In a paper titled "The Philippines: Still No Magic", investment giant Morgan Stanley said structural fiscal woes and restructuring inertia have caused the country’s dismal performance relative to other east Asian countries with comparable economies such as Malaysia, Thailand and Indonesia. Morgan Stanley is one of the biggest fund managers with over $451-billion worth of assets under its management.
According to Morgan Stanley’s East Asia Economist Daniel Lian, poor tax collection has been central to the lack of economic development and restructuring inertia for the country for many decades.
Lian stated that before any meaningful economic reform could take place, the Philippines has to overhaul its tax collection system.
Lian’s description noted the whimsical nature of the tax collection effort, becoming more lax when the regime lost restructuring momentum and rebounding when the political regimes pursued more aggressive reforms. According to Lian, the country is capable of generating tax revenue to the tune of about 25 percent of gross national product (GNP) based on its 33-percent corporate tax rate and 33-percent top-tier income tax rates as well as its system of indirect taxation. However, tax collection effort ratio never exceeded 20 percent of GNP. The country is, in fact, running the risk of plummeting below 10 percent for the first time since the Marcos regime.
Lian’s observations were confirmed by the Department of Finance’s own estimates which indicated that during the Aquino administration, tax collection ratio was at 14.6 percent of gross domestic product, improving further to 17 percent of GDP in the Ramos administration. When the Estrada administration came to power, however, the ratio dropped to 15.6 percent at the beginning of his term and further down to 13.9 percent by the time he was ousted.
The Arroyo administration, on the other hand, sent the tax collection ratio down to 13.5 percent when it took over and this year, the ratio is down to 10.8 percent from January to June. Lian said major corporates and landlords have used the tax laws to their advantage and minimize their tax exposure. Because the judiciary is overburdened, the chances of prosecuting tax evaders are slim. "The Arroyo administration is no doubt pro-restructuring and has unleashed many important reform measures in the past 20 months which, in some instances have ushered in significant reforms," Lian said. "But her efforts at boosting government revenues so far has not yielded any tangible result."
"It is important to understand that Mrs. Arroyo came to power with the support of the oligarchies such as the Catholic church, landlords and big business interest," Lian said. "It will be an uphill battle for her to convince these supporters to pay more taxes.
"Against this backdrop, Lian noted that the Philippines has suffered greatly from macro mismanagement that sent its total indebtedness to a staggering $110 billion, equivalent to 130 percent of the country’s 2002 GNP estimated at $97.7 billion.
According to Lian, the central government debt accounted for 66 percent of GNP. The Philippines, he said, is also the largest and most consistent source of external debt issuance in Asia, excluding only Japan, and the country remains the most exposed to shifts in global emerging market sentiment. "We believe it reasonable to expect that while the Philippines market will be periodically rocked by jitters emanating from global emerging markets outside Asia, its sufficient external liquidity and a competitive floating exchange rate regime should see it through rocky periods," he said. – Des Ferriols