By Melissa Luz T. Lopez, February 14 2019; Business World

Image Credit to Business World

THE PHILIPPINES can afford to increase state spending on social protection to help attain better living conditions by 2030, but it will have to raise more revenues to do so, the Asian Development Bank (ADB) said in a report released on Wednesday.

The regional lender said the Philippines needs to increase tax collections by at least 5.9% to as much as 9.6% from 2015 to 2030 to ensure ample funding to attain the Sustainable Development Goals (SDGs).

The United Nations introduced the SDGs in 2015 which set global standards for poverty reduction and social inclusion; environmental sustainability, climate change and disaster risk management; accountable, responsive and participatory governance; fair and stable order based on international rule of law; as well as peace and security.

For the ADB, nations need to step up their game in order to improve social protection, which includes cash transfers to the poor as well as the delivery of goods and services that enhance income security and access to basic health care.

“The Philippines would have to make further substantial efforts to increase its revenue-GDP (gross domestic product) ratio, but it seems to have some fiscal space as there is no apparent reason why its ratio should be so much lower than those in Malaysia, Thailand, and Vietnam,” the ADB said in the report, titled: Asia’s Fiscal Challenge: Financing the Social Protection Agenda of the Sustainable Development Goals.

“Social protection can only be truly complete when transfers and infrastructure complement each other so that all people actually have access to essential goods and services of adequate quality,” it added.

The ADB analyzed the fiscal footing of 16 member-states, including the Philippines, and how current social protection systems have been faring and funding needed to expand coverage.

“Public resources for social protection have to be increased in all countries and that means, most likely, government revenues will have to be increased,” the ADB said.

The Philippines’ revenue effort stood at 16.9% against a 20% expenditure effort in the nine months to September 2018, according to the Department of Finance. This left the fiscal gap at three percent of GDP in that period.

The country’s fiscal gap is projected to amount to 1.7% of GDP by 2030 if the Philippines will keep the status quo.

The budget deficit is projected to balloon to 7.6% of GDP if the revenue effort remains static at 13.9%, versus the more aggressive spending required to attain the SDGs equivalent to 21.5% of GDP.

If the Philippines will raise additional revenues and meet the 21.5% average revenue effort among developing Asian economies, then the budget will be broadly balanced by 2030.

Apart from the Philippines, India, Indonesia, Kazakhstan, Nepal and Sri Lanka need to “open new fiscal space” in order to finance increased social services.

The ADB added that fiscal stress will be removed only if these economies “brought up their revenue–GDP ratio to the regional average.”

The Philippines is also one of seven countries likely to feel “low” fiscal stress from pursuing the SDGs, the ADB added.

Cambodia, Laos, Myanmar and Timor-Leste will have to make “painful choices” to attain the SDGs, while Azerbaijan, Malaysia, Mongolia, China, Thailand and Vietnam are expected to meet the targets “without major effort,” as increased spending will not put undue pressure on budget deficits in these areas.

The ADB said governments can choose to raise tax rates, reallocate energy subsidies and natural resource taxes, and instill stricter tax enforcement in order to rake in more public funds.

“As a net natural resources importer, the country is suggested to rely on taxes. Post-tax subsidy taxes can be reduced to an amount of three percent of GDP. Tax efforts can be made to collect 4.3% of GDP, especially from corporate income tax,” the regional lender said.

“The country can also raise VAT (value-added tax) to reach and surpass the lower gap estimate.”

Republic Act No. 10963, or the Tax Reform for Acceleration and Inclusion Act (TRAIN), is expected to add P79.012 billion to public coffers this year following a boost in the law’s first year of implementation.

TRAIN reduced personal income taxes for those earning below P2 million and put in place a simpler system for computing donor and estate taxes.

These foregone revenues will be offset by removal of some VAT exemptions; higher tax rates for fuel, cars, tobacco, coal, minerals, documentary stamps, foreign currency deposit units, capital gains for stocks not in the stock exchange, and stock transactions; as well as new taxes for sugar-sweetened drinks and cosmetic procedures.

ADB President Takehiko Nakao has said that the Philippines needs to raise more taxes to improve local infrastructure and social services, adding that the “too-complicated” tax regime also needs to be addressed.

The administration of President Rodrigo R. Duterte targets to raise P3.2 trillion in total revenues this year, against plans to spend as much as P3.8 trillion particularly for intensified infrastructure development.

Succeeding tax reform proposals remain pending with Congress, with time running out for enactment with the May 13 elections approaching. — Melissa Luz T. Lopez