World Bank: tax reforms could unlock 7.1% of GDP in fiscal gains

The Philippines could unlock fiscal gains equivalent to as much as 7.1 percent of gross domestic product (GDP) by improving tax collection, government spending and public-sector efficiency, according to a new World Bank report.

The report, titled “Building on Reform: Public Finance for a Rising Philippines,” estimates that the country could generate additional fiscal revenue equivalent to between 3.6 percent and 7.1 percent of GDP annually by broadening the tax base, improving collection efficiency and making public spending more efficient and equitable.

The World Bank said these reforms could strengthen fiscal sustainability while supporting inclusive growth, without necessarily requiring higher spending.

“Earlier this year, the Philippines crossed into upper-middle-income status, a testament to decades of hard work and sound policy,” said Zafer Mustafaoglu, Division Director for the Philippines, Malaysia, and Brunei.

“The 3.6 percent to 7.1 percent of GDP in potential fiscal gains — hundreds of billions of pesos already within the system’s reach — can fuel the next chapter of that journey: more children learning to read, more families shielded from the financial devastation of illness, and millions of Filipinos lifted from poverty,” he added.

Presented by World Bank officials on Monday morning, the report identifies three broad areas where reforms could generate fiscal gains.

The first is creating more fiscal space through executive-led reforms, including consolidated government procurement, easier tax payments, streamlined corporate tax incentives and tighter limits on appropriations.

Procurement reforms alone could generate savings of up to P435 billion annually, the World Bank said.

“In business as well as in strategic procurement for government, there is this concept known as bundling demand. If you bundle demand and you negotiate what is known as framework agreements with major suppliers, the government is able to negotiate much lower prices and make those prices available for agencies regardless of when they procure,” said Jaffar Al Rikabi, World Bank senior economist.

“So just doing that for the high value items, the common items, negotiating these type of agreements, can save the government, we estimate, around 1.8 to 2 percentage points of GDP,” he added.

The second involves addressing fiscal gaps through legislative and institutional reforms that could strengthen both revenue generation and public spending. These include expanding electronic invoicing and audits, rationalizing value-added tax exemptions and modernizing fiscal management systems without raising statutory tax rates.

“You build citizens' trust when you show them that the resources you're collecting are being utilized effectively, which increases their willingness to pay taxes,” said Al Rikabi.

The third area is better targeting of spending on human capital. The report said more targeted health, education and social protection spending could improve outcomes without increasing budgets.

“On physical capital and on human capital, our message is that investment needs are high because the Philippines is rising. It's trying to meet the ambitions of other middle-income countries,” Al Rikabi said.

“And so it has really quite a substantial physical and human capital gap that it can fill.”

A common social-program registry could lift about 2 million Filipinos out of poverty, while stronger foundational learning and streamlined medical assistance could improve education outcomes and reduce health costs.

The report is part of the World Bank Group’s Public Finance Review, a diagnostic tool used to assess the efficiency and effectiveness of a country’s fiscal policies.