Phl urged to start fiscal normalization

The Philippines and the rest of Southeast Asia should begin tapering off emergency measures to ensure timely fiscal normalization, especially as the COVID situation continues to improve, according to an economic surveillance organization.

In its latest policy paper, Singaporebased ASEAN+3 Macroeconomic Research Office (AMRO) said the economic impact from the two-year pandemic has left a large dent in the fiscal policy space.

Governments have implemented huge stimulus packages to address COVID while failing to generate enough revenues. This has resulted in a deteriorating fiscal position and increased fiscal deficit and debt.

In the Philippines, outstanding debt has risen to a record P12.68 trillion as of March this year.

AMRO said fiscal normalization should start by reducing some emergency measures based on a need assessment.

“As the pandemic situation improves, fiscal authorities need to assess the needs for specific support measures, and selectively reverse the temporary changes in resource allocation,” AMRO said.

It noted that this can be done by cutting emergency financial support to affected businesses and households, and unwinding broad reductions in taxes and fees.

AMRO said economies in the region are beginning to shift fiscal policy focus away from crisis support, but this still depends on economic recovery prospects per country.

“This does not necessarily mean directly returning to pre-pandemic fiscal policy by stopping emergency support measures. The key to policy normalization is adjusting fiscal policy measures to properly reflect evolving needs, and a gradual policy transition based on a careful assessment of post-pandemic policy priorities and existing support measures,” it said.

Further, the regional macroeconomic surveillance organization said fiscal normalization should be gradually merged into a well-planned fiscal consolidation.

AMRO argued that a strong commitment to fiscal consolidation is essential to rebuild fiscal space and maintain market confidence.

“Post-pandemic fiscal consolidation plans rely more on revenue improvements than spending cuts,” it said.

The Department of Finance earlier said the incoming government would have to adopt a fiscal consolidation plan wherein tax rates could be increased and expenditures cut, as the Philippines faces ballooning debt and the new administration will surely have a challenging fiscal position.

However, AMRO warned that as economic recovery momentum is still fragile, revenue enhancing measures should be implemented with proper assessment of their impact on economic recovery.

In particular, it said that improving revenue collection capacity – including strengthening tax administration – can be prioritized before introducing new taxes or raising tax rates.

“For instance, a fiscal consolidation measure to increase tax revenue collection by rationalizing special tax treatments, such as tax incentives, may discourage foreign investors to invest in a country that adopts such measures,” AMRO said.

“The country can, however, mitigate this risk by improving infrastructure and the business environment to increase its competitiveness, and enhance tax services to reduce tax compliance burden,” it said.