Revisiting our debt penalty
Did you know that 15 years ago, about 9 out of every 10 pesos of revenues received by the Philippine national government just went to its debt payments?
At that time, I likened our government to a wageworker whose friendly neighborhood moneylender comes on payday to take away 9 out of every 10 pesos in his pay envelope.
Debt service payments for both interest and principal are automatically appropriated by law, hence an obligatory part of the national budget without need for Congress action. Back then, government’s total outstanding debt was P3.8 trillion, equivalent to about 75 percent of our gross domestic product (GDP).
With 86 percent of government revenues paying for P313 billion in interest and P361 billion for amortization on the principal then, a measly 14 percent was left to pay for government’s operational expenses and public investments like infrastructure. Hence, the bulk of the money to keep the government working had to be borrowed.
That year, the Asian Development Bank described our government as being caught in a Ponzi (financial pyramid) situation. That is, it needed to keep borrowing more to be able to both pay its outstanding debts and support public spending requirements.
But for us to be able to borrow more, our creditors needed to be comfortable about our willingness and ability to pay back, hence demanded that we keep raising taxes.
Worse, given the structure of our tax system, the burden disproportionately fell more heavily on the poor. During those years of fiscal crisis, the “debt penalty” carried by every Filipino amounted to about P47,000 (total outstanding debt divided by the population).
It was, in many ways, worse than the death penalty that was also being hotly debated at that time, but unlike the latter, could not be simply repealed with the stroke of a pen. That was when the government had to hike the value added tax rate from 10 to 12 percent, to keep public finances from collapsing.
Fast forward to 2020, and that “debt penalty” is no longer a prominent concern for our fiscal managers. Government is in fact proposing to lose money by lowering corporate income tax rates from 30 to 25 percent immediately, in the hope that this would help stimulate business recovery in the wake of the COVID-19 pandemic—never mind that this would mean losing an estimated P42 billion immediately, and P625 billion over the next three years. Why this seeming bravado?
There’s really no bravado to it, for three reasons. One, it’s more of an “up against the wall” situation for us after the COVID-19 crisis, and government hopes to “buy” the restoration of Filipinos’ jobs and incomes by foregoing that much in tax revenues. After all, those amounts, rather than being paid to government, would instead remain with the businesses, and they are asked to use it to sustain and create more jobs, not pocket it as additional profits (which our lawmakers must find ways to guard against). Two, not lowering our corporate tax rate now, when it is glaringly the highest among our Asean peers, would only condemn us to miss out entirely on the investments moving out of China to dodge the effects of the US-China trade war (as we already are).
Three, our government is in a good position to take the immediate hit of foregoing those revenues, because unlike 15 years ago, our annual debt service payments now represent only a quarter of total government revenues (debt service amounted to P884 billion in 2019, against revenues of P3.15 trillion), with total debt just 41 percent of GDP.
This vast improvement from our “debt penalty” days traces to prudent management by government’s professional fiscal managers, coupled with declining interest rates. This is one area where even our current fiscal managers led by Finance Secretary Carlos Dominguez credit their predecessors for having done a good job of putting our financial house in order. This has made it easier for our country to finally achieve the investment-grade credit rating we now enjoy in the financial markets.
That same fiscal prudence requires that proposed tax reforms happen now, to make sure that down the line, we won’t have to face the heavy debt penalty again.
