From Stability to Prosperity: A Story of the Philippine Economy

Posted on Posted in 2019, News

Written by: Samantha L. Castroverde

The Ateneo Economics Association’s KamalAEAn 2019, entitled “From Stability to Prosperity: A Story of the Philippine Economy” was held last October 8 in partnership with TALAB. The session started off with a presentation by Joseph Louie C. Limkin, director from the Department of Finance (DOF), which showcased the 10-point socioeconomic agenda and the provisions under the remaining tax reform program. An open forum followed the presentation thereafter.

The Road of Reform

Limkin began with AmBisyon Natin 2040-a set of visions to guide the Philippines into the future. Boosting the country’s income status and poverty eradication was the main focus of the DOF. The 10-point socioeconomic agenda further contextualizes these goals by listing down factors of improvement in the country.

Among the 10 agendas, 6.5 has been claimed to be achieved by the DOF. This includes: maintaining macroeconomic policies, progressive tax reform, energizing competition and ease of business, infrastructure spending, investment in human capital, and improvement of social protection programs. Rural development is on the way to being achieved as well. The remaining agendas that have yet to be addressed are securing land tenure, promotion of science and the arts, and the Reproductive Health (RH) Law.

TRAIN, or Package 1 of the tax reform, contributed to the steady funding of the country’s infrastructure and social services. In 2018, the actual revenue collected by TRAIN surpassed its goal when it reached 8% past  its target revenue. This further contributed to the increase of 2018’s tax efforts by 14.7% of the national GDP, the highest that was ever reached for the past twenty years. Lowering income tax was the main driver of Package 1, trading off with the increased taxation of gasoline, automobiles, and sweetened beverages, among others. Raising excise taxes on sweetened beverages and cigarettes are considered as health measures, while taxes on petroleum products are pointed out to be consumed by the higher-income households.

Social mitigation measures include the Conditional Cash Transfer Program (CCP), Pantawid Pasada Program (PPP), and enhanced social welfare programs through the issuance of the national ID. The CCP boasts of 10 million beneficiaries with an increased monthly stipend of 2,400 to 3,600 pesos. The PPP aims to soften the increased prices of fuel for Public Utility Jeepneys (PUJs) by giving “fuel cards” worth 518 Million to more than 103,000 drivers. The national ID had started its pilot testing in Manila in September of this year.

Limkin boasts of the fruitfulness of Package 1 in its first three years. “Despite slowing global trade and international crises, the country maintains sustained growth.” The Philippines is projected to surpass the upper-middle-income threshold by next year, according to the World Bank. where we will be at par with China, Malaysia, and Thailand. The country’s real GDP since the implementation of Package 1 in the latter half of 2017 and its following year are 6.7 and 6.2, respectively. However, 2019’s GDP is recorded to be at 5.6% in the first quarter and 5.5% in the following quarter. 

Despite qualms about how the tax reform is unnecessary, DOF maintains that the tax reform is still needed in order to redesign existing issues in our tax laws. Issues such as taxes not being indexed to inflation, leakage-prone policies, and bank law secrecy which makes it difficult to audit taxpayers.

Meanwhile, four remaining packages are left to be implemented. These are: Corporate Income Tax and Incentives Reform (Package 2), Alcohol and E-cigarette Excise (Package 2+), Property Valuation (Package 3), and Passive Income and Financial Taxes (Package 4). 

Package 2 focuses on reforming Corporate Income Tax (CIT) and Incentives. The Philippines has the highest CIT rate at 30%, but the country still experiences low efficiency collection and uncompetitiveness. To illustrate, Thailand’s 20% CIT rate garners 20% efficiency as compared to the Philippines’ 12.3% efficiency rate. Unnecessary incentives are the cause of said inefficiency. PHP 441 billion was allotted to incentivize firms in 2017, but only 3,150 large firms were able to benefit from this, which means they are exempt from the CIT. Small and Medium-Sized Enterprises (SMEs) resolve to pay the high rate of 30%. To mitigate this, Package 2 aims to lower CIT to 20% by 2029. It will also make incentives performance-based in terms of job creation, exporting, involvement in R&D, skills training, investment, and support of local suppliers. This hopes to make the incentives more value-adding. Package 2 will also remove the forever incentives, requiring firms to reapply for benefits and ensuring the deserving ones are approved by the system. 

Package 2+ aims to include alcohol and e-cigarettes in the tax increase, alongside the approved increase of tobacco products. Taxes from these products will flow into health expenditure programs. In particular, the DOF aims to fund the Universal Health Care (UHC) program. The package hopefully discourages the consumption of alcohol and cigarettes among the youth and poor.

Package 3 aligns the market values of a piece of land between the seller and the government. This is done through adopting international standards, rationalizing valuation, and establishing single-valuation base for taxation.

Package 4 intends to lower rates on passive income. The poor are more affected by the added rates to passive income because of limited and higher-taxed instruments, while the rich have a greater advantage in handling their income in terms of a more diversified portfolio of investments. There exists a preferential treatment to products (i.e. deposits) which only the rich can afford. Package 4 will then harmonize deposits regardless of income level.

Optimistic Outlook

“We do not want business as usual. We want a radical change in the way we live.” The success of economic reforms are not just the state’s responsibility, Limkin says, as it is also up to the people. He calls for a sacrifice of self-interest in favor of the common good. Without the tax reform, the poor will most likely remain poor because there will be no investment in infrastructure, education, and health. The key is to focus on imparting a far better future for the following generations. While this tax reform is initially challenging, it will provide long-term benefits to the majority in the next generation. 

Lively Discourse

KamalAEAn 2019 ended with an energetic forum between the students and the speaker. Many of the students are concerned about the farmers’ plight in the context of the Rice Tariffication Law, despite the presented advantages of the reforms in the overall economy. There is a concern for the inclusiveness of all sectors, despite the DOF’s claim that the reforms aim to level out the different income brackets in the long-run. Questions related to the farmers ranged from addressing the lowering prices of rice which inadvertently affects their livelihood, the feasibility of subsidizing farm equipment, and the terms of issuing the said loan of 15,000 pesos. 

There was also a question on automation, regarding existing financial measures in case of an automation takeover in the service sector. A question regarding the direction of the Philippine economy was also raised, whether or not it’s headed towards pro-consumer or pro-industry. To answer, Limkin acknowledges that there is no preferential treatment towards either, only what can benefit the majority.

In the end, it seems that the premium given to the long-term solution is challenged. The conditions of the present is regarded just as significantly as the potential of the future. Observing this, it can only be hoped for that the proper steps to mitigate the unforeseen effects of the tax reform are taken, through issuing the appropriate subsidies or incentives to those who are badly affected. 

Those departments responsible for the implementation of the tax reform must efficiently work together. One department is not always wholly responsible for the setbacks of the tax reform, most of the time, it is a symptom of a greater bureaucratic issue. For example, the Department of Agriculture is left to take charge of the aforementioned subsidies and equipment needed by the farmers. The tax reform is an excellent plan and is meant to truly move the country forward. In saying that, this means that all sectors must be included in that progress. 

References:

CEIC Data. (2019, June 1). Philippines Real GDP Growth [1999 – 2019] . Retrieved from https://www.ceicdata.com/en/indicator/philippines/real-gdp-growth.

Department of Finance. (n.d.). Package 1 : TRAIN. Retrieved from https://taxreform.dof.gov.ph/tax-reform-packages/p1-train/.
Department of Finance. (2019, October 7). CITIRA to let PHL truly prioritize key industries, areas–DOF. Retrieved from https://taxreform.dof.gov.ph/news_and_updates/citira-to-let-phl-truly-prioritize-key-industries-areas-dof/.
Laforga, B. (2019, September 1). National ID to be pilot-tested in Metro Manila. Retrieved from https://www.bworldonline.com/national-id-to-be-pilot-tested-in-metro-manila/.

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