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It is
somewhat doubtful if the economy can do better this year
than last year despite its relative success to date in
dealing with pockets of political instability and a
strong peso.
Any
likelihood of topping the 2007 growth rate will depend,
I believe, on how the government can deal with the
following issues: the peso strength’s impact on
consumption; legislative action to lower income taxes
and to cut, temporarily or otherwise, the value-added
tax (VAT) on oil; and legislative action on fiscal
incentives for businesses.
What is
most worrying to me at present is the call by several
sectors for the suspension of the collection of VAT on
oil and fuel products, which lends support to a similar
call earlier by a number of senators. If such suspension
is legislated by Congress, it is unlikely that
Malacañang will veto the approved bill, in which case, a
significant reduction in government revenues may be
expected for 2008 onward. The negative effect all
depends on how long Congress intends to suspend the VAT
on oil. Remember that there are calls to permanently
remove the tax, and this, I believe, would be the
riskiest of all options. A full suspension would result
in foregone revenues estimated at P50 billion annually.
Adding
pressure on the Executive is the strong call,
particularly by foreign businesses, for the government
to maintain, if not add to, the tax incentives currently
given to certain businesses or industries. The
Department of Finance has long been calling for the
cancellation of such fiscal perks, while the Department
of Trade and Industry has been pushing for them. Of
late, however, there seems to be an agreement in
principle between the two agencies on how to deal with
the matter. But ultimately this will be up to Congress
to decide. If retained by legislators, then the grant of
fiscal perks to businesses will also have the effect of
further reducing revenues collected by the government
and spent on necessary infrastructure and basic
services. Estimates place the foregone revenues at
around P30 billion annually. Also pending in Congress is
a proposal to revise income taxes with the intent of
granting relief particularly to middle-income families
as well as the poor. Again, the government can expect
from this a significant reduction in tax collection, but
with the hope that additional revenues can be expected
from consumption taxes like VAT as people spend their
tax savings on other goods.
Of late,
there is a proposal by the government to sell bonds to
overseas Filipino workers (OFWs) to help curb the peso’s
gains. State-run Land Bank of the Philippines will
reportedly sell peso- and dollar-denominated bonds where
OFWs can temporarily park their money instead of
remitting more money to their families in the country.
The logic is that as the peso’s value rises, then OFWs
will have to send more dollars to their families here.
However, sending more dollars also has the effect of
further strengthening the peso—given the oversupply of
dollars.
Among
the government’s fears is that a strong peso would
become a disincentive for people to work abroad. And
given the scarcity of quality jobs locally, this can be
a problem indeed. Moreover, the economy has been relying
on OFW remittances for the longest time to sustain its
growth trend. Remittances currently account for about 10
percent of the economy.
A strong
peso also has the effect of dampening export income. And
this is expected to be aggravated by an expected
slowdown in the US and Japanese economies. Exports
currently account for about 40 percent of the economy.
It already started to fall late last year, and this
early, the government is already expected to miss its
export growth targets for 2007 and 2008.
My
immediate concern is that if OFWs are convinced to limit
their remittances and instead invest their dollars in
bonds to be sold by Land Bank, then this will also have
the effect of limiting the consumption of their families
here and, in turn, dampen consumer consumption growth.
Question is whether such reduction in consumption would
be enough to tilt economic growth targets for the year.
With
expectations of foregoing about P100 billion in revenues
through congressional action on oil VAT, income tax, and
fiscal perks, couple this with the strong peso’s adverse
effects on consumption and export growth, for sure there
will be some concern on unintended effects on economic
growth.
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