The incoming administration of presumptive president Ferdinand Marcos Jr. must increase taxes, intensify tax collection and avoid populist programs if it wants to reduce the debt to GDP ratio, now at 63.5 percent, way above the international threshold of 60 percent.
As the country’s first quarter debt to GDP (gross domestic product) ratio surpasses the benchmark of 60 percent—now at 63.5 percent at its highest in 17 years —economists are urging the new administration to raise taxes and avoid populist projects,
Data from the Bureau of Treasury as of end March this year showed that this is the highest since 2005, during the Arroyo administration when it hit 65.7 percent. Total debt stock as of end March 2022 is P12.679 trillion, 4.8 percent higher than the P12.09 trillion in end February 2022 amid continued borrowing to boost the government’s war chest for COVID-19 recovery coupled with weaker peso during the period.
Meanwhile, the Philippine economy as of 2021 is valued at over P19 trillion, according to the Philippine Statistics Authority.
The administration of presumptive president Ferdinand Marcos Jr. will inherit the trillions of pesos of debt accumulated during the Duterte administration and will be tasked to manage the country’s debt levels.
Intensify tax collection
For Rizal Commercial Banking Corp. chief economist Michael Ricafort, the next administration should “intensify tax revenue collections as well as [implement] new tax reform measures to better manage the country's fiscal performance especially the country's overall debt management to make it more sustainable over the long-term and for the coming generations.”
“Further intensify tax revenue collections through stricter enforcement of existing tax laws, as well as new tax reform measures such as the upward adjustment/updating of the assessed value of real estate, long overdue after many years in few of property price appreciation over the years in able to collect more property/real estate taxes, simplification/easier taxation for the capital markets, higher taxes on sin products/sugary drinks to better align with other countries in the region, among others, all of which to increase the recurring tax revenue sources of the government,” Ricafort said.
“Other measures include anti-wastage/anti-leakages/anti-corruption measures to better manage the government's expenditures, starts and ends with good governance as a matter of policy,” he added.
Finance Secretary Carlos Dominguez III earlier said the Department of Finance (DOF) is preparing its fiscal consolidation proposal which would likely involve tax hikes to repay the country’s increasing debt.
Transition talks
Dominguez also said that the DOF has “already started” transition talks with the Marcos camp as well as with other presidential bets in the last elections to discuss ways how to manage the trillions of pesos in government debt the next presidency will inherit from the incumbent administration, said GMA News.
ING Bank Manila’s senior economist Nicolas Antonio Mapa, said the new administration “will need to convince investors that debt consolidation will be top priority.”
“Projects that generate near term revenue must be prioritized and populist projects that are costly and have limited revenue impact should be avoided,” Mapa added.
Union Bank of the Philippines chief economist Ruben Carlo Asuncion, likewise, said in dealing with high debt levels,
“the upcoming administration with its vast political capital must find ways to better collect taxes and eventually widen the tax base.”
However, Asuncion said that while additional taxes may be the easier way or it can be explored since there is political capital, it may not be timely for the beginning of a new administration.
University of the Philippines labor and industrial relations professor Rene Ofreneo said the next administration should not pass on additional tax burden to the masses and implement a progressive tax system, wherein those who earn more should be taxed higher and a wealth tax should be imposed.
“Further reduction of the debt-to-GDP ratio, in view of the international threshold of 60 percent, would help keep the country's relatively favorable credit ratings, at around one to three notches above the minimum investment grade, as has been sustained despite the pandemic over the past two year to ensure relatively lower borrowing costs and also at better terms,” Ricafort said.
If the country’s credit ratings are downgraded due to higher debt beyond manageable levels, the government will have to borrow at higher cost or interest rates.
“Having a debt-to-GDP ratio at these levels keeps the Philippines susceptible to ratings action at least for Fitch. A downgrade of course makes borrowing more costly,” Mapa said.
Moving forward, Asuncion said the next administration should put back the economy to a better growth trajectory from the impacts of the COVID-19 pandemic.
“Secondly, rising inflation should be dealt with so that the purchasing of the Filipino will not be further harmed,” Asuncion added
Tags: #raisingtaxes, #intensifycollections, #debttoGDPratio, #economy