Debt challenge awaits next administration
MANILA, Philippines — The next Philippine president could become unpopular with taxpayers, rich and poor, as the new government is expected to resort to tax reforms and spending cuts to avert a potentially disastrous debt crisis.
The Duterte administration will pass on the largest debt, measured by gross domestic product (GDP), of the post-Marcos era, at around 60.9% this year.
Finance Department chief economist Gil Beltran said the next president should engage in fiscal consolidation in which tax rates could be increased and government spending reduced.
“The medium-term program is only until 2024, and then the debt-to-GDP ratio starts falling. The national government
the debt ratio of 60.5% has reached a level we had 15 years ago, [and] general public debt has been reduced by 14 years to 52.2%,” Beltran said in an interview with The STAR.
“We need fiscal consolidation and a return to 6.5% annual growth to bring us back to pre-pandemic levels. A mixture of tax reforms – not necessarily increases in tax rates, [but] could be better designed taxes – and spending cuts could be needed,” he said.
The debt pile jumped to 11.73 trillion pesos at the end of 2021, or 60.5% of GDP, meaning the Philippines owes 60.5 pesos to its creditors for every 100 pesos of goods and services products.
Moreover, the latest debt ratio exceeded not only the government’s program of 59.1%, but also the international standard of 60%, raising concerns about the country’s ability to repay its obligations.
Based on the data, the Duterte administration will also pass on the largest debt to pay in the next 10 years since former President Joseph Estrada left 17.9% short-term debt and 22.5% debt. medium term.
From 2021, more than a third of the outstanding debt, of about 3,920 billion pesos, will fall due within the decade, pushing the next two administrations to pursue fiscal policies to pay these debts. Of the 11.73 trillion pesos of public debt, short-term debt due within one year accounted for 6.8%, while medium-term debt payable within one to 10 years accounted for 26.6%.
Given soaring debt, the state’s economic team plans to submit a consolidation plan containing a list of fiscal measures that might be worth considering for the next administration. As Beltran said, Duterte’s successor will have to shake up the tax system and tighten spending.
In one case study, the International Monetary Fund (IMF) warned that nations that undertake fiscal consolidation face the costly price of blowing up the following election.
The IMF said voters are punishing political incumbents for raising taxes and cutting spending, and the administration’s bets end up losing the next election after fiscal consolidation.
“For example, one percentage point of fiscal consolidation of GDP reduces the probability of government re-election by about eight percentage points,” the IMF said.
To make fiscal consolidation less costly on electoral outcomes, the IMF said governments can consider personal income tax adjustments with offsetting measures in place. However, the IMF has warned against raising corporate taxes, as investors linked to political parties tend to be ruthless during elections.
Leonardo Lazona, an economics professor at Ateneo de Manila University, said the next president would inherit limited space for new borrowing due to Duterte’s legacy of debt. What the next administration can do, however, is maximize debt to stimulate the economy, he said.
“If debt is used efficiently and allocated to high-return investments, including in human capital resources, the high debt-to-GDP ratio can spur greater economic activity that can be sustainable,” Lazona told The STAR. .
In pursuit of fiscal consolidation, he proposed that the next administration consider whether to impose a wealth tax on billionaires to generate additional revenue and even out the tax bracket.
“If the benefits of the recovery flow only to the upper-income classes and our tax generation relies on the wages of middle-income workers, then tax revenue may not be sufficient to pay our debts,” he said. Lanzona.
“We have to consider wealth taxes imposed on the top 1% of income classes. This will be the best way to mitigate any possible overheating that may result from increased economic activity during the recovery, thereby reducing inflation,” he said.
In an analysis by Oxfam, billionaires in the Philippines have seen their wealth jump by more than 35% during the pandemic, while an estimated 3.7 million Filipinos have fallen into extreme poverty in 2020 alone. study says the government can raise $6.3 billion if it taxes 2% on wealth over $5 million, 3% on wealth over $50 million, and 5% on wealth over $1 billion dollars.
“An annual wealth tax applied to the wealth of multi-millionaires and billionaires would raise $6.3 billion a year, enough to increase public health funding by 73% or cut the health budget by 84%, or enough to reduce poverty to $3.2. per day by 90%,” reads the analysis.
But for Maria Ella Oplas, professor of economics at De La Salle University, the next administration should consider keeping taxes at the same rate to encourage consumption in the face of rising commodity prices caused by soaring oil prices. fuel.
“Raising taxes will only kill businesses and people at a time when we should be pushing them to spend. It is up to the government to tighten its belt. The next administration should just freeze taxes so people can spend,” Oplas told The STAR.
To pay off debts, she said the government can revamp its fiscal position by cutting spending without tinkering with taxes.
Oplas suggested the government could close underperforming state universities and colleges. She said the next economic team could also look at state assets to identify which ones can be sold to the private sector.
In the long term, Oplas said keeping tax rates at their current levels will ensure the economy can maintain its pace of recovery. She added that revenue generated from business activities can provide the government with the resources it needs to pay off its debts.
“They should really facilitate the recovery of the corporate sector, so that the corporate sector is the one that will bring in the much-needed income,” Oplas said.
Lanzona and Oplas agreed that debt can be used to stimulate economic recovery; however, it will be up to the next administration to rebuild its budgetary stability.