Finance officials warned on Monday of an immediate credit downgrade for the Philippines and added pressure to borrow should the legislature reduce the personal income tax (PIT) without adopting the revenue-offsetting measures as proposed under the Comprehensive Tax Reform Program (CTRP), the Department of Finance (DOF) said.
Without the offsetting measures, the government would be forced to borrow an additional P30 each year to help bridge the budgetary shortfall.
At the House Committee on Ways and Means hearing on Monday, Finance Secretary Carlos G. Dominguez III told lawmakers the government would be forced to borrow from the markets and deal with the consequences of a reduced credit stature under such circumstances.
“If we choose to do only what is popular, that is reducing tax rates alone without passing the revenue-offsetting measures, the scenario will be dire: we court the possibility of a credit rating downgrade as we are forced to rely on borrowings to manage the deficit. This translates into P30 billion in additional borrowing costs per year for the government,” Dominguez said.
According to the DOF, the country’s borrowing costs dipped to 5.38 percent and 4.45 percent for domestic and foreign debts in April 2016, from 7.43 percent and 5.71 percent at end-2009 levels, respectively.
“If we fail to pass the revenue-enhancement measures, we will lose the growth momentum that took us years to build. We will face the specter of large budget deficits and move closer to a debt crisis. Moreover, growing uncertainty in global prospects means that the country needs to prepare well to build a solid fiscal buffer to keep us strong when the storm
comes,” he added.
Package one of the CTRP, as contained in House Bill (HB) 4774 authored by House Committee on Ways and Means Chairman Dakila Carlo E. Cua, aims to lower the PIT rates and implement revenue-offsetting measures, including the increase in excise tax rates of petroleum and oil products, lifting some of the exemptions in value-added taxes (VAT) and expanding the taxpayer base, among others.
“Our tax system itself is direly in need of reform. Our personal- and income-tax rates are much higher than the rest of the region. We need to bring them at par to be competitive for investments. Unjustly high tax rates are nearly an invitation for evasion. By lowering tax rates to the regional environment, we hope to attract even more investments to sustain a higher growth rate,” Dominguez said.
Among the infrastructure projects to be funded by the revenues generated from the implementation of the CTRP are the Bonifacio Global City-Ortigas Center Link Road Project, UP-Miriam-Ateneo Viaduct along C-5/ Katipunan Avenue, Metro Manila Priority Bridges Seismic Improvement Project (Guadalupe Bridge and Lambingan Bridge), and the Widening/Improvement of Gen. Luis St.-Kaybiga- Polo-Novaliches Road.
Other projects are also already in the pipeline, including the Panay-Guimaras-Negros LinkProject, Edsa-Taft Flyover, C-2 (Governor Forbes Street)/R-7 (España Street) Interchange Project, Circumferential Road 3 (C-3), Southern Segment from N. Domingo Street in San Juan City to Buendia Avenue in Makati City, C-5 Kalayaan–Bagong Ilog Improvement Project, and Dalton Pass East Alignment Alternative Road Project.
This also includes the Arterial (Plaridel) Road Bypass Project Phase III, Central Luzon Link Expressway, Phase II in San Jose, Nueva Ecija, Pasig-Marikina River Channel Improvement Project, Phase IV, MarikinaDam, Flood Protection Works in the Marikina River, including Retarding Basin, Flood Mitigation Project in the East Mangahan and the Floodway Area (Stage 1) and several major flood-control projects.
“To compensate for lower personal and corporate income taxes, we need to introduce new revenue measures. The Comprehensive Tax Reform package we bring before Congress seeks to increase revenues by P800 billion. This will go a long way in assisting the projected P1-trillion annual expenditure for infrastructure,” he added.
According to the finance chief, unless the government seizes the moment and mount an infrastructure program that would make the economy far more competitive, favorable economic trends sweeping the region will once again bypass the Philippines.
“If we fail to raise the volume of revenues required for our economy to break out over the next few years, we will fail in everything else,” he said.
Aside from Dominguez, in attendance at the CTRP hearing were Cabinet Secretaries Benjamin E. Diokno of Budget and Management, Ramon M. Lopez of the Department of Trade and Industry, and Ernesto M. Pernia of the National Economic and Development Authority, Arthur P. Tugade of the Department of Transportation, Mark A. Villar of the Department of Public Works and Highways, and Leonor M. Briones of the Department of
Education.