Moody’s warns against backsliding on fiscal gains

Political risks may remain low in the Philippines even as the government gears for an administration change this year, but policymakers—and voters—should still be aware of the country’s record of backsliding.

Moody’s Investor Service pointed to the government’s revenue performance, in particular, as a major area of concern for those watching the Philippine economy.

Significant strides in tax collection made during the Ramos years were followed by a consistent erosion in revenues from which the country has only recently recovered.

“In the ’90s, we had a similar improvement in revenue generation, but subsequently, there was backsliding. Only now are we recovering to levels of revenues,” Moody’s vice president and senior sovereign risk analyst Christian de Guzman said Monday.

De Guzman, who is in the Philippines to attend this week’s Asia Pacific Economic Cooperation (Apec) CEO summit, cautioned against complacency.

This comes amid discussions on disagreements between congress and the executive on proposals for the lowering of income taxes. Philippine salary-earners are among the most taxed in the region. However, the government’s tax base, which supports expensive infrastructure and social welfare projects, remains the narrowest among the Philippines’ peers.

“The Philippines is among the lowest revenue generators among investment-grade countries,” De Guzman said.

Under the tax code, top earners in the Philippines are taxed at 32 percent. Tax Management Association of the Philippines (TMAP), an industry group of tax lawyers and accountants, among others, has called for a 25-percent tax for the top income bracket—a level more comparable to neighboring economies.

Administration officials, however, have cited the government’s tax-to-gross domestic product (GDP) ratio to show the pitfalls of any proposal that would erode collections.

Finance Secretary Cesar V. Purisima said the country’s tax collections still hovered around the equivalent of 13 percent of gross domestic product (GDP), below the average of 16 percent for middle-income countries.

Attempts to lower income taxes, Purisima had said, should be offset with proposals allowing the government to earn more. Among these two measures—the rationalization of fiscal incentives and the modernization of the Bureau of Customs—are pending in Congress.