RP needs add’l taxes for balanced budget — IMF

Without further tax measures, the International Monetary Fund (IMF) said the plan of the Arroyo administration to increase spending would keep the fiscal deficit at two percent of gross domestic product (GDP).

According to the IMF, balancing the budget and increasing infrastructure spending would not be possible without additional tax measures on top of the recent tax reforms that increased the value added tax rate from 10 percent to 12 percent.

The Arroyo administration has repeatedly said it would not consider any more tax measures at least until after 2007, but few analysts believe that the increase in the value-added tax (VAT) rate would be enough to sustain the fiscal momentum.

At the end of its mid-year post-program monitoring (PPM) discussions with the Philippines, the IMF said in its report that it welcomed the plan to balance the budget by 2008 while significantly increasing social and capital spending.

According to the IMF, however, achieving both objectives would require further increases in revenue and additional tax measures would be needed to sustain fiscal consolidation.

In the report, the IMF said that although additional revenue could be generated from tax administration measures that would ensure the full implementation of existing tax policies, this would not be enough.

"While strengthening of tax administration has the potential to yield part of the needed additional resources, the Fund is of the view that additional tax measures will also be needed," the IMF said.

The IMF said that if the government intended to implement its plan to substantially increase its spending on transportation, irrigation and energy infrastructure, this would require additional revenue effort.

"By staff calculation, increasing capital spending by 1.5 percent of gross domestic product over the medium term while balancing the budget would require revenues to rise by about three percentage points of GDP," the IMF said.

The IMF pointed out in the report that during the meeting, Philippine authorities conceded the possibility that additional revenue measures would have to be taken to contain the deficit that would arise from increased spending.

The IMF identified two key tax measures that could solve this gap, namely the proposed restructuring of the tax incentives bill, amendments to the personal income tax law and further reforms in the excise tax regime.

According to IMF resident representative Reza Baqir, however, the IMF staff noted revenue concerns specifically about the personal income tax bills that, in their present form, would narrow the tax base.

"Clearly, it’s important that any tax measure not shrink the tax base," Baqir said.

Aside from additional tax measures, the IMF said other fiscal reforms should complement the revenue effort, such as the government rationalization plan which would lead to expenditure savings over time, along with the three-year rolling expenditure framework and the establishment of performance contracts for government corporations.