To avert fiscal crisis, Arroyo likely to impose new taxes

MANILA — As the country’s fiscal position remains susceptible to another crisis, the Arroyo government will likely try to impose new taxes at the latest by 2008, according to independent think-tank Ibon Foundation.

IBON research head Sonny Africa said that the administration might even do this earlier if its “desperate privatization efforts do not succeed in boosting enough revenues this year”.

“This is the inevitable result of its refusal to address revenue losses from trade and investment liberalization, revenue losses from corruption and big-time tax evaders, and grossly bloated expenditures from unconditional debt servicing,” said Africa. These are matters that the Arroyo administration cannot be expected to genuinely tackle, which is why it resorts to the only things left: new taxes and privatization of the public’s remaining assets, he added.

“The pressure for new taxes has even increased because of an apparently significant revenue failure in the first half of 2007,” said Africa.

The fiscal situation has apparently taken a drastic turn for the worse in the half of 2007. Government officially reported a deficit in January-May 2007 of P41.8 billion which is less than the P44.1 billion in the same period last year. But Africa pointed out that this does not accurately reflect the state of government finances because it is bloated by P26 billion in one-off privatization revenues, mainly from the government’s sale of its stake in PLDT. Without these one-off privatization gains the 5-month budget deficit would have actually increased to P67.8 billion or a very large 53% increase from the same period last year, he said. This would also even already be P4.8 billion higher than the official deficit target of P63 billion for the whole of 2007.

The proceeds from privatization in the first five months of 2007 covered up a severe revenue failure where revenues, without privatization, only increased by 4.4% from the same period in the year before. The P26 billion from selling-off government assets was needed to bring the increase in revenues up to the more accustomed 11.0% average of recent years. The issue now is how the government will deal with its problematic finances once the targeted P105 billion in earnings from its remaining big-ticket privatization is past, said Africa.

The government’s seeming success in reducing the national government deficit from a historic peak of 5.4% of gross domestic product (GDP) in 2002 to just 1.1% in 2006 was due largely to the regressive reformed value-added tax (RVAT) together with severe spending cuts on social and economic services. The RVAT which began to be implemented in late 2005 abruptly increased 2006 revenues by P76.9 billion. The combined share in the national budget of education, health and housing in turn continuously declined and, at 15.6% of the total budget in 2007, is 4.1 percentage points less than in 2001. This is barely half of the nearly 30% that goes to making interest payments on debt.

On the other hand, Africa pointed out that there have not been any improvements in revenue collection outside of the new RVAT and the recent big-ticket privatization. “If we take out the effects of RVAT and privatization, revenues increased annually by more or less 11% each year in the period 2003-2006,” he said. The imposition of RVAT abruptly increased revenues by some 20% in 2006 but this magnitude of increase will only register in 2006 and subsequent rates of revenue growth will still largely depend on the established revenue pattern of around 11% or so. This is a problem in itself because such revenues will not be enough to close the budget gap, he said.

However, the government persists in pursuing trade and investment liberalization that will only further reduce revenues. For instance the full implementation of the JPEPA which is up for ratification by the Senate in the 14th Congress could result in as much as P10.7 billion in foregone tariff revenues annually. The tariff losses from the other free trade agreements the Arroyo government is pursuing thus deserve much closer attention.

“The International Monetary Fund (IMF) and various international credit rating agencies have already expressed their desire for new taxes,” said Africa. “These are the early signs of a renewed bout of fiscal turmoil marked by drastic spending cuts and, eventually, higher taxes.”

The fiscal situation was one of the highlights of the study presented by Africa at the IBON Midyear Birdtalk, a semi-annual forum on the national economic and political situation and trends.