PH fiscal consolidation efforts on track — IMF

The Philippines’ fiscal consolidation efforts are on track but the government can still implement further revenue mobilization and expenditure reforms to create more fiscal space, the International Monetary Fund (IMF) said.

“Even with public spending projected to accelerate in the second half of 2023, the fiscal outturn is expected to fall below the deficit ceiling of 6.1% of gross domestic product (GDP) from a deficit of 7.3% of GDP last year mainly due to lower transfers to local government units (LGUs),” the IMF said in its latest country report.

This year, the government’s deficit ceiling is set at PHP 1.49 trillion or equivalent to 6.1% of GDP. This consists of PHP 3.847 trillion in revenues and PHP 5.34 trillion in disbursements. The assumptions for revenues and spending were recently revised upward by the Development Budget Coordination Committee.

“Revenue collection in 2023 thus far is better than targeted but is projected to be lower than in 2022 as a percent of GDP, largely due to the implementation of the second tranche of the personal income tax rate reduction and the negative cash flow impact resulting from the transition from monthly to quarterly value-added tax (VAT) payment,” the IMF said.

Latest data from the Bureau of the Treasury (BTr) showed that the National Government’s (NG) budget gap narrowed by 8.45% to PHP 1.018 trillion in the January-October period.

Revenues rose by 9.41% to PHP 3.224 trillion while government expenditures went up by 4.52% to PHP 4.242 trillion.

For 2024, the IMF said it expects the government to continue its fiscal consolidation efforts, noting that the pace of consolidation is “appropriate.”

Based on the DBCC assumptions, the deficit-to-GDP ratio is seen to further ease to 5.1% next year. The government is targeting to bring the ratio to 3% by 2028.

The IMF said that continued fiscal consolidation will “ensure debt sustainability and restore fiscal space.”

However, it noted that the government should explore additional measures to boost revenues.

“Exploring additional avenues for revenue mobilization will create more fiscal space to support policy priorities. Improving expenditure efficiency, curtailing contingent liabilities, and effectively managing the process of decentralization and public-private partnerships would help reduce fiscal risks,” the IMF said.

“The authorities could introduce a tax-policy oriented medium-term revenue strategy which lays out more ambitious tax measures to protect and finance more social spending and recover from natural disasters while keeping the consolidation path unchanged,” it added.

The IMF identified key tax measures such as broadening the value-added tax (VAT) and corporate income tax bases, amendments to the Corporate Recovery and Tax Incentives for Enterprises Act, and the rationalization of the mining fiscal regime.

The Finance department is pushing for the passage of key tax measures that could raise up to PHP 120.5 billion in revenues by 2024. These include the Passive Income and Financial Intermediary Taxation Act, VAT on digital transactions, the new mining fiscal regime, motor vehicle road user’s tax, and the excise tax on single-use plastics, pre-mixed alcohol, sweetened beverages and junk food.

On the spending side, the multilateral lender said that the government should also implement expenditure reforms, citing the military and uniformed personnel (MUP) pension reform and the devolution.

Reforming the MUP pension system will help create additional fiscal space while fiscal decentralization will help improve public services and accountability, it added.

The Marcos administration has made it a priority to reform the MUP pension system, which continues to put a strain on government finances.  The House of Representatives has already approved the bill, which would require new personnel to contribute to the pension fund. MUPs under the current pension system are not required to contribute to the pension fund, which is entirely paid for by the National Government.

The IMF also noted the importance of fiscal consolidation as a complement to monetary tightening.

“Fiscal consolidation envisaged as part of the medium-term fiscal framework serves an important dual role: it complements the tight monetary policy and creates more policy space to respond to adverse shocks down the road (including climate shocks),” it said.

The Philippine central bank has raised borrowing costs by a cumulative 450 basis points from May 2022 to October 2023 to curb inflation. This brought the key rate to a 16-year high of 6.5%.

Policy tightening and fiscal consolidation both help support disinflation through “taming demand pressures and anchoring inflation expectations.”

“Prudent fiscal policy not only rebuilds buffers for future stimulus but also helps reduce inflationary pressures, augmenting interest rate hikes, and creating more conventional policy space,” the IMF added. — Luisa Maria Jacinta C. Jocson