MANILA, Philippines — President-elect Ferdinand Marcos Jr. will have no choice but to raise taxes as proposed by the Department of Finance (DOF), or the economy risks losing its growth momentum due to the increase in debt, according to connoisseurs.
The Treasury Office announced yesterday that the national debt ballooned by 16% to another record high of 12.76 trillion pesos in April, from 10.99 trillion pesos a year ago.
In interviews with The STAR, experts said the Marcos administration may have to continue with the DOF’s fiscal consolidation plan – where VAT exemptions will be scrapped, tax cuts will be postponed and new taxes will be introduced. – to create space for debt payment.
On an annual basis, domestic debt jumped 14% to 8,940 billion pesos from 7,810 billion pesos. On the other hand, external obligations increased by 20%, from 3,180 billion pesos to 3,830 billion pesos.
For the month of April alone, the government added a net amount of 83.4 billion pesos to the unpaid account. According to the Treasury, the domestic balance increased by a net total of P66.3 billion due to regular issuance of short and long-term bonds.
In addition, the government has accumulated 16.2 billion pesos in external debt through the net acquisition of new loans worth 28.56 billion pesos and the depreciation of the peso against the US dollar amounting to 31.5 billion pesos.
However, the Treasury said the increase in external debt was somewhat tempered by the appreciation of the peso against other currencies totaling P43.86 billion.
Rizal Commercial Banking Corp.’s chief economist, Michael Ricafort, said tax reforms planned by the DOF in its consolidation plan should be carried out by the next administration.
As it stands, Ricafort said tax recoveries from existing measures appear to fall short of what the government needs to reduce outstanding debt. He warned that failure to resolve the debt problem would only keep the debt ratio at an alarming level which could cost the Philippines its positive credit rating.
The national debt, measured against gross domestic product, soared to 63.5% in March, the highest in 17 years. The international community observes a debt standard of 60% of GDP. Exceeding this level could raise concerns about an economy’s ability to pay.
“Scaling up tax collections from existing tax laws may not be enough and (the government) would inevitably require further fiscal reform measures – given around 5 trillion pesos plus the additional public debt incurred since then. the pandemic and the start of lockdowns in 2020, or an annual debt increase of about 2 trillion pesos a year, or about 10% of GDP, since 2020,” Ricafort said.
Similarly, Ricafort said the Marcos administration must strengthen its oversight against waste, leaks and corruption within revenue agencies to ensure that all resources are accounted for.
Associate director of the Ateneo Center for Economic Research and Development, Ser Percival Peña-Reyes, said the Philippines could experience stagflation – or the combination of a declining economy and high inflation – if the flows of revenues remain the same over the next few years.
“Right now, we are in this precarious situation where the threat of stagflation is looming. If the government neglects this, stagflation could really haunt us,” Peña-Reyes said.
Peña-Reyes said the writings of stagflation are on the wall: food prices are rising due to supply constraints, inflation is expected to hit 5%, and shipments are delayed by war in Europe. Sooner or later, he warned that the economic recovery may hit a snag, which could weaken the government’s revenue efforts.
“Stagflation could happen to us because it happens all over the world. Don’t forget that it is motivated by external factors. If stagflation hits us, the economy suffers. And if there is no growth, then there is nothing to collect. As such, I think the DOF’s fiscal consolidation plan should be considered,” Peña-Reyes said.
According to estimates, the government would have to raise 249 billion pesos in additional revenue each year to pay debts incurred in the management of the pandemic.
As such, the DOF has proposed that the next administration pursue a series of tax reforms that would lift VAT exemptions, postpone tax cuts, and impose new taxes from 2023 to 2025.