Tax Reform Program to Fill Backlog in Infrastructure, Education and Health

The proposed comprehensive tax reform program will, if approved in toto, let the Duterte administration improve 44,000 kilometers of national and local roads; build 6,700 health centers and hire nearly 10,000 doctors, nurses and midwives; and attain 100 percent health insurance coverage, along with building 80,000 more classrooms and hiring 157,000 teachers over the next five years, according to Finance Secretary Carlos Dominguez III.

Dominguez said President Duterte’s goal of liberating six million Filipinos from poverty by 2022 would be better achieved by implementing these initiatives, because raising productivity and improving competitiveness will, in turn, create more and better jobs—and thereby lift the economic status of the country’s impoverished sectors.

However, he said, if the tax reform program fails to get approved in its entirety by the Congress, the six million Filipinos representing the 21.6 percent still trapped in extreme poverty will be doomed to their fate, GDP expansion will not be sustained at 7 percent, the economy will suffer a credit ratings downgrade, and the benefits of continued high growth will remain exclusive to the rich.

“All the above will not be possible if the tax reform package is not passed,” Dominguez said.

“In a word, the 21.6 percent still trapped in poverty will remain there even after we have gone. We have reached the toughest point in poverty alleviation. We are left with what might be called the hardcore poor: those with no skills and no opportunities. They have the steepest slope to climb,” Dominguez said.

“By failing to act boldly at a most opportune moment, we will betray our people. We will condemn our nation to the vicious cycle of high inflation, high interest rates and inhospitable business conditions that we endured before,” he said.

Dominguez pointed out that: “Without the tax reform package, our GDP growth cannot be sustained by at least 7 percent. Without a dramatic increase in investments, the country will be consigned to growth below 6percent—a purgatory for an emerging economy with great potential.”

“Our economic simulation studies validate this,” he said.

The first package of the comprehensive tax reform program submitted to the Congress last September under the Department of Finance (DOF)-proposed Tax Reform for Acceleration and Inclusion Act aims to generate a net gain of P174 billion, equivalent to 1 percent of the GDP in 2018.

This initial package aims to make the tax system more progressive through the lowering of personal income tax (PIT) rates to make these at par with those in the region, expanding the Value Added Tax (VAT) base by limiting exemptions to necessities such as raw food, education and health care, while increasing excise taxes on oil and automobiles.

Dominguez said the congressional approval of the tax reform plan would allow the government to achieve 100 percent enrollment and completion rates, build 80,066 more classrooms and hire 157,412 more teachers between 2017 and 2020, with the end in view of attaining the ideal teacher-to-student ratio and classroom-to-student ratio under more conducive learning environments for our youth.

In health care, the DOF-proposed tax reform plan will enable the government to upgrade 300 local hospitals, build 6,793 new barangay and rural health centers, and hire an additional 2,098 doctors, 4,560 nurses, and 3,328 midwives between 2017 and 2020.

“It will allow us to achieve 100 percent PhilHealth coverage at higher quality of services,” Dominguez said.

In infrastructure, this will ensure that the government has enough funds to concretize 3,714 kilometers of national gravel roads, some 10,473 kilometers of national asphalt roads, and 30,209 kilometers of local gravel roads, along with irrigating some 1.3 million hectares of land and providing some 7,834 isolated barangays and 23,293 isolated sitios with road access, he added.

Dominguez said the growing uncertainty in global prospects as a result of recent external developments means the country would “need to prepare well and build a solid fiscal buffer to keep us strong when the storm comes.”

He said estimates done by the Asian Development Bank (ADB) show that the country needs to invest at least P610 billion annually in infrastructure, which is a feasible target if the government can provide a business friendly environment to investors.

This means that from 2016 to 2o22, the Philippines should spend a total of P1.073 trillion on urban and rural infrastructure; and another P718 billion on education and P139 billion on health; and P268 billion on social protection, welfare and employment.

“We must be fiscally prepared to invest more heavily in our human capital and in much needed infrastructure,” Dominguez said.

The DOF secretary raised a dire scenario should the Congress choose to pass only the tax package’s popular component , which is the reduction in PIT rates without the corresponding revenue-enhancing measures.

“Without improving on our revenues, many of our children will continue walking hours to get to school and our classrooms will continue to be packed beyond capacity. The poorest Filipinos will continue to have little or no access to health services. Our farmers will be unable tor raise their productivity and thus remain poor,” he said.

Along with this bleak scenario, the Philippines will most possibly suffer a credit rating downgrade as the government will be forced to rely on borrowings to manage the deficit, which means P30 billion in additional debt costs; consumers will have to absorb the consequences by having to cope with a permanent P2-depreciation of the local currency against the dollar, along with a two-percent increase in interest rates; and public funds for classrooms, health centers and rural roads will be in short supply, Dominguez said.

“If we fail to pass the revenue enhancement measures, we will lose the growth momentum that took us years to build. We will face the specter of large budget deficits and move closer to a debt crisis,” he said.

Dominguez likewise noted that without the tax reform package, growth will not only be slower but exclusive, with the rich continuing to corner the wealth created and the poor kept out of the national economic mainstream.

The government’s goal of reducing poverty rates from the current 21.6 percent to 14 percent to bring the Philippines at par with Thailand and China in terms of per-capita gross national income by 2022 will flounder.

Thus, the 2040 vision of eradicating poverty and making the country a high-income country like what South Korea and Malaysia are already today, will likewise fail, Dominguez said.

“In a word, the vision of achieving prosperous country status with zero poverty by 2040 will not be achieved,” he said.

“This is the time to break the vicious cycles of the past and carve a new path to a prosperous future for all our people,” Dominguez said. (DOF)