RP back on fiscal consolidation - Deutsche Bank

MANILA, Philippines - Investment bank Deutsche Bank AG of Germany is confident that the Philippines would get back to its fiscal consolidation path next year as long as the administration of President Aquino is able to address several tax policy issues.

Deutsche Bank chief economist Taimur Baig said in a research note that the government’s fiscal program of reducing the budget deficit to P290 billion or 3.2 percent of gross domestic product (GDP) next year from a record level of P325 billion or 3.9 percent of GDP this year would be feasible.

“We find the government’s fiscal program ambitious, and would consider it feasible if tax administration measures were complemented by some tax policy efforts. The 2011 fiscal target appears achievable though, especially if the prevailing zeal to crack down on tax evasion and improve spending efficiency is maintained,” Baig said.

The economist pointed out that President Aquino and Finance Secretary Cesar Purisima have hit the ground running with considerable focus on improving the fiscal performance despite the campaign pledge not to raise taxes and further improve tax administration and expenditure efficiency.

“We expect the government to address some tax policy issues from next year onward, which would include reducing tax exemptions and incentives, streamlining sin taxes, and perhaps raising the value added tax rate,” the investment bank said.

Baig said the Aquino administration is pursuing improvements in tax administration wherein the Bureau of Internal Revenue (BIR) and the Bureau of Customs (BOC) have been put under the spotlight with tax collection being monitored closely as well as the filing of tax evasion as well as anti-corruption charges before the Department of Justice and the Office of the Ombudsman.

He also cited the scheduled signing of an ambitious memorandum of agreement with the Millennium Challenge Corp. to carry out several reform projects, with the key one dealing with tax administration. 

The investment bank highlighted that the country’s poor tax collections could be attributed to various tax exemptions.

“There is a general recognition that many fast growing parts of the economy are not taxed due to various exemptions, the number of which has increased in recent years. This explains the poor tax buoyancy of late,” Deutsche Bank added.

On the spending side, the bank stressed the need for the National Government to pursue efforts to improve procurement process to increase spending efficiency as well as the passage of the Fiscal Responsibility bill that would ensure that all future spending measures are fully funded.

Just the other day, Purisima told members of the House Committee on Ways and Means that its was possible to further trim the budget deficit to P226 billion or 2.5 percent of GDP next year of the country’s domestic output as measured by the GDP would expand faster that seven percent.

The new administration has committed to trim the budget deficit to 2.0 percent of GDP starting 2013 until the end of the Aquino administration in 2016.

The administration of former President Gloria Macapagal Arroyo implemented a series of fiscal reforms aimed at achieving a balanced budget by 2008 or two years ahead of the original 2010 scheduled under the Medium Term Philippine Development Plan (MTPDP). This helped trim the budget deficit to P12.4 billion or 0.1 percent of GDP in 2007.

However, the global financial crisis prompted the Arroyo administration to abandon its commitment as the country’s budget shortfall swelled to P68.1 billion or 0.9 percent of GDP in 2008 and to a record level of P298.5 billion or 3.9 percent of GDP last year. Last year’s record deficit eclipsed the previous all time high of P210.7 billion or 5.3 percent of GDP booked in 2002.