The Philippines succeeded in maintaining macroeconomic stability despite the recent adverse developments associated with the global financial crisis. In 2009, as world GDP contracted, the Philippines’ GDP continued to grow by 0.9 percent, supported by private consumption spending that was partly fueled by remittance inflows and expansionary fiscal spending. Thanks to previous fiscal consolidation efforts, the government was able to undertake a countercyclical fiscal policy to address the economic slowdown. This has resulted in the largest fiscal easing in more than two decades. Meanwhile, prices have been stable and the balance of payments has remained strong throughout the past two years, also in large part due to the steady inflow of workers’ remittances. The economy is now recovering from the 2008-09 global recession, and the challenge will be to keep this recovery on track while the government mends its structural fiscal balance, which was weakened by the earlier countercyclical measures (a large part of which are permanent in nature), and while the central bank implements an exit strategy from its extraordinary crisis-related liquidity-support and easy monetary stance.
Aside from maintaining good macroeconomic management, the government also needs to address issues of medium and longer-term fiscal sustainability. To achieve sustained poverty reduction, access to essential public services needs to be expanded without jeopardizing fiscal stability. Policy actions to speed up economic growth will need to focus on strengthening tax policy and administration, significantly raising the public investment effort over the next five years, and improving governance to create a better climate for private investment.
v.Improving public expenditure efficiency and targeting
The Philippines lags behind other East Asian countries in several key areas of economic and social development, largely because of its lower public spending on infrastructure development, education, and health. To achieve regional spending parity, the Philippines would have to increase public spending in these priority sectors by a combined 5 to 7 percent of GDP. In particular, public investment spending on infrastructure falls short of the regional average by 3 to 4 percent of GDP, while public spending on education and health falls short by 2 to 3 percent of GDP. This combined spending gap can be financed partly by strengthening public financial management and by eliminating large, ineffectual public subsidy programs. In this last regard, it is advisable to phase out the National Food Authority (NFA) rice subsidy and transfer part of the fiscal savings to the Conditional Cash Transfer (CCT) program. The fiscal savings achieved through these measures, however, will not suffice to close the entire spending gap. Moreover, since NFA is off-budget, the replacement of NFA spending by CCT spending would increase the central government deficit, even though it leaves the overall non-financial public sector deficit unchanged. Therefore, additional revenues on the order of 4 percent of GDP will also be needed to close this spending gap.
vi.Strengthening the fiscal revenue base
The government will face an increased likelihood of a fiscal crisis if public expenditures are expanded without adequate increases in public revenues that reverse the decline in tax collection that has taken place since 2007. To raise revenues in the amount indicated above, the government has various options for improving tax administration and tax policies. There are some immediate actions that the government can take to raise revenues through improved governance in tax administration, such as (i) the adoption of performance indicators in the Bureau of Internal Revenues (BIR) and approval of the BIR’s rationalization plan, and (ii) obligating the public disclosure of all assets and net worth of BIR managers, accompanied by random audits. Other important reforms include actions to strengthen the BIR’s and BOC’s capacity to prevent smuggling and detect tax evasion. In this connection, the partial lifting of the bank secrecy law and outsourcing of key customs tasks to external contractors could yield major improvements in tax collection. Such tax administrative reforms, however, would not be expected to generate more than 1 to 2 percent of GDP in the best of circumstances. To close the spending gap identified earlier, therefore, some reliance on tax policy reforms is also likely to be needed. Reforms of the excise tax and VAT systems to increase yields offer “quick win” solutions because they could be introduced quite rapidly, raising revenues immediately and, on aggregate, equitably. Specific short-term measures that can be considered include: (i) raising excises on petroleum products, (ii) rationalizing and increasing excise taxes on tobacco and alcohol, (iii) broadening of the VAT base, reversing the progressive proliferation of exemptions that took place in recent years, and (iv) indexing all excise taxes to inflation. Beyond that, it is advisable to adopt more fundamental tax reforms, including reforms of the personal and corporate tax to improve their effectiveness and progressivity.
vii.Developing institutions for better fiscal risk management
Macroeconomic stability is critical for poverty reduction, but easily undermined by external and internal shocks. To be sure, fiscal risks are large and diverse in the Philippines, but their poor assessment and management needlessly expose the country to immiserizing fiscal crises. Effective measures to mitigate these risks could be rapidly implemented. They include strengthening the legal and institutional framework for risk management, improving the management of public debt, and improving the analysis and dissemination of data on fiscal risks. Suggested policy actions include (i) establishing a dedicated Fiscal Risk Unit and a Debt Management Office in the Department of Finance (DOF), (ii) developing and publishing an explicit debt management strategy, and (iii) strengthening the Department of Finance’s Corporate Affairs Group.
