CREDIT watchdog Fitch Ratings sees the recently approved Tax Reform for Acceleration and Inclusion (Train) bill at the House of Representatives as positive for the Duterte administration’s fiscal priorities.
Low government revenue is a key weakness in Philippine fiscal profile with a general government revenue equivalent to just 22 percent of gross domestic product (GDP) as of end-2016, compared with a median 30 percent for peer countries with a similar ‘BBB’ investment grade rating, according to Fitch.
“The potential passage of proposed tax reforms was listed as a positive rating sensitivity when we last affirmed the Philippines’ BBB-/Positive rating in March,” Fitch said.
While some of the revenue-enhancing measures contained in the bill were watered down to secure legislative passage, an estimated 0.8 percent of GDP will still accrue to revenue in 2018—not far from the original estimates of around 1 percent of GDP.
Key provisions of the bill include lower personal income tax rates, which should be more than offset by an increase in excise taxes on petroleum products and automobiles, an expansion of the value-added tax base, and the introduction of excise tax on sugar-sweetened beverages.
The approval of the bill demonstrates the administration’s commitment to broader tax reforms that have the potential to improve fiscal stability and support an ambitious public investment program.
“The speed with which this first bill passed through the House—and President Duterte’s intervention to give it a push over the line—suggests that tax reform is a priority for government,” Fitch noted.
Tax reform is crucial to the rest of the administration’s 10-point socioeconomic agenda that includes plans to ramp up investment in health, education, infrastructure and social protection, it said.
With infrastructure spending targeted to rise by 2 percentage points to 7.4 percent of GDP by 2022, it will be difficult to fulfill these plans—and also keep the budget deficit within 3 percent of GDP—without a medium-term rise in the revenue-to-GDP ratio, according to Fitch.
The government aims to spend P847 billion on infrastructure development this year, covering projects in all regions, including small-, medium- and large-scale ventures. In the six years to 2022, the government intends to fund its Build, Build, Build program with P8.4 trillion.
The Train bill passed by the House of Representatives may generate potential net revenue of P1.16 trillion in 2018 to 2022, according to estimates by the Department of Finance.
Global financial services Credit Suisse earlier noted the likelihood of a credit rating upgrade for the Philippines from Fitch Ratings if the proposed Train Act makes it through the Senate in its present form.
Moody’s Investors Service had said the passage of the first package of the tax reform program was credit-positive is it would address the weak revenue generation.