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Banking industry

Philippines' Fiscal Consolidation Hinges on EVAT Implementation

Strategic Insights

— 2 min read

The Philippines' ability to sustain its fiscal consolidation and improve its fiscal position heavily relies on the implementation of the expanded value-added tax (EVAT) law. The government's fiscal consolidation program is at risk due to concerns over declining spending on crucial public services and infrastructure, despite the national budget deficit being below ceiling. Investors are apprehensive that the reduction in the budget deficit came at a heavy price, and that the government may face difficulties in sustaining this improvement without the full implementation of EVAT.

Key Takeaways:

  • The consolidated public sector deficit as of June 2005 was significantly below the ceiling, but investors were concerned about the sustainability of this performance.
  • The reduction in the budget deficit in the first seven months of 2005 relied heavily on spending cuts, which has its limits, according to UBS.
  • The Asian Development Bank (ADB) noted that the sustainability of the Philippines' fiscal performance is questionable, as it reflects compressed development spending and a large windfall of interest income for the Bureau of the Treasury.
  • The Investment Climate Survey conducted by the World Bank (WB) and ADB in June 2005 found that businessmen were apprehensive over reduced fiscal space for providing crucial public goods, such as public sector infrastructure, law and order, and a relatively incorrupt and fair administration of justice.
  • The ADB cited systemic weakness in the institutions tasked to collect revenues for the government, which has persisted despite recent tax laws aimed at improving tax administration.
  • The Bureau of Internal Revenue and the Bureau of Customs both fell behind in their collection targets for the first seven months, by 3.6% and 7.8%, respectively.
  • The revised sin tax law, which increased the excise tax rate on alcohol and tobacco products, failed to raise the expected revenue, with actual collections even dropping 1.7% from last year's level.
  • National Treasurer Omar Cruz mentioned that the national government would implement administrative measures designed to raise additional revenues, should Congress succeed in retaining the VAT exemption on fuel and power.

Statistics:

  • The consolidated public sector deficit as of June 2005 was significantly below the ceiling, but investors were concerned about the sustainability of this performance.
  • The reduction in the budget deficit in the first seven months of 2005 was 3.6% and 7.8% behind the collection targets of the Bureau of Internal Revenue and the Bureau of Customs, respectively.
  • The revised sin tax law was projected to raise an additional P15 billion for 2005, but actual collections for the first six months of the year dropped 1.7% from last year's level.
  • The VAT on petroleum was projected to raise P30 billion in additional revenues in 2006, while the VAT on power was seen bringing in another P6.6 billion.
  • The government raised only P10.55 billion from excise taxes on tobacco, down P837 million from last year's collection.

Sources:

  • "Manila, Oct 11 Asia Pulse" (Asia Pulse, October 11, 2005)
  • UBS Investment Research (September 22, 2005)
  • Asian Development Bank (ADB), "Asian Development Outlook Update" (2005)
  • World Bank (WB) and Asian Development Bank (ADB), "Investment Climate Survey" (June 2005)
  • Bureau of the Treasury (BTr)
  • Department of Finance (DOF)
  • Philippine News Agency (PNA)

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