expect the higher targeted developmental spending outlined in the PDP 2017-2022 to support real GDP growth over the next five years, which we forecast to average 6.1 percent,” it said.

The first of a series of four tax reform packages aims to lower personal income tax rates for most Filipinos, boost revenue by increasing excise rates on automobiles and fuel, and expand the value-added tax VAT base, but maintains exemptions for seniors and persons with disabilities.

Given this, BMI said the income tax reform measures would not only simplify the income tax system for most taxpayers, thus reducing the cost of compliance, but also help shift the tax burden from the poor to the rich to support the government’s move toward more inclusive growth.

The reform also proposes three measures aimed at offsetting the loss of revenue from personal income taxes:
First, the number of goods and services exempted from VAT will be limited to essentials, such as raw food, health and education, and the 59 other items previously proposed will also be reduced.

Second, oil excise rates will be increased progressively from the first half of 2017 onward until 2020, after which it will be subjected to an annual indexation of 4 percent, except if Dubai Crude exceeds $100 per barrel.
“The oil excise is a highly progressive tax as it is estimated by the government that the top 10 percent wealthiest households consume 51 percent of fuel in the country,” BMI said in its research note.

Lastly, automobile excise rates will also be doubled from the existing tiered structure, and the additional revenue raised through this segment will be used to improve traffic management solutions and fund infrastructure development, it added.

Fiscal sustainability

BMI also pointed out that the tax reform package also corresponds with the economic development objectives laid out in the PDP 2017-2022, which was approved by the National Economic and Development Authority (NEDA) Board in late February.

“We believe that the government’s medium-term plan to boost infrastructure and developmental spending, combined with offsetting measures to improve revenue and reduce current expenditure, bodes well for fiscal sustainability and real GDP growth,” it said.

“Furthermore, we highlight that improvements that had been made to the public procurement process under the former Aquino administration will continue to enhance the efficiency of government capital spending and limit wastage of public resources,” it added.

Some of the key targets that were laid out in the medium-term development plan include increasing public infrastructure spending from 5.1 percent of GDP in 2016, to 7.4 percent by 2022, and raising developmental spending as a share of overall expenditure to 50.1 percent, from the average level of 33 percent between 2010-2015.

“According to the report, this will be paired with a more prudent expenditure, sustainable debt liability management strategies, and government bureaucracy rightsizing to enhance efficiency,” BMI said.

‘Political infighting’

However, BMI noted that risks to the Philippines’ fiscal outlook are weighted to the downside as the passage of the tax reform bill could face further delays due to political infighting.

“Given recent episodes surrounding the arrest of Senator Leila De Lima of the Liberal Party (LP) and the dismissal of four other LP and affiliated senators from their committee chairmanships, legislators from the Senate minority could hold the bill hostage in order to force the government into a consensus,” it warned.

Early this week, BMI said it had downgraded the short-term political risk index score for the Philippines to 63.5 from 64.6 to reflect the heightened risk of political instability in the country.

Factors it considered were: growing divisions within the government, disagreement between the government and the Catholic Church, as well as President Rodrigo Duterte’s non-adherence to established intergovernmental commitments.

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