VAT

So what now?

With the economic turbulence now gripping world financial markets once again, and the possibility of either a double dip recession or stagflation looming, governments around the world will be unable or unwilling to respond with another round of stimulus.

Only the monetary authorities both in the EU and the US stand in the way of a full blown debt crisis. It is quite ironic that S&P, the credit rating agency which figured in the first global crisis should have sparked this one.

Then it had caved in to Goldman Sachs to provide triple A credit ratings to the toxic sub-prime mortgages that led to the collapse of Lehman Brothers and brought AIG to its knees. This time around, it refused to cave in to pressure from the Obama White House which had legitimate reasons for questioning the downgrade that it gave the US economy.

In Manila, economic managers were closely watching as events overseas unfolded. The question on everyone’s minds must be, so what now? The best case scenario out of all this might be for the global economy to experience tepid growth accompanied by high inflation. And so then what? What options does the government face if that happens?

When the GFC hit three years ago, the government was on a path to fiscal sustainability with the budget nearly in balance. It had averted a debt crisis of its own early in the decade by raising and expanding the value added taxes from 10%-12%.

The stimulus initiated by the Arroyo administration led to deficits of 3-3.5% in the three years leading up to 2010. Spending in order of 200-350 billion pesos went to fuel and electricity subsidies as well as targeted discounts for seniors. A conditional cash transfers program was launched to help indigent families weather the storm.

Alongside these social programs, a relaxing of rules for granting fiscal incentives at business parks and economic zones was legislated by Congress. While the increased social spending could easily be retracted (and much of it was) when better economic conditions prevailed, fiscal incentives couldn’t.

They are partly the reason why the government now struggles to balance its revenues and expenditures. Having imposed a heavier form of regressive taxation on the broad sections of the public, the government of the day then took the money raised from that and gave it to special interest groups which arguably did not result in its stated policy goals to boost overall investment.

The present crisis now provides an opportunity to correct that. Firstly by rescinding redundant tax perks that have eroded government revenues, and secondly by making room for the expansion of both social and infrastructure programs, the government of PNoy can create a more equitable incidence of taxes and benefits while fostering a return to fiscal balance and growth.

What would be the incentive for Congress to do this right now?

Well let’s just say there are ways of making them come around. In Australia, the government’s stimulus measures during the GFC involved a school building program in every electoral district irrespective of the political affiliation of the local member.

The same thing could happen in the Philippines. Even without a fiscal responsibility bill, the Palace could pressure Congress to enact legislation to provide revenues for an expanded school building program under a 2012 supplementary budget. The timing of this, right before the 2013 elections would be impeccable.

In fact the same thing could happen if the government were to index sin taxes on alcohol and tobacco and earmark the spending for primary health clinics for each congressional district. It would be hitting two birds with one stone: making the tax system more effective while improving health outcomes.

They say, a crisis is a terrible thing to waste. That’s what happened the last time a financial crisis hit. Let’s hope this time around, the government does not waste the opportunities this current one presents it with.

Snap, Crackle, Pop!

The media and blogosphere may have been mindlessly harping on the fumbling errors and bumbling missteps committed by the current administration of PNoy over the past six months in its first year in office, but the mood of the public and the markets seems to have taken it all in stride.

As latest polling by SWS reveals, PNoy and his policies continue to enjoy unprecedented confidence levels from the public. This exuberrant satisfaction is mirrored by the investor community which has driven the local bourse to all time highs following the normal transfer of power from one administration to the next during the middle of the year.

Despite its fiscal woes, the government very recently finds itself situated at a very auspicious moment in which it is able to borrow at very favorable terms. Its treasury issuance last month was oversubscribed four times leading to extremely low borrowing rates of just over three quarters of a percent for its 90-day treasury bill, nearly half what it was the previous month.

This makes it not far off from the yields of similar notes issued by the US Treasury and that of the UK, Eurozone and Japan! The governments of the struggling PIIGS economies of Portugal, Iceland, Ireland, Greece and Spain are having a much harder time raising funds to bridge their fiscal gaps having resorted to the IMF for credit while the Philippines exited from that program back in 2006 having paid all of its debts to the Fund in full.

With stellar economic growth predicted to hover around 6-7% per annum and a relatively benign inflation outlook predicted to continue over the next few years, the country is poised to take-off along with other emerging economies. The next decade could see the nation address some fundamental problems like infrastructure bottlenecks and social inequity if the government plays its cards right. Already the Gini coefficient a measure of income inequality reached its lowest point for quite some time.

What many will find most remarkable in all this is that there have hardly been any changes made to the socio-economic policy settings left behind by the previous administration despite all the campaign rhetoric about change. It could be seen as an acknowledgement that many of these settings prepared the conditions now evident for better times ahead.

As proof of this consider the following: the Conditional Cash Transfers program initiated in 2008 (CCT) is being expanded, the RH bill, which was drafted and vigorously pushed for in the previous Congress by the now leader of the opposition in the lower house and ally of the former president, is being supported, and reforms in education, training, research and development are continuing.

“Normalcy” restored

The boost in confidence has occurred because of the observance of the rule of law during and after the elections which led to a credible outcome. The political transition and stability this engendered has restored the notion of the Philippines as a “normal” state once again. The same transformation of perception occurred previously in Indonesia that led to it attaining G20 status (its recent setbacks notwithstanding).

Problems of corruption and conflict will still linger, but as was shown during the 90s under the Ramos administration, they can be tempered for as long as growth with equity is pursued (it should be noted here that it was during that previous period of expansion that poverty incidence as measured by the share of the poor to the overall population, fell to its lowest point since records were kept, and the country became relatively peaceful as a result, despite the fact that the poverty headcount, or the number of poor individuals kept rising-just not as fast as the rate at which the overall population grew, proving the point that equity is important).

What is crucial over the next six years is for the observance of good governance and the “market for rules” to be enforced. As demonstrated by two previous administrations, it is quite possible for political corruption and influence peddling to co-exist with an open market economy despite the enactment of “world-class” procurement laws and the application of electronic/automated processes in awarding government contracts.

The roll out of the PPP contracts beginning next year will be a litmus test as to whether the government can enter into such agreements without anomalous transactions occurring on the side. Another one will be the ongoing campaign to lift the tax take of the country which has not been buoyed by the recent recovery in economic activity.

With these key planks in place, the government will have sufficient funds to resource reforms in social policy arenas. Without them, an overall tax hike could loom as a distinct possibility which would threaten social cohesion particularly if an increase to the regressive VAT rate is pushed.

As the year draws to a close, it is worth considering the journey the country has taken. At the start of the year, there were doubts as to whether we would be faced with a doomsday scenario come election day. There were talks of civil unrest and military adventurism following a no-election or no-proclamation scenario.

At the close of the year, the country’s financial, economic and dare I say social outlook could not end at a brighter note. Indeed there is much cause to celebrate as the prospect for an economy that crackles and pops as opposed to one that merely sizzles but fizzles takes shape.

ADB warns gov’t against move to hike VAT to 15%

ADB warns gov’t against move to hike VAT to 15%
By Ronnel Domingo
Philippine Daily Inquirer

MANILA, Philippines—The government should not raise the value-added tax to 15 percent as this, along with the corporate income tax being lowered further, would make the Philippine tax system more regressive, according to the Asian Development Bank.

In a policy note on the Philippines, the multilateral lender said the Philippines should rather raise excise taxes on tobacco, alcohol and gasoline to improve its tax effort or collections expressed as a percentage of total output (gross domestic product).

The ADB noted a standing proposal for another increase in the VAT from the current 12 percent and a further lowering of the corporate income tax to 25 percent from 30 percent would not improve the tax effort, which was pegged at 12.8 percent in 2009.

“The overall impact [of this scenario] on the tax effort is neutral,” the ADB said. “But if the [corporate income tax] is cut further to 20 percent, the tax effort decreases by -0.6 percentage point.”

Villar: I will spare no one for graft

Villar: I will spare no one for graft
The Philippine Star

MANILA, Philippines – Defending himself from the “Villarroyo” tag, Nacionalista Party standard-bearer Sen. Manuel Villar Jr. vowed to spare no one, including President Arroyo, in charging people guilty of graft and corruption.

Villar said that if ever he becomes the new president, he would even “encourage” the prosecution of Mrs. Arroyo after she steps down on June 30 because of the numerous anomalies that have been linked to her during her administration.

The issue of Villar having links with Mrs. Arroyo as well the allegation that he is the real candidate of the administration continue to be among the issues raised against him by his opponents.

He has repeatedly denied these and reiterated that it was he and his NP colleagues who had spearheaded numerous probes against Mrs. Arroyo over the course of her administration.

“I have criticized the President on numerous occasions,” Villar said.

In fact, he said that he would give the President a rating of 4 out of 10 in terms of honesty.

According to Villar, it was the NP that initiated the congressional probes into the “Hello, Garci” issue, the NBN-ZTE deal and the jueteng controversy against the President.

He said the investigations on these issues were done under his term as Senate President and so he gave the go-signal for these to take place.

“I’m not seen as a critic of anybody. That’s my style. I would rather do things than say them,” he said.

“But when I was asked if I agree with the President, maybe a hundred times, I’ve said, I disagree with her,” he added.

The allegations against Villar coming from the Liberal Party and its standard-bearer Sen. Benigno Aquino III has been a thorn in his side and has contributed to the drop in his survey ratings.

The LP camp coined the term “Villarroyo” or Villar-Arroyo to describe the alleged alliance between the President and Villar and has stuck with it throughout the campaign period.

Villar and the NP have responded in kind by coming up with the “Aquinorroyo” and “Gloriaquino” tags for Aquino.

The party has alleged that the LP camp has various connections with the Arroyo administration, including Aquino’s relatives in the current government and the presence of former Cabinet members and officials of Mrs. Arroyo in the LP.

Villar also vowed not to support the supposed bid of Mrs. Arroyo for the speakership of the House of Representatives if and when he and the President succeed in their respective bids.

Mrs. Arroyo is running for congresswoman of Pampanga, prompting her critics to suspect that she intends to reclaim power by going after the speakership.

Villar reiterated that the NP would put up its own candidate in order to thwart the alleged bid of Mrs. Arroyo.

Villar: I’m prepared to lose

Although he is determined to win the presidency, Villar also said he is psychologically prepared for the worst in case he loses.

Villar said he has prepared himself for two possibilities, which are winning and losing the presidency.

“You will be surprised, I am prepared to win but I am also prepared to lose. I have had my ups and downs but I have faced them all,” Villar said over the ANC show “Headstart” last Friday.

“If I win, I am ready to run the country on day one. If I lose then I am also prepared. I know that psychologically, I must be prepared,” he said.

Meanwhile, the Pwersa ng Masang Pilipino (PMP) yesterday told Villar to “prepare well – for losing.”

“Judging by how his numbers have been sliding consistently, I would say that Sen. Villar is beginning to realize that his millions, and even billions, will not prevent the inevitable,” said PMP spokesman Ralph Calinisan.

Northern Alliance picks Villar

The Northern Alliance in the House of Representatives has chosen to support Villar.

At least 15 of the 21 congressmen present during Friday’s meeting in Baguio City agreed to back Villar, according to Ilocos Sur Rep. Eric Singson, deputy speaker for Northern Luzon of the Lower House.

He said they chose Villar because he promised to help develop Northern Luzon and take care of Ilocanos.

Villar also vowed to develop the industrial and agriculture industries of the North like tobacco and the export processing zones and the extension of the North Luzon Expressway.

In another development, the NP said yesterday that consumers would most likely see an increase in the value added tax (VAT) if Aquino wins in the May elections.

In a statement, the NP noted that the presence of a “VAT block” in the LP is now more evident with the addition of Mrs. Arroyo’s economic adviser, Albay Gov. Joey Salceda, to its camp.

“Noynoy is surrounded by the most passionate apostles of increasing the VAT pain. This early it is fair to equate a Noynoy victory with a 15-percent VAT rate,” the NP said. – With Christina Mendez, Sandy Araneta, Artemio Dumlao and Andy Zapata