Reducing reliance on tax breaks and improving collection are key to building fiscal buffers, according to the International Monetary Fund (IMF).

The IMF is urging the Philippine government to re-evaluate its tax incentive programs. This recommendation aims to accelerate the decrease in the country’s budget deficit and strengthen its financial resilience against potential economic disruptions.

Elif Arbatli Saxegaard, IMF Deputy Division chief, proposes a two-pronged approach: reducing certain tax exemptions and enhancing the tax refund system. This strategy, she emphasizes, wouldn’t necessitate raising tax rates. Instead, it prioritizes expanding the tax base and ensuring better compliance.

No to consumer tax increase

 Finance Secretary Ralph Recto previously expressed his disapproval of imposing new taxes on consumer goods, fearing it would exacerbate inflation.

The Development Budget Coordination Committee (DBCC) has set a goal of reducing the fiscal deficit from 5.6 percent of GDP (gross domestic product) in 2023 to 3.7 percent by 2028. Saxegaard highlights the importance of not only collecting taxes efficiently but also strategically diversifying revenue sources. This diversification would create a financial buffer to withstand economic shocks.

Building on Pandemic Response

IMF Resident Representative Ragnar Gudmundsson emphasizes the value of accumulated fiscal space. During the pandemic, the government’s ability to respond promptly with economic stimulus and social protection programs stemmed from past fiscal prudence. He raises a crucial question: can the government react swiftly if new challenges arise?

Gudmundsson acknowledges the potential role of tax incentives. However, he advocates for “greater selectivity” to ensure these benefits are directed towards sectors that demonstrably promote economic growth.

Saxegaard acknowledges the ambition of the government’s medium-term fiscal consolidation program, targeting an annual deficit reduction of 0.5 percentage points.

Positive despite ambitious goals

Despite the ambitious deficit reduction plan, Saxegaard acknowledges the Philippines’ manageable debt levels and investment-grade credit rating. This positive outlook is attributed to the country’s robust business environment, strong household consumption, a resilient labor market, and a narrowing trade deficit.

Saxegaard concludes by acknowledging that a slower pace of fiscal consolidation would impact the projected debt profile, but emphasizes that sustainability wouldn’t be compromised; debt reduction would simply occur at a slower pace.

In essence, the IMF recommends: Review tax incentive programs to identify areas for streamlining or elimination; enhance tax collection efficiency through an improved tax refund system; broaden the tax base to encompass a wider range of revenue sources; and maintain a strategic use of tax incentives, focusing on sectors that demonstrably contribute to economic growth.

By implementing these recommendations, the Philippine government can achieve its fiscal consolidation goals and build a more resilient economy.