Tax reform is crucial to PH economic growth – DOF


IT is crucial for the Congress to pass all measures in the proposed Tax Reform for Acceleration and Inclusion Act to make the Philippines more investor-friendly and avoid a sovereign rating downgrade, the Department of Finance (DOF) said.

In a statement on Thursday, Finance Secretary Carlos Dominguez 3rd said the Duterte administration should spend over P2 trillion in infrastructure and human capital development in its six years of office to prepare well and build a solid fiscal buffer to keep the economy strong amid growing uncertainty in global prospects.

Estimates by the Asian Development Bank show that the country needs to invest at least P610 billion annually in infrastructure, which is a feasible target if the government can provide investors with a business-friendly environment.

This means that from 2016 to 2022, the Philippines should spend a total of P1.073 trillion on urban and rural infrastructure, P718 billion on education, P139 billion on health and P268 billion on social protection, welfare and employment.

“We must be fiscally prepared to invest more heavily in our human capital and in much needed infrastructure,” Dominguez said.

The amount should provide a much needed boost to the economy, including the jobs creation, an analyst said.

“As they say, the devil is in the details – insofar as the plan is as stated, it is and it will be good,” said Justino Calaycay Jr., marketing and research head of A&A Securities.

“The important thing is the dispersion of these infrastructure projects and aligning human capital development with the over-all economic blueprint,” he added.

Tax reform

The priorities, Dominguez said, warrant a comprehensive tax reform program that will allow the government to improve 44,000 kilometers of national and local roads and build 6,700 health centers and hire nearly 10,000 doctors, nurses and midwives.

Part of the vision is to attain 100 percent health insurance coverage, along with building 80,000 more classrooms and hiring 157,000 teachers over the next five years.

The first package of the comprehensive tax reform program submitted to the Congress in September aims to generate a net gain of P174 billion, equivalent to 1 percent of the gross domestic product in 2018.

The package aims to make the tax system more progressive by lowering the personal income tax (PIT) rates on a par with region. It seeks to expand the value-added tax coverage by limiting exemptions to raw food, education and health care, while increasing excise taxes on oil and automobiles.

Risk to credit ratings

If the Congress chooses to pass only the popular component of reducing the PIT rates without the corresponding revenue-enhancing measures, the DOF secretary noted there would be dire consequences.

“Without improving on our revenues, many of our children will continue walking hours to get to school and our classrooms will continue to be packed beyond capacity. The poorest Filipinos will continue to have little or no access to health services. Our farmers will be unable to raise their productivity and thus remain poor,” he said.

Along with such bleak scenario, the Philippines will like incur a credit rating downgrade and government forced to rely on borrowings to manage the deficit, Dominguez said.

This means P30 billion in additional debt costs, and consumers would have to absorb the consequences by coping with a permanent P2-depreciation of the peso against the dollar, along with a 2-percent increase in interest rates, and a short supply of public funds for classrooms, health centers and rural roads.

At present, the Philippines holds investment grade credit ratings from global credit watchdogs Fitch Ratings, Moody’s Investors Service and Standard & Poor’s Global Ratings.

“If we fail to pass the revenue enhancement measures, we will lose the growth momentum that took us years to build. We will face the specter of large budget deficits and move closer to a debt crisis,” Dominguez claimed.

Without a tax reform package, growth would not only be slower and exclusive but the rich would continue to corner the wealth of the nation with the poor out of the national economic mainstream, he also alleged.

“In a word, the vision of achieving prosperous country status with zero poverty by 2040 will not be achieved,” he said.

“This is the time to break the vicious cycles of the past and carve a new path to a prosperous future for all our people,” Dominguez said.


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