Honorable Senator Hontiveros, Honorable Senator Binay, Honorable Senator Gatchalian, Honorable Senator Lacson, Honorable Senator Aquino, Honorable Senator Villar, my fellow workers in the government, good morning.
The Development Budget Coordination Committee submitted to the Congress the proposed General Appropriations Act for 2017. We chose to call this submission A budget for Real Change. I hope that upon close examination you will find the title fitting.
President Rodrigo RoaDuterte was elec¬¬¬¬ted to office with a clear mandate for real change. The mandate includes restoring order and reorienting government to serve the people. It includes transforming our economy to be truly inclusive by improving infrastructure and social services. It includes some intangible things as well, such as public faith in our leaders and a sense of security on our streets.
At the end of this term, this administration envisions a country at peacewith its neighbors and free from the threat of armed rebels and organized crime. We envision a country where the poverty rate is brought down from 26% to 17% through investments that create meaningful jobs, along with an economic strategy that lifts lagging regions into the mainstream.
To accomplish this vision of inclusive growth, we have to do things that might seem contradictory at first glance. We need to lower tax rates to be at par with our ASEAN neighbors so that we can be more competitive in attracting investments. At the same time, we need to broaden the tax base and simplify the process to allow the government to invest more in infrastructure and other social goods.
In the immediate term, we will have to allow for the budget deficit to grow slightly—although this will be substantially offset by lower debt service. By lowering individual and corporate income tax rates, we hope to increase revenues through better compliance. Lower tax rates do not necessarily imply lower revenue intake, so long as the tax base is broadened and tax administration is improved.
We hope to further compensate for the lower tax rates by closely reviewing the incentives that were so casually given out in the past. We are looking at adjusting excise tax rates for a number of goods and eliminating some VAT exemptions and zero-rated transactions. We will submit to the Congress in a few weeks the specific tax reforms we recommend.
The country’s fiscal situation allows much room to push for reforms.
In 2015, revenue sustained its double-digit growth, outpacing nominal GDP growth. Total collections amounted to P2.1 trillion or 10.5% over the previous year. That growth includes the transfer of P60.1 billion, or about 0.5% of GDP, to the General Fund.
Tax revenues reached P1.8 trillion or 5.6% higher than the previous year. Tax administration reforms and higher revenues from the implementation of the Sin Tax Law enabled tax ollections to grow by 7.4%. We expect the improvements in collection to continue through 2016 and beyond.
The Bureau of Customs, however, collected marginally less revenues. Collections for 2015 saw a 0.5% decrease over the preceding year. A substantially lower oil price regime accounted for this.
Through the first half of 2016, revenue collections were at P1.1 trillion, a 1.4% increase over the first half of 2015. If we net out the transfer of the Coco Levy Fund, the improvement in collections is 7%. Based on year-to-date June 2016 performance, total revenues can reach P2.2 trillion by the end of the year, with tax revenue at P2 trillion.
Proceeds from the Sin Taxes, used to supplement our public health services, underscore what creative revenue measures can accomplish.
In 2015, revenues from sin taxes increased the Department of Health’s budget by 63% over the 2013 numbers. By the first half of this year, revenues from Sin Taxes raised the DOH budget to P122.6 billion—up 130.4% over 2013, when the Sin Tax law was enacted.
The enlarged DOH budget has been used to fund public health programs that benefit the poor above all.
The money was also used to provide insurance coverage to an additional 10.1 million indigent families as well as 2.8 million senior citizens under the Financial Risk Protection strategy.
In pursuit of the Millennium Development Goals, close to 614,000 indigents were immunized against pneumonia, 489,000 immunized against dengue, and more than 302,000 females aged 9 and above were given HPV vaccine as protection against cervical cancer. In addition, our public health program was able to treat 88,000 tuberculosis cases and more than 4,212 HIV/AIDS cases.
Income from the sin taxes enabled funding of 5,700 health centers in schools, and the enhancement of 956 Barangay Health Stations to qualify them for Philhealth accreditation. In addition, 1,623 Urban/Rural Health Units became 3-in-1 accredited. A total of 162 mobile dental clinics were also deployed.
The same sin taxes allowed the hiring of new health workers: 9,334 nurses, 171 dentists, 170 medical technologists, and 808 public health associates.
In 2015, total excise taxes from sin products reached P143.1 billion. This is a tax measure that outperformed earlier estimates and directly benefited the poor.
Imagine what other creative taxes could do for the economy and our people.
Meanwhile, our debt-to-GDP ratio continued to improve.
At the end of 2015, our outstanding national debt receded to 44.7% of GDP. We expect our debt-to-GDP ratio to drop to 42.8% and 41.6% in 2016 and 2017.
Today, only a third of the national debt is from foreign borrowing, compared to almost half in 2009. The foreign debt component of our national debt declined to15.6% of GDP by the end of 2015. Our preference to borrow locally is in line with our desire to mitigate risk on debt servicing from adverse foreign exchange fluctuations and to make room for borrowing activities that will help broaden and deepen our domestic capital markets.
At the same time, our financing mix policy also considers the welfare of OFWs and the competitiveness of our exports.
By the end of 2016 and 2017, we expect our foreign and domestic borrowing mix to be at 34:66.
Our policy is to source as much of our financing needs from domestic sources. At end-2015 interest payments for the outstanding national debt declined from 31.7% to 14.7% of revenues. That trend will continue.
The proposed budget targets a deficit of 3% of GDP. This is only marginally higher than the previous years. But the slightly higher budget deficit will translate into substantial infrastructure and human capital expenditures next year. This will enable our economy to expand programs, such as TESDA, that raise the skills profile of our labor force.
Higher public spending, in turn, will help make our GDP growth rate more robust and inclusive.
Last quarter’s Gross Domestic Product (GDP) growth of 7% will enable the new government to keep its growth targets on track for the rest of the year and for 2017. The second quarter growth rate for 2016 was the highest quarterly and semestral growth since 2014 and was 5% and above for 18 consecutive quarters.
If we look regionally, we see that NCR posted the highest per capita Gross Regional Domestic Product (GRDP) in 2015 at P398,985—nearly three times the national average and 9 percent higher than in 2014. Aside from NCR, two other regions, CALABARZON and CAR likewise posted real per capita GRDP higher than the national average at P145,859 and P131,110, respectively. Meanwhile, ARMM had the lowest real per capita GRDP among the regions at P26,757 in 2015 or just a mere 7% of NCR.
We need to do more to help our lagging regions. We need to stimulate growth in regions outside NCR by increasing regional infrastructure and social services spending in those areas.
In order to support the administration’s program of infrastructure build-up and increased investments in human capital, as presented in the President’s ten point socioeconomic agenda, the Finance Department is tasked with increasing revenues. We are expected to accomplish this while bringing down the oppressive tax rates.
Obviously, we need to put together a truly transformative tax reform package.
Just to make the challenge more interesting, the tax reform package must be designed not just to raise revenues but support inclusive growth. It must be a revenue package that coheres with the goals of maintaining the sustainability of our debt program, and more importantly attracting investments, creating meaningful jobs, and eradicating poverty. That package must attempt to make the tax system simpler, fairer, and more efficient, with the goal of broadening the tax base, lowering the tax rate, and increasing revenues.
While we are still under consultation to work out the precise numbers and mechanisms for our proposed reform, we wish to share our intended tax policy directions.
Today, the Philippines has among the highest tax rates in the region and among the narrowest tax bases. This is a condition tax reform should reverse. We should aim to bring down tax rates while at the same time broadening the tax base.
The tax reforms we intend to present Congress aim to lower tax rates and broaden the tax base to align with the systems prevailing in our neighboring economies. The package will include a review of tax incentives that have been given without time bounds.
The excise tax on oil has not been adjusted for two decades and the significant drop in oil prices gives us an opportunity to adjust to inflation. We are also looking at a tax on sugary and fatty foods to encourage consumers to buy healthier foods. This will be akin to the sin taxes.
In our present tax system, the VAT system captures approximately half of GDP. Self-employed professionals easily escape the tax net, largely due to bank secrecy laws. It is a system that causes inequality, economic distortions, and discourages investments.
We are designing a system that will be more transparent, performance-based, highly targeted, and time-bound. By increasing the effective tax rate for companies receiving incentives and reducing the corporate tax rate, we improve the equity of the whole system.
We will likewise seek to reform property tax rates with the end goal of unlocking the land market and helping LGUs raise more revenues. As announced earlier, we will seek to lower estate taxes to encourage updated documentation of land ownership.
Consistent with the thrust of modernizing governance, reducing corruption and inefficiency, and cutting red tape, we will continue reforms in the BOC and the BIR to help raise revenues.
We will also explore further tax measures, such as luxury and casino taxes, if needed to make up for revenue losses.
In general, the rich will have to pay more in taxes while the vulnerable sectors of society will be protected through highly targeted subsidies such as the conditional cash transfer program. We will ensure that the ordinary workers and the bottom 50 percent of households will be fully protected through social protection programs.
Over the next six years, we plan a thorough overhaul not only of our revenue systems but also of the entire government structure. We will begin with the abolition of obsolete agencies as the first steps in trimming bureaucratic fat.
The Philippines is at a critical juncture. 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.
The Ten-Point Socioeconomic Agenda revolves around the need to maintain sound macroeconomic and fiscal policies, invest in the people, and address the binding constraints to investment and job creation. This is why we need tax reform.
Tax reform is needed to achieve the larger goals of the administration and to make sure that everybody feels the country’s growth.
The people elected President Rodrigo RoaDuterte because they want real change and a break from the status quo. To achieve President Duterte’s promise to the people to deliver tunaynapagbabago—real change that the people can feel—we need to enact big reforms that can steer the country toward a better future.
Be assured we will be bold as well as imaginative. We intend to set the course for the next decades to come. So much rests on the reform efforts.
Last May, our voters wanted bold and imaginative leadership. We voted for real change. We intend to deliver on that.