Focus shifts to spending after TRAIN enactment

ENACTMENT of Republic Act (RA) No. 10963, or the Tax Reform for Acceleration and Inclusion Act (TRAIN) that took effect Jan. 1, will help dispel any doubts about the government’s ability to pursue its aggressive infrastructure development program, but much now depends on spending as planned, Moody’s Investors Service said yesterday.

“With respect to the tax reform which has been signed into law… we can say it would put the Philippine government in a better position to accommodate its ambitious infrastructure agenda,” Moody’s senior credit officer Christian De Guzman said in a webcast yesterday.

RA 10963, signed into law on Dec. 19, 2017 reduces personal income taxes for those earning below P2 million, alongside a simpler system for computing donor and estate taxes. Foregone revenues will be offset by the removal of some exemptions from valueadded tax; increased tax rates for fuel, automobiles, tobacco, coal, minerals, documentary stamps, foreign currency deposit units, capital gains for stocks not in the stock exchange, and stock transactions; as well as new taxes on sugar-sweetened drinks and cosmetic surgery.

Bigger tax collections are expected to offset foregone revenues from personal income tax cuts, generating P89.9 billion in fresh funding this year.

Finance Secretary Carlos G. Dominguez III has said that 70% of these additional revenues will help fund big- ticket projects under the government’s “Build, Build, Build” program, which has a total financing need of P8.44 trillion until 2022. The state is looking to spend P1.1 trillion on infrastructure for this year alone.

“In the absence of that revenue pick up, we did expect the government to pare back on that ambitious infrastructure development agenda. However, the expected pick- up in revenues does give space to continue with that aggressive sort of spending,” Mr. De Guzman added.

The additional revenues generated by the tax package would likewise pad public coffers and support a stronger fiscal profile, he noted, saying: “Revenue has been a key weakness of the Philippine government as compared to similarly rated peers in the past.”

“This tax reform and the expected pick up in receipts will help close that gap.”

The Philippines holds a “Baa2” rating — a notch above minimum investment grade — with a “stable” outlook from Moody’s, which affirmed that score in June last year.

Moody’s expects the Philippine economy to grow by 6.8% this year, although short of the 7-8% target set by the administration of President Rodrigo R. Duterte who ends his six-year term in 2022.

It remains to be seen, however, whether increased tax collections will unlock the economy’s potentials to grow even faster, Mr. De Guzman said, as this would largely depend on the government’s ability to ensure prompt budget disbursements and project rollout, given a history of underspending.

POLITICAL RISKS

The Philippines’ robust economic momentum will likely remain resilient despite nagging security and political concerns.

Mr. De Guzman said political risks are “easing” after government forces recovered Marawi City from Islamic State-inspired militants after a five-month battle last year, even as Mr. Duterte extended martial law in Mindanao for a year till end-2018.

“However, we have not nor do we expect those domestic security threats to pose an immediate risk to economic growth,” the credit analyst said, adding he expects the Philippines to remain one of Asia’s fastest-growing economies this year. —