The Philippine Debt Conundrum: Relying on Consumption Tax Makes Life Harder for the Poor


August 18, 2022

Manila, Philippines – When President Ferdinand Marcos Jr. gave his first State of the Nation address, he said he would like to end his presidency in 2028 with single-digit poverty and a public debt below 60% of the economy.

However, the Ibon Foundation think tank said that with the government’s overreliance on consumption taxes, which it says erodes the “take-home pay” of the poor and middle class, millions of Filipinos will continue to languish. in poverty.

The government’s debt stock hit the 12.79 trillion peso mark in June due to “net issuance of domestic and external loans as well as currency adjustments”, the Bureau of the Treasury (BTr) said.

But this year’s borrowing – 2.2 trillion pesos – is expected to take outstanding debt to a new high of 13.44 trillion pesos by the end of the year, with an annual debt-to-income ratio gross domestic (GDP) by 62 percent, breaching the internationally recommended ratio of 60 percent for debt to be manageable.

This, while the Philippine Statistics Authority (PSA) said there were 20 million Filipinos, or 18.1% of the population, living in poverty, up from 16.7% in 2018 and the government target of 15.5% to 17.5%.

From 6,090 billion pesos in 2016, the BTr said outstanding government debt rose by 296.06 billion pesos, or 2.4 percent, in June, leaving Marcos with an outstanding debt of 12 790 billion pesos, or 31.5% external loans and 68.5% internal loans.

This, while the external debt, which is 5.1% higher than the 3.83 trillion pesos in May, reached 4.02 trillion pesos, while the internal debt reached 8.77 trillion pesos, or 1.2% more than May’s 8.67 trillion pesos.


But despite unprecedented borrowing, which Rodrigo Duterte’s previous administration said was for the COVID-19 response, Finance Secretary Benjamin Diokno said “we’re not going the way of Sri Lanka.”

This year, Sri Lanka’s debt-ridden economy “collapsed” as its government, which owes $51 billion, failed to pay interest on its loans. As a result, even basic necessities, such as food and medicine, are now in short supply.

Last week, the BTr said the government’s share of outstanding debt to the economy had risen to 62.1% in June from 63.5% in March, the highest since the 65 .7% in 2005.

However, the debt-to-GDP ratio, which is the best way to determine an economy’s ability to repay its loans, still exceeded the 60% threshold considered manageable by multilateral lenders for developing economies, such as the Philippines.

Income cannot catch up with expenses
The BTr said last month that the government’s budget deficit for June had widened to 215.5 billion pesos, 43.81 percent higher than the 65.7 billion pesos recorded a year ago.

The June result was driven by the 27.91% growth in expenditure (505.8 billion pula) which outpaced the 18.20% increase in government revenue, or income (290.3 billion).

He said the expenses, which amounted to 27.91%, or 110.4 billion pesos, more than the 395.4 billion pesos spent last year, were due to higher capital expenditure. for infrastructure, military modernization and social services.

“Similarly, expenditures have increased thanks to the implementation of various social protection programs of the Ministry of Social Welfare and Development, the release of the coir levy fund of 10 billion pesos and the increase expenditure on personnel services,” the BTr said.


Government revenue collection, meanwhile, increased by just 18.2 percent to 290.3 billion pesos in June — Internal Revenue Bureau (173.5 billion pesos), Customs Bureau (76 .2 billion pesos) and other offices (1.1 billion pesos). .

The BTr pointed out that the increase in revenue collection was due to the 17.42% increase in tax revenue (250.9 billion pula) and the 23.46% increase in non-tax revenue (39 .4 billion pula).

Pay the debt
Diokno, who served as governor of the Bangko Sentral ng Pilipinas under Duterte, said former finance secretary Carlos Dominguez III was “very good at making sure we borrow at the lowest rate possible”.


The Marcos administration has said it plans to gradually reduce the debt ratio to 52.5% by 2028, the end of Marcos’ term. In 2019, the debt-to-GDP ratio had already fallen to 39.6%, but COVID-19-related borrowing took government bonds to unprecedented levels.

Sonny Africa, executive director of the Ibon Foundation think tank, told that “the government is ultimately paying off the debt with the revenue it generates”, but there is a problem with how the revenue is generated.

He pointed out that the previous administration’s tax reforms significantly shifted the tax system “toward regressive indirect taxes on consumption and away from progressive direct taxes on income.”

Consumption taxes are those “paid directly or indirectly by consumers” through the sale of goods and services – taxes that are “at the expense of poor and low-income Filipinos”.


He said the Tax Reform for Acceleration and Inclusion (TRAIN) Act increases consumption taxes on essential and previously VAT-exempt goods and services while reducing income and inheritance taxes, even for wealthy families.

This, while pointing out that despite the two-tier corporate income tax bracket, most of the tax cuts from the Business Recovery and Business Tax Incentives (Create) Act still benefit large corporations. businesses.
Who pays the bonds?
Africa said poor and middle-class Filipinos now bear a disproportionately higher tax burden than before, while most wealthy families and all large corporations bear a lower tax liability.

“The huge and widening income and wealth gaps in the country and our urgent need for income make this particularly unconscionable,” he said, pointing out that government policies are driving down consumption and the welfare of Filipinos.

Based on data provided by the Ibon Foundation, the petroleum tax provision of the TRAIN Law led to a collection of 197.3 billion pesos in 2019 to 2020, while the reduction in inheritance taxes and donors resulted in a loss of 14.5 billion pesos.


The reduction in corporate tax in 2019 to 2020 by the Create law also resulted in a shortfall of 372 billion pesos. As a reminder, the Create law reformed corporate income tax and incentives and reduced the corporate tax rate from 30% to 25%.

The Ibon Foundation said its studies showed that the Create law would cause a shortfall of 251 billion pesos – 133.2 billion pesos in 2020 and 117.6 billion pesos in 2021 – which could have been spent on a stronger response to COVID-19.

He pointed out that due to the government’s overreliance on “regressive” means of revenue generation, indirect taxes on consumption have risen to 3.6% of GDP in 2020 from 2.5% in 2008.

This, while corporate taxes fell to 2.8% of GDP in 2020 from 3.5% in 2008, the Ibon Foundation said: “An overreliance on regressive consumption taxes is a self-imposed straitjacket.

A harder life for the poor
Africa said “callous and unfair tax reforms have eroded the take-home pay of the poor and middle class, and made them even more vulnerable to worsening inflation.”

According to PSA data, headline inflation in the Philippines hit the 6.4% mark in July due to faster increases in the prices of meat and fish, gasoline and transportation, and electricity.

Last February, Dominguez proposed new or higher taxes to pay for loans taken out by the Duterte administration, particularly to deal with the COVID-19 crisis.

However, Africa said the problem with the proposal is not the revenue generated but where it is generated from, saying about three-quarters of the projected revenue will come from the indirect consumption tax.


Marcos and Diokno are not in favor of additional tax measures, although they plan to impose a 12% value added tax on digital transactions and tax single-use plastics. They also plan to reform property assessment and capital market taxation, which the Duterte administration originally proposed.

But last month, as lawmakers in Makabayan proposed income tax cuts for middle-income families, Diokno said it was “too early” to make changes to the existing tax system. on personal income.

Let the rich pay?
Africa said revenue is never enough for government spending and deficits are normal, but “our deficits will only get worse, or our social and economic services will be squeezed, without creative leaps in generation income”.

“A wealth tax on billionaires is extremely relevant and urgent,” he said.

“If the government really wants to increase its revenue, it should support the Billionaires Wealth Tax Bill which was introduced by Makabayan representatives last year,” Africa said last March.

He explained that 2,919 Filipino billionaires are together worth 8.1 trillion pesos, already 16% of the wealth of the Philippines. “A tiny wealth tax will contribute 467.1 billion pesos to government revenue,” he said.

However, Diokno said he was unwilling to support proposals to raise tax rates on the wealthy, saying such a move could drive away potential investors in the Philippines.

“You could disable many of these people. Those who want to enter the Philippines might think twice before doing so. That kind of effect, so you have to weigh all those factors,” he said.

For Africa, debt is only a drag on growth if the government does not overcome its self-imposed fiscal shackles by refusing to tax billionaires and big business more.

“He needs to spend a lot more on an expansionary fiscal program to accelerate the recovery, but that won’t happen if he remains obsessed with controlling debt and solvency,” he said.

Rosario Guzman, head of research at the Ibon Foundation, said the goal of reducing the debt-to-GDP ratio to less than 60% is based on an economic ambition to attract foreign capital and greater capital participation. private in infrastructure.

“The lower ratio can be achieved in the medium term by the administration, but this would ultimately mean a counterpart of government revenue that would be collected largely through regressive consumption taxes.”


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