A bitter pill to swallow

Bangko Sentral ng Pilipinas Governor Benjamin Diokno, who as the finance secretary-designate will be the chief economic manager of the incoming administration, last week announced a six-year fiscal plan to bring the budget deficit back to a manageable pre-pandemic level by 2028. The fiscal consolidation blueprint, which will essentially outline measures to shore up government revenues and perhaps cut public expenditures, will be submitted to President-elect Ferdinand Marcos Jr. within two weeks, or immediately after the new administration takes over on July 1.

Such a plan is crucial because of the urgent need to raise revenues to start repaying government debt that has ballooned to P12.7 trillion as of end-March 2022, breaching 60 percent of gross domestic product (GDP) — the threshold of international standards for prudent economic housekeeping. This is projected to reach P13.1 trillion by the end of 2022.

Diokno himself indicated that the first item on the agenda when he takes over the finance portfolio will be the sustainability of government debt. “We need a lot of money — first [in order] to continue our [economic] growth momentum and second, to service our higher level of public debt,” he said. The debt problem has been exacerbated by the depreciation of the peso past the P53 to $1 mark, making it more expensive to repay the foreign loans borrowed during the pandemic.

The outgoing Duterte administration actually drafted a fiscal plan for the incoming administration. Finance Undersecretary Valery Brion, quoting the Bureau of the Treasury, said that to prevent having to use more borrowings to pay P3.2 trillion in incremental debt due to the pandemic, the government needs to generate at least P249 billion each year in new revenues. Based on the Department of Finance (DOF)’s estimates, a total of P349.3 billion can be raised each year if the Marcos Jr. administration implements three packages of tax reforms starting from 2023 up to 2025. A key DOF proposal is to defer the scheduled reduction in personal income tax rates for 2023-2025 to generate P97.7 billion yearly. The DOF also recommended the removal of many exemptions from the 12-percent value-added tax starting in 2023 to generate P142.5 billion a year.

According to Brion, the Philippines’ debt-to-GDP could ease faster from more than 60 percent by year’s end to 59.1 percent in 2023, 57.7 percent in 2024, and 55.4 percent in 2025 if the Marcos Jr. administration pursues this complete fiscal consolidation and resource mobilization plan. The consequence of not acting fast on the debt problem, on the other hand, will be more economic difficulties. “We need to start paying for the debts we incurred during the pandemic, with the first principal payment falling due as early as 2023 … If we do not pursue fiscal consolidation and resource mobilization, there are serious and spiraling consequences to our fiscal and economic health. If no reforms are introduced or the reforms are diluted, there will be two scenarios ultimately leading to the same outcome: a fiscal and economic crisis as a result of higher debt, lower socioeconomic spending, and fewer investments,” Brion pointed out.

However, Marcos Jr. and Diokno have on separate occasions frowned upon the imposition of new or additional taxes when the new administration is just starting. During his presidential campaign, Marcos Jr. said that it may not be a good time to immediately introduce new tax measures amid the protracted fight against COVID-19. This is obviously to avoid angering the public, which normally bears the brunt of new taxes. Diokno stressed the need to focus on sustaining economic expansion rather than raising taxes. But the problem is that any economic growth trajectory has been made more difficult by the protracted war between Russia and Ukraine, which has roiled global markets, pushed up oil prices, and disrupted the economic recovery of many nations.

There is really nothing wrong with imposing new tax measures, especially since the Philippines needs to repay a swelling debt and avoid the risk of a credit-rating downgrade. The country enjoys investment-grade ratings from the top three debt watchers—Fitch Ratings, Moody’s Investors Service, and S&P Global Ratings. It is important to keep this credit rating, which is a measure of a government’s creditworthiness. Improved ratings will allow the government to demand lower rates when it borrows from lenders, which can translate to lower interest rates for consumers and businesses borrowing from banks, using government-issued debt paper as benchmarks for their loans.

“Sometimes you have to take a medicine that tastes lousy — that is bitter and it’s no good, but if you don’t take it, you may even get worse,” outgoing Finance Secretary Carlos Dominguez warned. It will be interesting to see how Diokno’s fiscal consolidation plan will play out. The details — and their subsequent implementation — will determine if the Marcos Jr. administration will be able to control the worsening fiscal situation and address the burgeoning public debt or, failing that, bring the country to a deeper economic malaise.

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