IMF seeks sin tax hike to keep RP deficit in check

MANILA, Philippines - Despite difficult conditions as a result of the global economic slump, the International Monetary Fund (IMF) yesterday called on the government to pass revenue-raising measures in order to fund planned higher expenditures and keep the country’s budget deficit in check. IMF Resident Representative Dennis Botman, in a briefing at the conclusion of the Fund’s Article 4 consultation with the Philippines, pointed out the need to reform how tobacco and alcohol products are taxed, rationalize fiscal incentives and streamline deductions for self-employed individuals and professionals. He said the additional revenues the government would collect would not only help offset the expected drop in taxes due to a decline in consumer spending, but should also help it keep its budget deficit within the Fund’s “prudent" recommendation of 2 percent of gross domestic product (GDP), equivalent to around P150 billion. “These resources [can also be] used to finance the ambitious increase in public investment in the 2009 budget, which is very welcome in this time of a slowdown," he added. He said public investments would have a larger effect on economic activity than revenue measures like tax cuts. “But in order to fully pay for these expenditures while at the same time contain the deficit within 2 percent of GDP, it is very important that Congress pass these tax measures," he said. Under Article 4 of the IMF’s Articles of Agreement, the Fund assesses a country’s economic developments and policies and discusses findings with government officials. Under Article 4, IMF member countries, among others, are to ensure that economic and financial policies foster “orderly economic growth with reasonable price stability." Measures proposing to increase tax collections from tobacco and alcohol products, rationalize the grant of fiscal incentives and limit the expenses self-employed individuals and professionals can deduct from their gross income are presently pending at the House of Representatives. The law requires tax measures to be passed by the House first before these can be transmitted to the Senate. Mr. Botman warned that if the deficit goes past 2 percent of GDP, the government would have difficulty meeting its debt obligations in the future, derailing the government’s plan to eventually balance its budget. The government borrows to finance its deficit, enlarging its debt stock. It also borrows to finance the debt, however, necessitating that the deficit be kept in check to keep the debt from bloating. “A deficit of around 2 percent of GDP is a prudent response to the current economic slow-down," Mr. Botman said. President Gloria M. Arroyo has yet to sign the P1.415-trillion budget for 2009 into law. The budget is crucial since a P160-billion increase in spending, under a P330-billion “Economic Resiliency Plan," hinges on it. Other components of this stimulus plan are: P100 billion to be put up by government financial institutions and the private sector to fund infrastructure projects; P40 billion in forgone revenues from a tax relief measure approved the year before and a lower corporate income tax rate effective this year, which are expected to boost consumption; and P30 billion in additional benefits from social security institutions. The government has programmed a P102-billion deficit this year, equivalent to 1.2 percent of GDP, but has indicated the deficit could go up to 2 percent of GDP due to lower tax revenues resulting from easing inflation. “[A] measured fiscal stimulus, as well as room for further monetary easing, provides the foundation for relatively robust domestic demand which will drive growth in 2009," said Mr. Botman. Next: IMF sees flat growth for imports, exports IMF sees flat growth for imports, exports The IMF has projected Philippine GDP growth at 2.25 percent this year. Fitch Ratings projected 2 percent and Standard & Poor’s 2.2-2.7 percent percent. Moody’s Investors Service is the most optimistic among the four with its 3.3 percent GDP growth projection. The government targets growth of between 3.7 percent and 4.7 percent this year. Mr. Botman said both import and export growth would likely stay flat this year, while remittances by Filipinos living or working abroad are expected to grow by a “modest" 2 percent. Bangko Sentral ng Pilipinas data showed that Filipinos working remitted a total of $16.4 billion last year, or over a billion dollars per month. Remittance growth was 13.7 percent last year. Despite the steady growth in remittances, Mr. Botman said the country would likely post a balance of payments deficit of half a billion dollars this year, partly due to outflows in portfolio investments. - Paolo Luis G. Montecillo, BusinessWorld