Dindo Manhit, President of the Stratbase ADR Institute
A chorus of local and international economic analysts made a unanimous forecast for 2018: economic growth is expected to be faster than the 6.7% expansion in 2017. As Finance Secretary Sonny Dominguez himself proclaimed, there is “unprecedented optimism” over the country’s economic prospects under the Duterte administration.
In addition to expectations of continued strong performance among the usual growth drivers, the increased optimism stems mostly from the recently passed Tax Reform for Acceleration and Inclusion (TRAIN) law, the first package of the Duterte administration’s tax reform program, and arguably, its most controversial legislation to date. After all, the Duterte government is embarking on the country’s first comprehensive tax program in two decades.
The government’s bold move to amend the tax code is commendable.
For years, the tax system has been widely criticized for being inefficient: the tax base is narrow and compliance cost is high, leading to low revenue collections despite having one of the highest tax rates in the region. While the timetable has been pushed back several times, the passage of TRAIN shows the government’s ability and willingness to leverage on the President’s popularity and political capital to advance its socioeconomic agenda.
The impacts of TRAIN are seen to fuel private consumption as consumers will then have more disposable income. Revenues collected from it would also strengthen the government’s ability to bankroll its development program, especially its aggressive infrastructure drive.
Despite the shortfall in revenues amounting to P67 billion from the original Department of Finance (DoF) proposal, the government has promised to roll out several flagship infrastructure projects within the year.
In a show of commitment towards this end, the infrastructure allocations accounted for a third of the total budget for 2018. The Department of Public Works and Highways (DPWH), for instance, received P637 billion for 2018, even surpassing the Department of Education’s (DepEd) budget allocation.
By the government’s account, around 44 public infrastructure projects amounting to P1 trillion are already under construction, and 15 other projects are expected to be implemented in 2018.
The incremental revenues from TRAIN have become even more critical especially with the government’s shift in its preferred mode of infrastructure financing, from Public Private Partnerships to Official Development Assistance and local financing. In addition to the “Build, Build, Build” projects, the government is also set to implement smaller infrastructure projects included in the Three-year Rolling Infrastructure Plan (TRIP).
Given the passage of the TRAIN Law, the Duterte administration appears to understand the urgency to address the country’s infrastructure problems immediately.
On this note, the traffic conditions in Metro Manila and other urban centers are only getting worse. A number of observers have even pointed out that Metro Manila may soon become uninhabitable without any infrastructure intervention in place. The Philippines has also fared poorly in several global rankings, partly dragged down by its decrepit infrastructure. Moreover, infrastructure development has been mostly concentrated in urban cities, highlighting an urban-rural infrastructure gap. Needless to say, the country’s infrastructure quality has been a major obstacle from maximizing its economic gains.
The 2017-2018 Global Competitiveness Report puts the Philippines at 97th out of 137 countries in terms of overall infrastructure, trailing behind other ASEAN countries. Infrastructure was also cited as one of the five most problematic factors for doing business in the country.
According to the World Bank, the logistics performance index of the Philippines has also been declining with a ranking of 71st in 2016, falling several notches from 44th place in 2010. The country’s ratio of cost-to-sales of goods is also higher compared to other Southeast Asian nations.
These results are not surprising.
After all, the Philippines has consistently underinvested in the infrastructure sector, spending less than the recommended 5% of the Gross Domestic Product (GDP). While the past governments have acknowledged this deficiency, it was only the Duterte government, supported by a wide fiscal space, which boldly dared to ramp up infrastructure spending to unprecedented levels.
By 2022, the government committed to pour in P8.2 trillion into the sector. Of course, the larger infrastructure allocation should also be matched by faster and more efficient government spending.
To the government’s credit, it has been taking initiatives to address roadblocks in the bureaucratic process.
For all its flaws and shortcomings, we must acknowledge the long-term benefits from the TRAIN, especially if the government successfully implements these infrastructure programs as planned.
However, as the government is working on legislating future tax packages, it must also heed lessons from its TRAIN experience.
While we recognize the government’s need to raise enough revenues to finance its development programs, we cannot discount the adverse effects of higher commodity prices among Filipino consumers. In the first month of TRAIN’s implementation, for instance, prices have already gone up by 4%, the highest in three years.
Moving forward, the government should prioritize tax administration reforms to boost revenue collections, instead of imposing taxes on a wide array of commodities to fill the revenue gap.
At the end of the day, while the Philippines is one of the most highly taxed economies in the region, its tax efficiency rate is also among the lowest. Perhaps we can also take a page out of our neighbors’ books.