The International Monetary Fund (IMF) is advising the Philippine government to review its tax incentives program with an aim to reducing its fiscal deficit faster and hedge against economic shocks.

“Some measures could be to reduce some tax exemptions and also improve the tax refunds system which can increase compliance,” IMF Deputy Division Chief Elif Arbatli Saxegaard said last Monday in a media briefing at the Bangko Sentral ng Pilipinas, Pasay City.

Not necessarily increasing tax rate

“That does not necessarily require an increase in the tax rate but base broadening and improving implementation,” she noted.

These statements came after Finance Secretary Ralph Recto said he does not plan to introduce new taxes on consumer goods to prevent higher inflation.

The Development Budget Coordination Committee aims to reduce fiscal deficit to 5.6 percent of gross domestic product (GDP) this year to 3.7 percent in 2028.

Apart from efficient tax collection, Saxegaard said the government must strategically broaden sources of tax income to build extra fund against economic shocks.

She said this is important as the government continues to spend higher on infrastructure with at least 5 percent of GDP annually and deliver better social services.

“During the pandemic the government was in a position to respond to the effect of the shock by stimulating the economy and spending on social protection mechanisms precisely because they have accummulated fiscal preference,” IMF Resident Representative to the Philippines Ragnar Gudmundsson elaborated.

Primary concern

“Our primary concern is that if additional shocks surface, is the government in a position to respond quickly?” he said.

Gudmundsson stressed the government could still grant tax incentives but with “greater selectivity” to ensure only sectors that boost economic growth benefits from them.

Given the government’s current capacity to raise revenue and its financial obligations, Saxegaard said its latest medium-term fiscal consolidation program is “ambitious.”

Ambitious plan

“It applies an annual reduction of deficit of 0.5 percentage point which in our view is still an ambitious fiscal consolidation plan,” she said.

However, Saxegaard said the country still has manageable debt levels and investment-grade credit rating due to robust business environment, strong household consumption and labor market, and narrowing trade deficit.

“Slower fiscal consolidation plan has an impact on projected debt profile but that remains sustainable. It just doesn’t go down as quickly as the earlier plan,” she said.