Governor Ernesto Isla, Atty. Alice Vidal, Justice Raul Victorino, Justice NarcisoNario, Atty. Ramon Maronilla, Dr. Aida Cruz, members seated at the presidential table including Justice Pamaran, David Kho, General Ermita, my good friend, members of the board of trustees, members and guests in today’s forum and birthday celebrants.
In October, my mother is celebrating her 93rd birthday. She’s very healthy and she’s very active, and let me quote to you what she always tells me on my birthdays. She says “may you live as long as you want, and may you never want as long as you live.” I’ll tell my mother that you appreciated that.
Thank you for this opportunity to brief you today on our fiscal situation and our plans for reform.
Last week, the NEDA announced that our GDP grew by 7% in the second quarter. This is despite the contraction of our agriculture because of the effects of El Niño.
It is useful to note that our economic expansion is now increasingly investments-led as opposed to consumption-led. Our manufacturing sector is finally growing even as our exports appear to have stalled.
We have maintained our balance of payments surplus, and our gross international reserves are at record levels. Our debt service levels are at their lowest since the debt crisis of the early eighties.
We are estimating that our year-end growth will be somewhere close to 7%. At any rate, the economic team based its budget estimates on a 6.5% growth rate. The P3.3 trillion budget we submitted to Congress is, in fact, based on a conservative estimation of our probable growth.
We are projecting the same 6.5% to 7% next year. Several international banks, however, have projected a higher growth range for our economy. If we make a mistake, it will be on the side of caution.
All things considered, we have very good conditions in which to introduce policy and governance reforms. We have enough headroom to raise our budget deficit level from 2% to 3%. That single percentage point will allow us to undertake programs to make our economic expansion a lot more inclusive. That is equivalent to about P150 billion additional spending.
Based on our reading of the resounding mandate of our voters last May, the Duterte administration has outlined a 10-point socioeconomic program. This includes: raising our investments in human capital; increasing investments in infrastructure to improve the country’s logistics backbone; improving the productivity of our agriculture through investments in farm systems, irrigation; and reconfiguring our tax system to make it more equitable.
The Duterte administration looks to increasing infra spending to ease congestion here in Manila, decrease the cost of moving people and goods through the archipelago, boost tourism, and pump prime economic activity. There will no longer be underspending which reined in economic performance in the past.
The next six years can either continue along the path of high economic growth but high socioeconomic inequality, or chart a different path towards shared prosperity that will uplift all. This is why it is so important to fund the 10-Point Socioeconomic Agenda, and this is why we need tax reform. Our proposed tax reform is both structural and administrative in nature.
As promised during the campaign, the administration is now pushing for a reduction in corporate and individual tax rates. The regional average tax rate for individuals is 25% while we average 30% for corporations and 32% for individuals. We will try to come as close to the average of our neighbors as soon as we can.
Bringing down individual income tax rates will boost the spending power of wage earners. Bringing down corporate tax rates will encourage investment inflows to our economy. The prevailing tax rates have been a disincentive to investments coming into our economy.
However, we must offset these revenue losses in order to invest in our infrastructure and our people, and to make sure that everybody feels the economic growth. Initial estimates put our revenue loss from lowering income tax rates at about P174 billion. To make this up, we will improve tax administration efficiency and reform our tax policy to be fairer, simpler and broader.
Our tax system is crying out for reform. While we have among the highest tax rates in the region, we also have among the narrowest tax bases. For instance, the BIR’s Large Taxpayer Unit monitors fewer than 3,000 taxpayers. In an economy our size, that is obviously too low.
The challenge for the BIR, our principal revenue agency, is to simplify the tax system to increase its reach. We cannot go on with a tax system where under a million carry the tax burden of a hundred and five million.
A simplified tax system should help expand the base of taxpayers. It must also reduce the margin of personal discretion to reduce corruption. I have also asked our friends at the BIR to treat our taxpayers better when they come to consult them or to pay their taxes.
We are pushing for full computerization of transactions at the Bureau of Customs as well as pegging valuation of goods to prevailing real time prices in the international market. This should slowly phase out the need for brokers and the proliferation of fixers.
In addition to making our two main revenue agencies more efficient, we are studying a number of options to raise more revenues for government to fund the reform.
We are reviewing the tax incentives that were so casually given out in the past. Many of the businesses are enjoying incentives they do not really need. We are designing a system that will be more transparent, performance-based, highly targeted, and time-bound. It’s about time to rethink our policy of attracting investments into the country.
We are, likewise, reviewing the exemptions to VAT. In our present tax system, the VAT system captures approximately only half of GDP. Self-employed professionals easily escape the tax net, largely due to bank secrecy laws. Overall, it is a system that causes inequality, economic distortions, and discourages investments.
We are looking to impose excise taxes on unhealthy food products. We will index and reform property valuations, with the end goal of unlocking the land market and helping LGUs raise more revenues. We will also index the oil excise to inflation. Indexation is a built-in mechanism that will make the tax system responsive to economic conditions.
In sum, we will pursue a tax reform package that will enhance inclusive growth, bring relief to our wageworkers, and bring more into the tax base without courting a credit rating downgrade.
Reducing income tax rates while increasing public revenues might seem a contradiction. But it can be done—through a tax system that is fairer and more efficient for all, with lower rates and a much more broadened base.
This is a good time to make our systems right. We need big reforms that can steer the country toward a better future.
The economy is rising. Investor confidence is high. Public support for the new President is unprecedented. The national debt has been tamed. There is consensus for the reforms.
Most important: there is political will to reform the system and political capital to drive it at a pace unthinkable in the previous administration.
We will seize the opportune convergence of factors at this time: a dynamic growth rate, robust growth potential, a stable currency, a stable fiscal profile, and determined national leadership.
We will not waste this opportune convergence. We will make our society fairer for the next generations. We will make our communities stronger and protect our citizens. We will make our economic growth more sustainable and inclusive.
In the end, this is not simply about revenues and expenditures. Resource mobilization is a means to an end—building a nation. This is about building our nation.
Thank you and good day.