Your honors:
Thank you for this opportunity to brief the Senate on our fiscal performance, our debt management and the outlook for the spending program of this administration. Allow me to take this opportunity to reassure you of the Duterte administration’s commitment to fiscal stability into the medium term.
The key to financial stability is revenue generation. I am happy to report to you that from 2015 to 2016, we improved total revenues from P2.109 trillion to P2.196 trillion, which represents an improvement of 4.1 percent.
Over the same period, the BIR improved its collection from P1.433 trillion in 2015 to P1.567 trillion in 2016. This represents a growth rate of 9.3 percent. The BOC has made improvements in its collection, raising P396 billion in 2016 from P367 billion in 2015. This represents a growth rate of 7.8 percent. Other revenue generating agencies have also achieved huge improvements in its collection by 14.8 percent. Overall, we have achieved a strong tax revenue growth of 9.1 percent in 2016. When the numbers for 2017 come in, I am sure they will show even more dramatic improvement due to the ongoing administrative reforms and, hopefully, the beneficial early effects of tax reform. In the first six months of the year, total revenues grew by 6.8 percent from the same period last year. Tax revenues for the first six months also improved by 8.8 percent.
These are truly promising growth figures. Rest assured that our main revenue agencies are committed to maintaining this momentum.
In order to balance the picture, let me say that non-tax revenues fell by 8.9 percent in the same period. Revenues from privatization decreased even more dramatically by 43.6 percent due largely to the expected diminishing returns from this program.
Allow me to highlight the performance of tobacco and alcohol excise tax collections. In 2011, the so-called “sin taxes” brought in revenues equivalent only to 0.5 percent of GDP. After the new excise tax schedule was enacted into law in 2012, revenues from this source doubled to about 1 percent of GDP in the succeeding years. Collections in 2016 dropped slightly to a 0.1 percentage point as percent of GDP due mainly to the proliferation of fake stamps and the implementation of graphic health warnings on cigarettes, but we expect the said revenues to maintain its growth momentum in the coming years.
Recently, we uncovered large-scale tax fraud committed by a cigarette company. During his second State of the Nation Address, President Duterte ordered the DOF and the BIR to accept the offer of the cigarette company to settle its tax obligations along with appropriate penalties. The settlement amounts to P25 billion exclusive of VAT charges of P5 billion. This will be the largest sum of taxes collected ever from a single taxpayer in Philippine history. It brings windfall revenues for the government during a time when calamities inflicted unexpected spending burdens for the government.
On July 20, the BIR collected P3.4 billion from this cigarette company as a first tranche of its settlement offer to the government. The date of full collection will depend on how fast the Philippine Competition Commission approves the sale of this company’s assets to the eventual buyer. Mighty will be out of the cigarette manufacturing business. Our future sin tax collections are expected to rise by at least P1 Billion a month. This can be used to pay for additional medicines, commodities and services that will prevent and control the deadly diseases caused by tobacco use, and improve our healthcare facilities.
Between now and 2022, with tax reforms and continuing improvement in tax administration, we look to improving the ratio of revenues to GDP from the current 15 percent to 17.7 percent by 2022. Tax revenues-to-GDP will increase from 13.7 percent in 2016 to 17 percent in 2022. This will bring our tax effort to about the regional average.
Nevertheless, because of the spending program we have adopted, including aggressive spending to close infrastructure gap and to expand social services, we expect to incur budgetary deficits through the medium term. We commit to maintaining a deficit at an average of 3 percent of GDP between now and 2022.
For 2018, the National Government aims to raise total revenues of P2.8 trillion, or 16.3 percent of GDP. This includes revenue measures of P133.8 billion. With the yields from the revenue measures and the continued implementation of administrative reforms by our revenue collecting agencies, we expect revenues to grow by 17.0 percent in 2018.
Tax effort will increase to 15.3 percent of GDP in 2018 to be able to finance needed social expenditures. The fiscal deficit remains manageable at 3 percent of GDP to allow for higher infrastructure and human capital investments for our people.
When we do need to borrow to finance the deficit, we have as a matter of policy committed to an 80-20 borrowing mix in favor of locally sourced, peso-denominated debt. This will reduce foreign exchange risks and help utilize excess liquidity in our financial system.
The consolidated public sector financial position estimated for this year and for 2018 shows a deficit well within 2 percent of GDP. It is not true that the ambitious infrastructure program will lead to reckless borrowing and undermine our fiscal stability.
We benefit tremendously from the prudent financial management of the last decade. The prudence paid off in the form of decreasing National Government debt-to-GDP ratio. Even with the programmed increase in the deficit-to-GDP ratio to enable pump-priming of the economy, we expect the national debt-to-GDP ratio to become even more benign by 2022.
In 2012, national debt was 51.5 percent of GDP. This year, the ratio has come down to 40.6 percent of GDP. We project that by 2022, the national debt should have climbed down to only 37.7 percent of GDP. The debt has become more manageable by the day.
Interest payments as a percentage of national government revenues declined from a high of 36.9 percent in 2005 to only 13.8 percent in 2016. Interest payments as a portion of expenditures declined from a high of 31.1 percent in 2005 to 12 percent in 2016. We expect this pattern to continue in the succeeding period, especially with the passage of the Comprehensive Tax Reform Package One. The Package One of the Comprehensive Tax Reform Program, which was approved by the House last May 31, 2017, is currently being deliberated in the Senate, with 14 hearings and meetings to date. This proposes a tax system that exempts those with a taxable income of below 250,000 pesos, while the rest of the taxpayers will also see lower rates – except those who are very rich or earning above P5 million.
Apart from lowering income taxes, we want to make sure that the micro enterprises will not be burdened. Currently, they have to pay income tax, and follow the tax requirements of large corporations. They also have to pay VAT or percentage tax. Our proposal is to levy an optional 8 percent tax on gross sales in lieu of income, VAT, or percentage tax. This will improve compliance significantly.
We also want to lower the donor’s and estate tax to 6 percent so it doesn’t matter if the person passed away, donated a property or simply wants to transfer a property — it will be a standard of 6 percent. We will lose some money, yes, but the key here is to make the land market more efficient so that the land will go its best use. This will create more investments and eventually, jobs.
However, if we stop with measures that will reduce revenues, it will be difficult for our current fiscal stance and hinder our administration’s development agenda. In line with this, we are also proposing some revenue-enhancing measures which include broadening the VAT base, and increasing oil and automobile taxes.
The total tax reform Package One under Senate Bill 1408 proposal will allow us to generate P169 billion from the tax policy in 2018, comprising a loss of P126 billion from personal income tax and a gain of P187 billion from the VAT base expansion and increase in automobile and petroleum excise, and P47 billion from the sugar-sweetened beverage excise tax. We expect an additional P44 billion from BIR and BOC due to improved tax administration. All these funds will be used to fund priority socioeconomic programs of the Duterte administration. The revenuesfrom the tax reform will be spent only for infrastructure, health, education, and anti-poverty programs.
The first package will help keep the deficit in check, although it will not produce enough revenues to fully fund the infrastructure and social services programs. Succeeding packages of the comprehensive tax reform program will be brought to the legislature soon.
We reiterate our commitment to continue implementing administrative reforms and revenue-enhancing measures to attain revenue targets and sustain collection growth.
In closing, let me say that our fiscal position is strong. That strength encourages us to be bold in projecting that we will lead Southeast Asia in growth for the next few years even as we reshape our growth to be more inclusive.
The strong financial position emboldens us to aspire for a breakout from the present plane of economic growth to a higher one. The future bodes well for our people.
Thank you.