Risks to economic growth abound

The economic team has warned that the budget deficit cap may be breached if Congress will not pass the proposed tax reform package 1B, which includes the lifting of bank secrecy for taxation purposes and the automatic exchange of taxpayer information.

In its Fiscal Risks Statement 2019 report, the interagency Development Budget Coordination Committee (DBCC) also flagged as risks to the fiscal state the possible delays in the rollout of big-ticket infrastructure projects under the ambitious “Build, Build, Build” program, the ballooning pension benefits of military and uniformed personnel as well as the planned shift to a federal form of government.

With regards to the planned shift to a federal form, the DBCC said that “while the prospects of federalism are on hopeful borders, it is not without its risks.”

“For instance, regional disparities may only be exacerbated if fiscal equalization efforts are weak, further noting that the status quo is not strongly equalized to begin with. Also, federalism will only cement the positions of political elites if strong institutions disallowing the prevalence of political dynasties, as well as reforms to the party system, are not firmly set before the shift,” the DBCC explained.

“If the proposed package 1B will not be passed, the budget deficit is estimated to hit 3.2 percent of GDP (gross domestic product) from 2018 to 2019 and 3.2 percent by 2022,” the DBCC said, as the projected revenues from the tax package will not be collected even as the government ramps up spending on public goods and services.

The government has programmed a budget deficit ceiling equivalent to 3 percent of GDP this year, 3.2 percent in 2019 and 3 percent from 2020 to 2022.

Tax reform package 1B also includes a tax amnesty and other tax administration measures such as higher motor vehicle user’s charge. These were measures removed by the Senate from the version of the first tax reform package passed by the Lower House last year.

Last week, the Senate ratified the bicameral report on the tax amnesty bill, which is expected to raise about P41 billion once a general and estate tax amnesty are implemented.

However, the Department of Finance (DOF) wanted the entire proposed package 1B passed.

“It is very necessary for us, we believe, that the law on bank secrecy be relaxed in cases where there is a suspicion. If there’s a law for us to collect a tax and then you don’t give us the tools to do it, then it will be very difficult for us to do it,” Finance Secretary Carlos G. Dominguez III earlier told reporters.

As for the “Build, Build, Build” program, the DBCC reiterated that “unless a global crisis happens, there is minimal risk of default” from the loans to be availed of to finance the 75 flagship infrastructure projects.

“Perhaps the biggest risk to the ‘Build, Build, Build’ program will be delays in the implementation of the infrastructure projects, consequently delaying benefits and incurring unwanted costs. Its completion will foster economic growth and ultimately, development; conversely, its delay will only prolong the current state of affairs. Delays in the necessary right-of-way acquisitions and the bidding process in general, as well as inefficiencies in both the agency and the available contractors’ absorptive capacities, are among the major contributors to this risk,” the DBCC said.

“Early procurement and timely consultation of the revised implementing rules and regulations (IRR) of the Procurement Law should minimize delays in project implementation. Likewise, supply-side interventions such as capacity-building programs will enable contractors to make better and more strategic implementation decisions,” it added.

Last week, Socioeconomic Planning Secretary Ernesto M. Pernia said the government was “making definite progress” with “Build, Build, Build,” with 35 projects worth a total P1.54 trillion already having had secured approvals from the state planning agency National Economic and Development Authority (Neda).

Pernia, who heads Neda, said 31 projects would be completed within President Duterte’s term while the remaining 44 could start implementation during this administration.