Managing the national government debt
Commentary

Managing the national government debt

/ 04:25 AM March 06, 2024

The national government’s total outstanding debt stood at a record-high P14.6 trillion as of end-2023. To pay off this debt, each Filipino has to pay around P129,470.

Our country’s debt-to-GDP ratio, which shows how much we owe relative to how much we produce as a nation, was only at 39.6 percent as of end-2019, but ballooned to 60.9 percent by end-2022 largely because the national government had to borrow heavily to address the adverse effects of COVID-19 on lives and jobs.

While debt-to-GDP slightly decreased to 60.2 percent by end-2023, much needs to be done to reduce it to its pre-pandemic level. Why is it important to do so?

It crowds out funding for education, health care, and infrastructure. When debt is high, a large portion of the government’s budget will be used to pay our debt, which reduces the portion of the budget that could be allocated to priority projects. To illustrate, P611 billion, or 11.6 percent of the 2023 national budget was allocated to pay our country’s debt. This is expected to increase to P1.9 trillion, or around 34 percent, of the 2024 national budget.

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Higher debt-to-GDP ratio hinders more investments. It may lead to concerns among investors about a government’s ability to repay its loans, potentially leading to higher interest rates and reduced investment that could have generated more and better jobs.

Borrowing domestically crowds out funding for private investors. In 2023, 68.5 percent or P10.02 trillion of the national debt was borrowed locally, 8.79 percent higher or P809.5 billion more than in 2022. When the government borrows more funds locally, private investors face higher interest rates since there are less funds available for them to borrow, which can further dampen economic growth.

How can we reduce national debt? The government has to earn more revenues and/or decrease its spending to reduce our national debt. We recommend the following:

Step up efforts to improve tax collection efficiency. According to the Department of Finance, the Philippines has a low tax efficiency rate compared to most of our Asean peers. Personal income tax collection efficiency is 6.2 percent, higher only than Indonesia’s 0.1 percent but significantly lagging behind Vietnam’s 25.1 percent. Meanwhile, corporate tax collection efficiency in our country is only 11.6 percent, much lower than Malaysia’s 34 percent and Singapore’s 17 percent. We have the highest value-added tax rate (12 percent) but the lowest VAT efficiency rate (0.4) among our Asean peers.

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In addition to the recently approved Ease of Paying Taxes Act, Congress should also consider pursuing amendments to the bank secrecy law to make the investigation and prosecution of tax fraud more effective.

The government should also implement a risk-based tax audit system which would allow the Bureau of Internal Revenue to focus on auditing high-risk taxpayers, or those who pay relatively low taxes compared to what they earn.

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Pass priority tax reforms into law. The proposed VAT on digital service providers, excise tax on single-use plastics and pre-mixed alcoholic beverages, and package 4 of the Comprehensive Tax Reform Program, would help generate an estimated P32.4 billion in additional revenues for the government in 2024.

Engage in more public-private partnerships, sell select government assets, and privatize some government-owned and -controlled corporations. The recently approved bid of San Miguel Corp. (SMC) to improve the Ninoy Aquino International Airport is a good first step. The agreement requires SMC to pay the government up front and annuities a total of P80 billion, which could substitute foregone revenues from the scrapping of the proposed excise tax on junk foods and sweetened beverages worth P75.7 billion for 2024.

The government could sell assets such as those owned by the Bases Conversion and Development Authority in Clark and the Basay mining project in Negros Oriental. Privatizing the Philippine Amusement and Gaming Corp. and key facilities managed by the Philippine Ports Authority can also unlock additional revenues.

Remove the restrictive economic provisions in the 1987 Constitution to attract more investments, create quality jobs, and encourage technology transfer. More businesses mean more revenues from corporate tax and more jobs mean more revenues from increased personal income and consumption taxes. Additionally, technology transfer can help make the country more competitive and upskill and reskill the labor force, which would attract more job-generating businesses and further increase public revenues.

Pass key reforms to reduce government spending. We recommend for Congress to pass equitable and sustainable reforms to the pension system of military and uniformed personnel (MUPs). Unfunded MUP pension liabilities are now at P14 trillion, which is 45.8 percent higher than the P9.6 trillion recorded in 2019. Amending the bank secrecy law can also help reduce government debt as it would help the Bangko Sentral ng Pilipinas monitor corrupt and illegal financial actions.

Conclusion. Like a responsible family, our country should try as much as possible to live within our means. While parents strive to give the best for their children, they cannot always rely on borrowed money to pay for their family’s needs.

While borrowing can be a useful tool for necessary expenses and economic development, it is crucial to ensure that borrowed funds contribute to long-term growth. Maintaining a healthy debt-to-GDP ratio is a reflection of wise fiscal choices that safeguard the nation’s financial well-being in the long run.

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Gary B. Teves served as finance secretary under the Arroyo administration.

TAGS: Debt, national government, opinion

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