The Public Sector: Debt sustainability handles

I am pleased to share with readers, the fiscal sector section of our June 7 Quarterly Economic Outlook Report, “Growing Pains.” Christine Tang, Shane Sia and I wrote this for GlobalSource Partners (globalsourcepartners.com), a New York based network of independent analysts in emerging markets.

The National Government debt was steady at 61% of GDP in Q1, held down by a smaller budget deficit and a high denominator that reflected both real GDP growth and higher inflation. With nominal GDP expected to normalize ahead, the Finance department has come up with proposals to boost revenues and manage expenditures (see the Table) to bring the overall deficit down from the 6.1% of GDP target this year to 3% by the time this administration ends.

Based on the latest fiscal program, revenues, expected to dip to 15.2% of GDP this year from 16.1% last year, are targeted to grow 2 ppt to 17.2% by 2028 while expenditures, also expected to decline to 21.3% of GDP this year from 23.4% last year, are programmed to slide by 1 ppt more and maintained at around 20% of GDP.

OUR VIEW
The previous administration raised the tax effort by 1.4 ppt between 2016 and 2019 through a comprehensive package of tax reforms. Given what this administration has presented so far, it is not clear that it can achieve a 2 ppt increase in the tax effort by 2028 with the package it has drawn up so far. The target requires government to generate incremental annual revenues of 0.3% to 0.5% of GDP but the revenue flows we have seen are not large: a.) PIFITA (Passive Income and Financial Intermediary Taxation Act) is expected to be revenue neutral, b.) the other three measures for near-term implementation are not expected to yield much, about half of 0.1% of GDP per the IMF’s 2022 Article IV report, and, c.) the second set of measures are estimated to yield a flat stream of annual revenues equivalent to 0.3% to 0.4% of GDP starting 2025.

The proposed budget reforms could help improve tax administration (e.g., digitalization) and create fiscal space through efficiency gains but we expect the benefits to be spread out over long time periods. Likewise, the recently approved Maharlika Investment Fund as well as the merger of the two banks, targeted by end-year, will need time to yield the promised benefits. In the limelight now is the politically sensitive military and uniformed personnel (MUP) pension reform which the IMF’s latest end of mission statement cited as “important to create fiscal space for economic and social priorities.” Department of Finance (DoF) officials are now doing the rounds of consultation with MUPs and the likely outcome would be a set of more modest changes that will reduce the annual drain on the budget and slow the growth of pension liabilities. (See the Box.)

Overall, we think that unless other revenue measures are identified, a gentler slope for debt reduction can be expected. Government is currently targeting to bring down the National Government debt ratio from 61% last year to below 51% by 2028.

Romeo L. Bernardo is principal Philippine adviser to GlobalSource Partners (globalsourcepartners.com). He serves as a board director in leading companies in banking and financial services, telecommunication, energy, food and beverage, education, real estate, and others. He has had a 20-year run in the public sector including stints in the Department of Finance (Undersecretary), the IMF, World Bank, and the ADB.

romeo.lopez.bernardo@gmail.com