Phl to score higher in economic freedom index — DOF

The Department of Finance (DOF) expects the Philippines to score higher in the economic freedom index of the Heritage Foundation next year, following the enactment of various laws that set improvements on Filipinos’ property rights and trade freedom.

In his latest economic bulletin, Finance Undersecretary and chief economist Gil Beltran said the country may perform better in the 2020 Index of Economic Freedom (IEF) compared to its scores in this year’s index.

“For index year 2020, the country’s score is expected to improve significantly,” Beltran said.

He said the increase would be driven by the signing of the Personal Property Security Act, which would improve the country’s score on property rights, one of the factors considered in the computation of the IEF.

He said that the approval of the Rice Tariffication Act would reduce the penalty for non-tariff barriers in the computation of the IEF’s trade freedom index.

“We recognize that government should not stand in the way of private sector participation in the economy. That is why

TradeNet.ph, for example, should already be made operational to cut red tape in the processing of trade-related documents by 76 trade regulatory agencies,” Beltran said.

The Heritage Foundation defines economic freedom as the fundamental right of any person to control his or her own labor and property such that individuals are free to work, produce, consume, and invest in any way they please and that governments allow labor, capital, and goods to move freely and refrain from constraining liberty.

Economic freedom, therefore, brings greater prosperity and is associated with healthier societies, higher incomes, human development, democracy, and poverty elimination.

In the 2019 IEF, the country recorded an overall score of 63.8, landing the Philippines in the 70th ranking out of the 186 participants. This is nine notches down from its rank in index year 2018.

The IEF was weighed equally by 12 quantitative and qualitative factors – property rights, government integrity, judicial effectiveness, tax burden, government spending, fiscal health, business freedom, labor freedom, monetary freedom, trade freedom, investment freedom, financial freedom – grouped into four broad categories – rule of law, government size, regulatory efficiency, and open markets.

However, Beltran said the IEF still has limitations as it “leaves out important details.”

“For example, the foundation puts a premium on small government without regard for the economy’s developmental stage; thus, there is penalty for increasing government spending whether an economy is industrialized or developing,” Beltran said.

“But a developing economy may require greater government involvement in the economy as in the provision of infrastructure and social services such as basic education, health and social protection,” he said.

He said a low tax effort due to high level of tax evasion may also give a misleadingly high score in the tax burden index. Conversely, he said improving tax administration, which results in a higher tax effort, may also mean lower tax burden score.

“The foundation also does not take into account equity issues of progressive tax system. Since the IEF simply takes the highest marginal tax rate in the computation of the index, the score of the Philippines was reduced because the highest marginal personal income tax rate was increased from 32 percent to 35 percent,” the DOF official said, referring to the personal income tax reforms under the Tax Reform for Acceleration and Inclusion Law.