Philippines Needs to Invest 30% of GDP for 2040 Vision of High Income Economy

The vision to transform the Philippines into an upper middle-income economy by 2022 and close to becoming a high-income one by 2040 will fall through unless total investments are raised from 24 percent to 30 percent of the country’s Gross Domestic Product (GDP).

National Economic and Development Authority (NEDA) Secretary Ernesto Pernia, said that of this target, the public share of investments must rise 5.4 percent of GDP this year to 7 percent onwards by 2022. Pernia said that beginning this year, the budget for public infrastructure would be increased to 5.4 percent of GDP, which is equivalent to about P861 billion, while private investment is expected to contribute 18.6 percent of GDP, for total investments equivalent to 24 percent of GDP.

“This is a significant improvement from historical lows, but this level will not be enough to help the country achieve its vision of eradicating poverty and becoming a high-income economy, where Malaysia is nearly right now, by 2040,” he said. Pernia said that to achieve this vision, the country needs to bring total investments from 24 to 30 percent of GDP, of which 7 percent of GDP will be contributed by the public sector. “Hence, an ambitious program focusing on infrastructure is necessary not only to raise the government’s contribution to investments, but also to fill the country’s massive infrastructure backlog that has been inherited from past governments,” Pernia said.

“In order to raise enough revenues to fund the government’s unmatched public spending plan, it needs to implement broad and deep reforms in tax policy and administration,” he added. “Without the tax reform, we will not be able to fund the needed increase in infrastructure spending beginning 2018.” According to Secretary Benjamin Diokno of the Department of Budget and Management (DBM), the total infrastructure budget, both national and local, is projected to grow from P861 billion in 2017 to P1.898 trillion by 2022, or from 5.4 to around 7 percent of GDP.

“These record levels of spending will align our country with its more vibrant neighbors and put us on track to achieve our vision of eradicating extreme poverty and transforming our economy into a high-income one by 2040,” Diokno said.

Diokno reiterated, though, that the unprecedented levels of public spending in the years ahead can happen only if the government were to raise a lot more revenues, which will require major reforms in tax policy and administration. He recalled that the first package of the Comprehensive Tax Reform Program (CTRP) crafted by the Department of Finance (DOF) was submitted to the Congress lastSept. 26. Finance Secretary Carlos Dominguez III said the DOF welcomes the recent statement of Rep. Dakila Carlo Cua, who chairs the House ways and means committee tackling tax reform, that the first package would likely be approved by the panel in January this year.

Dominguez said that “in the medium-term, tax reform is expected to help reduce the poverty rate from 21.6 percent in 2015 to 14 percent in 2022, lifting some six million Filipinos out of poverty, and helping the country achieve upper middle-income country status where per capita gross national income increases from $3,550 in 2015 to at least $4,900 by 2022, close to where Thailand is today.” If this momentum is sustained, the country would be well on its way to becoming a high-income economy by 2040 with a per capita gross national income of a least $11,000, which is where Malaysia is right now, he added.

Package One of the CTRP proposes to lower personal income tax rates, broaden the Value Added Tax (VAT) base, and adjust the excise taxes on automobiles and petroleum products. The lowering of personal income tax rates, a promise that President Duterte made during the 2016 poll campaign, will increase the take-home pay of workers and make our tax rates more competitive, Dominguez said. A broader VAT base will level the playing field and reduce massive leakages, while higher excise taxes on oil products and automobiles will improve the progressivity of the tax system as richer households consume far more of these products, he said.

“For instance, the top 10 percent of households consume around 50 percent of oil products (per 2015 FIES). Higher excise taxes can also help address traffic congestion and pollution,” Dominguez said. “Meanwhile, to protect the poor and vulnerable, highly targeted transfers and subsidies will be provided as part of the ramp up of social spending from 37.3 percent of the 2016 budget to 40.1 percent of the 2017 budget,” he said.

According to a report quoting BMI Research, sustaining the country’s high growth path is dependent on the Duterte administration’s ability to roll out big-ticket infrastructure projects.

“Economic growth performance will largely depend on the Duterte administration’s ability to cut through red tape and get infrastructure and investment projects going, as well as to reassure investors of the government’s commitment to maintain and improve the public-private partnership program,” read the report of BMI Research published in the January edition of its Asia Monitor. Also, the Oxford Business Group has cited a November report of ratings agency Standard & Poor’s that said the Philippines was a top performer in Southeast Asia in 2016 partly because of an expansionary fiscal policy that emphasizes public infrastructure.

Other institutions have also said the Philippines can sustain its high growth of above 6 percent and its status as one of Asia’s fastest growing economies provided that the Duterte administration delivers on its commitment to accelerate spending on infrastructure. These private and multilateral institutions include the International Monetary Fund, World Bank, Asian Development Bank, Fitch Ratings, S&P Global Ratings, Nomura, First Metro Investment Corp. (FMIC), Colliers International, Nordic Business Council of the Philippines (NBCP), Philippine Chamber of Commerce and Industry (PCCI), Employers’ Confederation of the Philippines (ECOP), Goldman Sachs, Bank of the Philippine Islands (BPI), Standard Chartered Bank, Hong Kong and Shanghai Banking Corp. (HSBC), Sun Life Asset Management Co., AB Capital Securities, Lamudi PHL and the Management Association of the Philippines. (DOF)