Balancing fiscal measures and economic growth

THE ECONOMIC CLIMATE for the past few years has largely been defined by headwinds and turbulence as myriad challenges — from skyrocketing inflation rates and global activity slowdowns, to natural disasters, a pandemic, and geopolitical strife — impact the landscape. The onus has fallen to many government bodies to stimulate economic growth while keeping their finances in check. The Philippines, like many countries, is navigating this delicate balance.

“Global activity proved resilient in the second half of last year, as demand and supply factors supported major economies. On the demand side, stronger private and government spending sustained activity, despite tight monetary conditions. On the supply side, increased labor force participation, mended supply chains and cheaper energy and commodity prices helped, despite renewed geopolitical uncertainties,” the International Monetary Fund (IMF) wrote in an article published in January.

“This resilience will carry over. Global growth under our baseline forecast will steady at 3.1% this year, a 0.2 percentage point upgrade from our October projections, before edging up to 3.2% next year.”

The IMF emphasized that policy focus must shift to repairing and improving the management of public finances, and improving medium-term growth prospects will be key to capitalize on this resilience.

“Important divergences remain. We expect slower growth in the United States, where tight monetary policy is still working through the economy, and in China, where weaker consumption and investment continue to weigh on activity,” the IMF said.

“In the euro area, meanwhile, activity is expected to rebound slightly after a challenging 2023, when high energy prices and tight monetary policy restricted demand. Many other economies continue to show great resilience, with growth accelerating in Brazil, India, and Southeast Asia’s major economies.”

FISCAL CONSOLIDATION

In a recent evaluation of the Philippines’ fiscal consolidation efforts, the IMF has said that while the country is on track with its goals, there are notable areas for improvement.

“Even with public spending projected to accelerate in the second half of 2023, the fiscal outturn is expected to fall below the deficit ceiling of 6.1% of gross domestic product (GDP) from a deficit of 7.3% of GDP last year mainly due to lower transfers to local government units (LGUs),” the IMF said in its latest country report.

This year, the government’s deficit ceiling is set at P1.49 trillion or equivalent to 6.1% of GDP. This consists of P3.847 trillion in revenues and P5.34 trillion in disbursements. The assumptions for revenues and spending were recently revised upward by the Development Budget Coordination Committee (DBCC).

The IMF also mentioned that the government is collecting more money than expected, but it’s still less than what they collected last year compared to the size of the economy. This is largely due to the implementation of the second tranche of the personal income tax rate reduction and the negative cash flow impact resulting from the transition from monthly to quarterly value-added tax (VAT) payment.

According to information from the Bureau of the Treasury, the gap between what the government earns and what it spends decreased by about 8.45% to P1.018 trillion from January to October 2023. Revenue increased by about 9.41%, reaching P3.224 trillion, while spending went up by about 4.52%, reaching P4.242 trillion.

According to the assumptions made by the DBCC, the deficit compared to the size of the economy is expected to decrease even further next year, reaching 5.1%. The government aims to bring this ratio down to 3% by 2028.

Looking ahead to 2024, the IMF said that continued fiscal consolidation will “ensure debt sustainability and restore fiscal space.”

TAX MEASURES

To maintain these efforts, the National Economic and Development Authority (NEDA) stressed the importance of enacting new tax measures that aim to bolster revenue generation and support the government’s ambitious plans for economic and social transformation. Proposed tax reforms, including excise taxes on various goods and services, are expected to inject additional revenue into the economy, contributing to fiscal stability.

To this end, the passage of key tax measures that could raise government revenues up to P120.5 billion this year have been urged. These include the Passive Income and Financial Intermediary Taxation Act, VAT on digital transactions, the new mining fiscal regime, motor vehicle road user’s tax, and the excise tax on single-use plastics, pre-mixed alcohol, sweetened beverages and junk food.

“The fiscal targets for 2023 are likely to be met. However, sustaining this achievement until 2028 would be challenging without the prompt enactment of new tax measures,” the NEDA said.

“The (current) proposed tax measures, which include excise taxes on sweetened beverages, VAT on digital service providers, and a new fiscal regime for mining, are expected to generate over P900 billion in additional revenue from 2024 to 2028,” it said. “The Executive and Legislative branches need to closely collaborate to ensure that the resulting measures do not lead to revenue shortfalls.”

While the NEDA advocates for their enactment to support fiscal goals, the Department of Finance (DoF), however, ran counter to their assessment and announced that they are not considering any new consumption-based tax proposals this year. The DoF instead aims to focus on increasing their collection efficiency, such as the passage of the recalibrated Package 4 of the Comprehensive Tax Reform Program (CTRP).

One of the priority measures of the current administration, Package 4 aims to foster growth in key financial markets by simplifying the tax structure on passive income, and on certain instruments and other financial products.

MORE REALISTIC OUTLOOK

In addition, Finance Secretary Ralph G. Recto suggests that existing growth and fiscal targets may need adjustment to reflect a more realistic outlook, considering how global economic dynamics and internal challenges develop over the course of the year.

“We’re discussing that right now because I think we have to come up with more realistic targets,” Mr. Recto said. “Don’t you think we need some adjustment there? I think we need to. Something more realistic but still high for 2024 and beyond.”

Currently, the government is targeting GDP growth of 6.5%7.5% this year and 6.5%-8% from 2025 to 2028 under the DBCC’s latest macroeconomic assumptions and medium-term fiscal and growth goals.

In context, the economy grew by 5.6% in 2023, slower than the 7.6% expansion in 2022 and short of the government’s 6%-7% goal for that year.

“We are reviewing all of that. It’s a six-year term for the President, and we’ve finished one year and a half. We know what’s happening globally, so we have an idea of something more realistic,” the DoF chief said.

“The fiscal plan was made when (Ferdinand R. Marcos, Jr.) became President in 2022. There was no war in the Middle East, the Ukraine war had just begun. Thereafter, prices of food and oil rose,” Mr. Recto said. “That plan was done way back a year and a half ago. It’s always under review and more so today.”