PHL budget deficit may rise to 4% of GDP if tax reform will not include revenue-enhancing measures

MANILA—The Department of Finance (DoF) foresees a rise in the share of government’s budget deficit to as much as four percent of gross domestic product (GDP) and risk the country’s investment grade ratings if the proposed tax reform program will not be passed on its original form.

Finance Undersecretary Karl Kendrick Chua, who said that approving only the increase in the personal income tax (PIT) and not the revenue generating measures, namely, the hike in the excise taxes on fuel and vehicles, would be detrimental to the state’s financial health.

“Passing only the PIT measure will lead to various degrees of revenue loss if there are no offsetting tax measures. This loss can undermine fiscal sustainability and raise the deficit to as high as 4.0 percent of GDP,” he said in a statement.

The government has increased the cap on deficit level to three percent of GDP from two percent in the previous session as it increases investments on infrastructure.

The House of Representative’s Ways and Means Committee has approved a substitute bill that consolidated the House Bill (HB) 4774, which mirrors the Department of Finance’s (DOF) Comprehensive Tax Reform Proposal (CTRP), and the 52 similar measures.

CTRP is targeted to allow the government to get additional funding for infrastructure, education, health and social protection.

PIT is estimated to result to a decline in revenues by around Php 63 billion if the measure was approved and implemented in the second half of this year as targeted.

For 2018, the revenue loss from the measure is seen to be around Php 138 billion and Php 152 billion in 2019.

These losses are the reasons the revenue-enhancing measures need to be approved also, Chua said.

A hike of the share of deficit level to GDP may increase interest rates, which in turn is detrimental to the general public as this hikes interest rates, he said.

Chua said the worst case scenario is an increase of government borrowing by around Php 30 billion and by around Php 100 billion for the private sector.

He added that increasing the taxes on the ultra-rich alone, or those with net taxable income of above Php 800,000, is not enough since this segment is only about three percent of the individual taxpayer based