Finance Secretary Carlos Dominguez III today said the “Budget for Real Change” that Malacañang has submitted for congressional approval will flesh out the vision of President Rodrigo Duterte for a Philippines which by 2022 will be free of insurgencies and organized crime and boasts a poverty rate of just 17% resulting from investments that create quality jobs and disperse wealth.
In his presentation to Congress as a member of the Development Budget Coordination Committee (DBCC), Dominguez told the House committee on appropriations that to realize President Duterte’s vision of inclusive growth as spelled out in the 10-point socioeconomic agenda, the government must implement a comprehensive tax reform package that includes lowering personal and corporate income taxes and simplifying tax processes while accelerating spending on infrastructure and investments in human capital.
“Obviously, we need to put together a truly transformative tax reform program,” Dominguez said during the first appropriations committee hearing on the proposed 2017 General Appropriations Act (GAA) of P3.35 trillion.
“Just to make the challenge more interesting, the tax reform package must be designed not just to raise revenues but support inclusive growth. It must be a revenue package that coheres with the goals of maintaining the sustainability of our debt program, and more importantly, attracting investments, creating meaningful jobs and eradicating poverty,” he added.
Dominguez said the country is “at a critical juncture. The next six years can either continue along the path of high economic growth but high socioeconomic inequality, or chart a different path towards shared prosperity that will uplift all. This is why it is so important to fund the 10-Point Socioeconomic Agenda.”
“The 10-Point Socioeconomic Agenda revolves around the need to maintain sound macroeconomic and fiscal policies, invest in the people, and address the binding constraints to investment and job creation. This is why we need tax reform,” he said.
The revenue erosion from the lowering of income tax rates, Dominguez said, would be offset by reform initiatives that include broadening the tax base, reviewing fiscal incentives that have not been indexed to inflation, adjusting the fuel excise tax rates, imposing taxes on unhealthy food items and eliminating some VAT exemptions.
“At the end of its term, this administration envisions a country at peace with its neighbors and free from the threat of armed rebels and organized crime. We envision a country where the poverty rate is brought down from 26% to 17% through investments that create meaningful jobs, along with an economic strategy that lifts lagging regions into the mainstream,” Dominguez said.
“The people elected President Rodrigo Roa Duterte because they want real change and a break from the status quo. To achieve President Duterte’s promise to the people to deliver tunay na pagbabago — real change that the people can feel — we need to enact big reforms that can steer the country toward a better future,” he added.
Dominguez said the Philippines today has among the highest tax rates in the region and among the narrowest tax bases. “This is a condition tax reform should reverse. We should aim to bring down tax rates while at the same time broadening the tax base,” he said.
This tax reform plan, he noted, “aims to lower tax rates and broaden the tax base to align with the systems prevailing in neighboring economies.”
“In our present tax system, the VAT system captures approximately half of GDP. Self-employed professionals easily escape the tax net, largely due to bank secrecy laws. It is a system that causes inequality, economic distortions and discourages investments,” he added.
Dominguez said as a general rule, the rich will have to pay more in taxes while the vulnerable sectors of society will be protected through highly targeted subsidies and the conditional cash transfer program. “We will ensure that ordinary workers and the bottom 50 percent of households will be fully protected through social protection programs,” he said.
“Tax reform is needed to achieve the larger goals of the administration and to make sure that everybody feels the country’s growth,” he added.
The other members of the DBCC — Budget Secretary Benjamin Diokno, Director General Ernesto Pernia of the National Economic and Development Authority, and Deputy Governor Diwa Gunigundo of the Bangko Sentral ng Pilipinas — were also present at the briefing.
“We hope to further compensate for the lower tax rates by closely reviewing the incentives so casually given out in the past. We are looking at adjusting excise tax rates for a number of goods and eliminating some VAT exemptions and zero-rated transactions. We will submit to the Congress in a matter of a few weeks the specific tax reforms we recommend,” Dominguez said.
“We are designing a system that will be more transparent, performance-based, highly targeted and time-bound. By increasing the effective tax rate for companies receiving incentives and reducing the corporate tax rate, we improve the equity of the whole system,” the finance secretary added.
Dominguez also said the deficit target would be increased to 3% of the Gross Domestic Product (GDP) under the 2017 proposed budget, which will “substantially be offset by lower debt service.”
“The proposed budget targets a deficit of 3% of GDP. This is only marginally higher than the previous years. But the slightly higher budget deficit will translate into substantial infrastructure programs and human capital expenditure next year. This will enable our economy to expand programs such as TESDA that raise the skills profile of our labor force,” he noted.
Dominguez said the Duterte administration will not stop at overhauling revenue systems, but would also trim bureaucratic fat by, for starters, abolishing obsolete agencies.
According to Dominguez, the country’s stable fiscal situation allows the Duterte administration to carry out these reforms.
He cited the country’s double-digit revenue growth, which outpaced nominal GDP growth; higher tax collections as a result of tax administration reforms and the implementation of the Sin Tax Law; and the improving debt-to-GDP ratio, which has reduced the outstanding national debt to 44.7% of the GDP by the end of 2015.
“Today, only a third of the national debt is from foreign borrowing compared to almost half in 2009. The foreign debt component of the national debt declined to 11.6% of GDP by the end of 2016,” Dominguez said.
“Our policy is to source as much of our financing needs from domestic sources,” he said. “At end-2015 interest payments for the outstanding national debt declined to 14.7% of revenues. That trend will continue.”
He likewise pointed out that in 2015, total revenue collections amounted to P2,109 billion or 10.5% over the previous year, with tax revenues reaching P1,815.5 billion or 5.6% higher than the preceding year.
Through the first half of 2016, revenue collections were at P1,101 billion, a 1.4% increase over the first half of 2015, he added. “If we net out the transfer of the Coco Levy Fund, the improvement in collections will be 7%.”
The only revenue decline was at the BOC, with collections for 2015 decreasing 0.5% over the preceding year due to substantially lower oil prices, Dominguez said.
“Tax administration reforms and higher revenues from the implementation of the Sin Tax Law enabled tax collections to grow by 7.4%–still higher than the nominal GDP growth. We expect the improvements in collection to continue through 2016 and beyond,” Dominguez said.
Dominguez noted that the “sin” tax has shown that creative revenue measures can deliver the much-needed government funds to improve social services.
For instance, the “sin” tax increased the budget of the Department of Health (DOH) by 63% in 2015 and 130.4% in the first half of 2015 over its 2013 numbers, allowing the agency to fund public health programs that benefit the poor the most and provide insurance coverage to an additional 10.1 million indigent families as well as 2.8 million senior citizens under the Financial Risk Protection strategy.
Proceeds from the “sin” tax also allowed the DOH to immunize close to 614,000 persons against pneumonia and over 355,000 against dengue; treat 79,000 tuberculosis cases and more than 4,000 HIV/AIDS cases; vaccinate more than 302,000 females aged 9 and above against cervical cancer; hire 9,334 nurses, 171 dentists, 170 medical technologists and 808 public health associates; build 5,700 health centers in schools, enhance 956 Barangay Health Stations to qualify them for PhilHealth accreditation; deploy 162 mobile dental clinics; and make 1,623 Urban/Rural Health Units become 3-in-1 accredited.