Finance Secretary Carlos Dominguez III has underscored the broad impact of a recent Supreme Court ruling which increased the coverage of the Internal Revenue Allotment (IRA) due local government units (LGUs) to include all national taxes, which even Fitch Ratings and Moody’s Investor Service have flagged as a possible challenge to the Philippines’ public finance management program.
Dominguez said the intended beneficiaries of the ruling, of which the full text has yet to be released by the Supreme Court, should be made aware that the issue “is not a simple matter” and thus, should be implemented with due care to ensure that the government maintains its strong fiscal position.
Initial estimates show that based on the general statement issued by the Supreme Court stating that the “just share” of LGUs should be computed and sourced from all national taxes (and not just from the national internal revenue taxes), the IRA arrearages could reach P1 trillion to P1.5 trillion if the decision is retroactively implemented, Dominguez said in an earlier interview.
He said the Development Budget Coordination Committee (DBCC), “would have to deliberate” on this issue. Dominguez, along with Budget Secretary Benjamin Diokno, Socioeconomic Planning Secretary Ernesto Pernia, Bangko Sentral ng Pilipinas (BSP) Gov. Nestor Espenilla Jr. and Executive Secretary Salvador Medialdea are the members of the DBCC.
“We should communicate that this issue is not a simple matter. Both Fitch and Moody’s have put a red flag as warning regarding this Supreme Court ruling. They are fully aware of the (ruling’s) possible risks,” Dominguez said.
The Finance Chief pointed out that while both credit rating agencies remain bullish on the country’s high growth prospects over the medium term, they both mentioned the SC ruling as a possible challenge to effective public finance management.
On July 17, Fitch Ratings announced that it has affirmed the Philippines’ investment-grade rating at ‘BBB’ with a stable outlook, citing the country’s strong macroeconomic performance, growth in investments and private consumption.
“We expect domestic demand to maintain strong growth of 6.8 percent in both 2019 and 2020, which would maintain the Philippines’ place among the fastest-growing economies in the Asia-Pacific region,” Fitch said in its press statement.
Responding to the latest rating decision by Fitch, Dominguez has said: “This is another recognition of the bold economic policy of the Duterte administration to fix the flawed tax system for the first time in over 20 years, and at the same time provide a steady revenue stream for its ‘Build, Build, Build’ infrastructure development initiative as well as for social programs that would accelerate poverty reduction and grow the middle class.”
On Moody’s positive assessment, Dominguez said that this was “yet another recognition of the Duterte administration’s commitment to structural reforms in the economy that would lead to robust and inclusive growth into the medium term.”
Fitch said that it “expects central government revenue to improve to 16.2 percent of GDP in 2018 and 16.7 percent in 2019 from 15.6 percent in 2017. The revenue improvement should help preserve fiscal stability as government expenditure increases under the planned public-investment programme, which aims to raise the government’s capital expenditure to 7.3 percent of GDP by 2022 from 6.1 percent in 2018.”
“We therefore expect the budget deficit to stabilize at around 3 percent of GDP in 2019 and 2020 and gross general government debt to decline to around 35.4 percent of GDP in 2020 from 35.9 percent of GDP in 2018,” Fitch said.
The ratings agency, however, noted “the impact on the Philippines’ fiscal balances of a recent Supreme Court ruling requiring increased transfers from the central to local government units remains unclear given the uncertainty over the precise timing and content of the ruling.”
Fitch said that “based on our preliminary assessment, the ruling could put upward pressure on the general government debt ratio, as well as creating challenges for effective public-finance management.”
Moody’s, meanwhile, also affirmed its Baa2 rating on the Philippines and maintained its stable outlook, citing the country’s “high economic strength derived from a large and fast-growing economy and improving fiscal strength based on moderate government debt levels and gains in debt affordability.”
“The government has made progress on several facets of the socioeconomic reform agenda that was unveiled at the outset of the term of President Rodrigo Duterte. In particular, tax reform has complemented faster implementation of infrastructure development. As a result, Moody’s expects a broadly stable government debt burden at moderate levels, below 40% of GDP, improving debt affordability, and sustained high GDP growth,” Moody’s said.
But it also noted that “prospective changes to governance frameworks could have negative implications for public finances,” which it said include, among others, “the recent Supreme Court ruling that redefines the share of national government revenue to be transferred to local levels of government.”
Dominguez said he remains confident that the Philippines will maintain its status as among the fastest-growing economies in the region on the back of higher spending on the “Build, Build, Build” program and stronger domestic demand as pointed out by Fitch in its report.