Senator Pia Cayetano, chair of the Senate Ways and Means Committee, Congressman Joey Salceda, chair of the House Ways and Means Committee, former Prime Minister Cesar Virata, Development Bank of the Philippines Chairman and former Finance Secretary Alberto Romulo, esteemed former secretaries of finance, and eminent economists, thank you for coming.
I really appreciate your taking the time to attend this little gathering. Your presence is a great encouragement and augurs well for the reforms that we will discuss today.
I would like to thank Senator Pia Cayetano and Congressman Joey Salceda upfront for their presence today, but especially for their continued support for the game-changing reforms being pushed by the Duterte administration.
In less than two months, the House has delivered three out of four tax reform packages well in advance. In the very able hands of Joey Salceda, these difficult reforms were well defended and now better understood by both legislators and the people. Thank you, Joey.
I also thank Senator Pia for taking up the challenge of becoming Ways and Means chair. It is not a popular job nowadays and only someone who can put the interest of the country above narrow sectoral interests can handle it. Thank you, Pia. Thank you for the early start in conducting hearings on alcohol and e-cigarettes, which I understand will soon be presented in the plenary. The DOF commits to helping you defend all these tax reforms and convince both our senators and the public that the benefits far outweigh the costs.
I would also like to thank my distinguished predecessors and eminent economists in this room for showing strong support every year as we come together for lunch to discuss how we can collectively move the country forward. As I often tell the DOF team and the public, we build on the good work that you have done. The reforms we are pushing today are easier because you have secured the fundamentals for us.
Economic performance
It is not typical that we have in one room the country’s top economists, former finance secretaries, and the Ways and Means chairs. In other countries, meetings like this usually happen when a crisis compels them to hold emergency sessions and undertake reforms. I think a number of you have experienced that. But today, we meet as our country enjoys relatively robust economic growth, continuing reduction in poverty, and a generally positive outlook despite global headwinds.
As you know, economic growth was 5.5 percent in the first half of 2019, not surprising given the five-month delay in the enactment of the 2019 budget. We are implementing a catch-up spending program and are optimistic that there will be no repeat of the budget delay. In fact, the leaders of both Houses and the Executive are meeting every month to monitor progress on the budget and the 25 priority SONA bills.
We still maintain as the fighting target a growth rate of 6 or higher by yearend. It will keep us on track to meeting our ultimate goal, which is to bring down poverty incidence from 21.6 percent in 2015 to 14 percent by 2022, and to create more opportunities for law-abiding Filipinos. We will graduate from lower to upper middle-income country status ahead of the 2022 schedule. This is proof that we can eradicate extreme poverty within a generation, if we stay on course and continue to do the right things.
In 2018, we responded to elevated inflation by decisively implementing measures to increase the supply of food, especially rice, which was a top contributor to inflation last year. Rice tariffication, in particular, brought down rice prices by up to 10 pesos per kilo, and inflation further slowed to 1.7 percent in August—the lowest in 35 months. We are certain to end this year with inflation well within the target range of 2 to 4 percent. As I was mentioning this morning to Romy and some other people, the rice tariffication especially benefits not only the general public but the business sector as well because there will be less pressure for increases in wages.
Over the past three years, the administration has shown great political resolve in pursuing sweeping, game-changing reforms that the President committed in his Zero-to-Ten-Point Socio-economic Agenda. We have done this while investing heavily in infrastructure, maintaining fiscal discipline, and ensuring that we grow in a truly inclusive manner.
You will recall that earlier this year, Standard and Poor’s raised our sovereign rating from triple B to triple B plus. This is the highest rating we have ever achieved and just one notch away from the sterling A-rating territory. This is also higher than Italy and Portugal’s credit ratings. Again, this is due to the hard work that all former secretaries of finance have done.
In order to enter this A-rating territory within two years, we have to stay on the course and ensure fiscal discipline. This means taking a strong position against what is not in the best interest of the people as a whole. While some bills seek to benefit some sectors, they take away money from millions of other poor and jobless people who also deserve our help. For instance, the 17th Congress proposed bills that would have eroded some P1 trillion pesos annually if they became law. In fact, the President’s veto of these bills contributed to our credit rating upgrade.
At the midpoint of the administration, we find ourselves more ready than ever to pursue the necessary reforms, beginning with the four tax reform packages.
Tax reform
The passage of Package 2 or the Corporate Income Tax and Incentives Rationalization Act, or CITIRA, will encourage even more meaningful foreign direct investments. It will also promote the development of the local industry, expand small and medium enterprises (SMEs) as well as job creation.
The gradual lowering of the corporate income tax rate from 30 to 20 percent will be the best incentive we can give almost a million MSMEs, which are working hard and contributing a lot to the country by employing a majority of our workers.
At the same time, Package 2 also seeks to modernize the fiscal incentive system to make them performance-based, time-bound, targeted, and transparent.
We have already discussed this topic on several occasions so I will not belabor the point. But let me give you the latest findings.
In 2017, TIMTA data revealed that we granted 441 billion pesos worth of tax incentives to just 3,150 companies. In fact, 1,169 of them have been receiving incentives for over 10 years and distributed over 145 billion pesos in dividends, higher than the 127 billion in income tax incentives they received. So who are we really subsidizing: their companies or their stockholders abroad? And all these incentives are being given out by IPAs without any cost-benefit analysis to determine whether incentives have yielded real benefits to the economy.
In addition, some of these firms cheat the government of 63 billion pesos by abusing transfer pricing rules. The total is a staggering 504 billion pesos or around 3 percent of GDP, the size of our fiscal deficit. In other words, we have to account for the 504 billion pesos that we gave up and ensure that the taxpayers’ hard-earned money was not wasted. You know, it’s really strange. You get the COA investigating us for what we spend but we do not do any audit of how much we have given up. I don’t think that maybe COA should do it. However, it’s our responsibility to check whether or not these incentives are actually benefiting us. For all you know, they are. But we don’t have hard data on that.
To clarify, we are not removing incentives. We want to make sure that the incentives we give produce results. Under the new incentive regime, superior incentives and additional deductions will be given to companies that create better jobs, invest in R&D, train their employees, and buy local products.
We hope to finish in the coming months this fiscal incentive rationalization saga, which started in 1995 under Secretary de Ocampo — it’s only 24 years, I think it’s about time to get something done! — and which every succeeding finance secretary pursued. This story spans 24 years and 8 Congresses already. Let us bring this saga to a successful conclusion in this 18th Congress. Please help us make CITIRA the final season, like the 8th and final season of Game of Thrones.
Package 2+ seeks to increase excise taxes on alcohol and e-cigarettes. At the heart of this measure is the promotion of public health, especially of the youth. What we call alcopops and vapes are so easily accessible to the youth. In fact, I just read that Trump is trying to limit the flavors. He must have heard me because that’s what I told Juul when they came here. If we ever pass this, we do not want this thing to taste any other way than tobacco. If we do not intervene, we can expect binge drinking and nicotine addiction to increase, possibly destroying the future of the youth—our key asset in our demographic dividend.
Package 3, or the real property valuation reform, seeks to use uniform valuation standards. This will help resolve right-of-way issues that have stalled infrastructure projects for up to 10 years or more given valuation disputes.
Package 4 on passive income and financial taxes will simplify the tax system, support capital markets, and improve equity. The reform aims to lower the number of tax rates from 80 to 40, thereby reducing arbitrage. This package also reduces interest income tax from 20 to 15 percent, allowing 75 percent Filipinos who are small depositors to save and earn more from their investments. But the rich will, of course, have to pay more with a 15 percent dividend tax.
Economic reforms
The other priorities of this administration include the three economic reform bills, which are the amendments to the Public Service Act, the Foreign Investments Act, and the Retail Trade Act.
These reforms will further open up the economy to foreign investments and create more and better jobs. Overall, the reforms will also lower prices and improve the quality of products and services in the market.
The administration will also continue to accelerate the implementation of the “Build, Build, Build” program, which has the highest multiplier effect on the economy – the first of which is job creation. Our estimate is that infrastructure spending contributed around three million jobs in 2018.
We will also pursue the full implementation of the Rice Tariffication Law, which was enacted after 30 years of failed attempts. This has already made the country’s staple cheaper for more than 100 million Filipinos, particularly the low-income households who spend about 20 percent of their budget on rice.
We understand the concern of the rice farmers and we are accelerating the implementation of the Rice Competitiveness Enhancement Fund, including cash assistance to farmers. With rice tariff revenue expected to exceed 10 billion pesos, we can provide more support to farmers. We will also improve the productivity of the agriculture sector as a whole. This effort includes the distribution of individual titles to land reform beneficiaries, rather than CLOAs which nobody, except LandBank, accepts as collateral. If you go to BPI, or even the rural banks, they don’t accept it. So it’s not working.
Conclusion
The passage of the remaining tax reform packages and other economic reforms will help us secure the A-minus credit rating within the next two years and achieve our 14 percent poverty target by 2022. There is reason to believe that the winds are in our favor and the stars all aligned, or as the naval prose goes, here we have fair winds and following seas.
President Duterte enjoys broad support from our people. I think they appreciate the sincerity, the hard work, and the visionary strategy of President Duterte. That strong support was expressed in the midterm elections. As I said, none of the legislators who supported tax lost this time. I think there’s a lesson there in that recent election.
The executive and legislative branches of government have never been as united in vision and strategy. The decades of work started and sustained by the individuals in this room inspire us to continue to do what needs to be done.
Again, thank you for you guidance, and we request your support to go over the finish line in record time.
Thank you very much.
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