The economic agenda beyond tax reform

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THE COMPREHENSIVE tax reform program is arguably most contentious economic policy of the Duterte administration.

With the biggest tax reform package already implemented, and with more advancing through the legislative mill, the question is: what’s next?

Agenda 2020 logoThe tax reform program is the single largest measure that the economic managers, with the Department of Finance (DoF) at the forefront, are pushing for. It aims to make the tax system more equitable and shore up funds to fuel the administration’s key policies such as infrastructure, regional development, and human capital development. The program consists of five tranches, which have all been proposed to Congress as of July 2018.

We saw the first package — the Tax Reform for Acceleration and Inclusion (TRAIN) law — implemented at the start of 2018, with significant revenues already being generated from this measure.

The government’s tax effort, or the overall tax revenues relative to the economy, stood at 15.2% in the first nine months of the 2018 — the highest nine-month tax effort ever recorded — from 14.5% in the same period the prior year. The DoF said 0.4 percentage point of the improvement was due to TRAIN, while 0.3 percentage points was attributable to tax administration improvements.

However, the TRAIN law is still regarded a pain for Filipinos despite lowering income taxes for salary workers as its accompanying social mitigating measures weren’t implemented satisfactorily, or so critics have said.

The second package, known as the Tax Reform for Attracting Better and High-quality Opportunities (TRABAHO), has also seen resistance. Although the bills are seen to ease the corproate tax burden on 90,000 small and medium enterprises, over a hundred thousand micro businesses, and even a thousand more large corporations, there is still strong opposition to the change in the fiscal incentives structure, especially from economic zone locators.

President Rodrigo R. Duterte asked Congress to fast-track the bill in the hopes it would be enacted before the end of 2018. However, it fell short of its target as Congress prioritized the 2019 budget that faced delays in the House. The Senate and the Finance department already conceded and said they would try to push the bill again early this year.

There is also the tax amnesty program, an attached follow-up measure to TRAIN, that seeks to clean up the tax base. The bill is currently undergoing bicameral conference committee discussions as of this writing, and will be prioritized by Congress so it can be implemented this year.

Other tax reform packages include higher excise taxes for mining, alcohol, and tobacco; a universal property valuation system; and the rationalization in capital income and financial taxes. All have hurdled the lower chamber of Congress as of December and are now up for Senate committee-level talks.

The DoF initially set an end-2018 target to have all of the remaining tax packages out of the legislative mill, or ahead of the campaign period for the 2019 mid-term polls. Even with the tight schedule in Congress as they push for their other legislative priorities, the DoF remains optimistic that the tax packages after the TRABAHO bill can be approved before the start of the 18th Congress, noting that the remaining bills are relatively easier to discuss.

But the tax measures still face some risk as such initiatives are usually unpopular during the election season, with legislators focused on campaigning. This leaves them a small window to approve all measures before the 17th Congress concludes mid-year.

Still, when the government eventually gets its tax reform program in place, what’s next for the administration’s economic agenda?

The economic team has been going around the country to consult with micro, small and medium enterprises (MSMEs) on their concerns and recommendations through their annual Sulong Pilipinas workshop. Tax reform, infrastructure, a national identification system, and the ease of doing business were among the top recommendations by businesses that were delivered by the Duterte administration since the Sulong began in 2016.

In 2018, it was the first time that the Sulong Pilipinas went outside Metro Manila to places such as Cebu, La Union, Clark, and Davao. The top recommendation across all of them was improving agricultural productivity through the use of new technology, raising farmers’ incomes, improving access to finance, tax incentives, and better farm education.

“The priority areas coming out of the Sulong process is a clear message from the SMEs in the regions that they want agriculture productivity to be a high priority for the EDC (Economic Development Cluster),” Finance Assistant Secretary Antonio G. Lambino II said in an interview.

The DoF chairs the EDC, with members including the Agriculture, Trade, Budget, Public Works, Transportation, Science, and Tourism departments, as well as the Department of Interior and Local Government and the National Economic and Development Authority.

“So we’re going to present outputs of the Sulong to the Cabinet, and start brainstorming among the agencies kung anong puwedeng gawing agenda,” he added. “But I think the next possible frontier is land use and titling.”

“Kasi ‘yung titling, may problema ‘yung sistema natin in the sense that the collective titles given in the land reform program, they do not incentivize productivity. So the one of the recommendations is to individualize those land titles so there’s an incentive to be more productive and be more profitable,” Mr. Lambino said.

Aside from having collective land titles, the land reform program also chopped up farms into smaller pieces of agricultural land, which disabled them to have economies of scale. This means the cost of operating and maintaining the land outweighs the gains.

Agriculture has long been a drag to the economy.

From a 1.5% growth rate in the first quarter of 2018, it slowed to a measly 0.2% in the April-May period and then contracted by 0.4% in the third quarter. The sector accounts for about 10% of the country’s gross domestic product (GDP). It also employs about 10 million, or 25% of the working population.

The sector’s weak performance was largely blamed by the government for the economy’s consequent lackluster growth as it caused food shortages and, in turn, pushed up prices. Headline inflation had continuously accelerated since January 2018 until it reached a peak of 6.7% in September and October, which was the fastest pace in nine years. It has since moderated to 6% in November and 5.1% in December.

“I think really if you look at the GDP numbers, manufacturing, there’s momentum there. Services has had momentum for quite a while. It’s really agriculture — how to get the fishing industry to adopt more sustainable practices, how to get the rice imports and local production balances, how to get it right to support farmers who want to move to higher value crops or to diversify cropping. It’s how to get them where they want to go,” Mr. Lambino said.

“After decades of doing something over and over again year in, year out, it’s very hard to shift and to do things differently so we have to work with a lot of agencies — not just the agriculture, but also technology and training-related agencies, and the whole support ecology around those shifts that need to happen,” he added.

A 2018 study from think tank Philippine Institute for Development Studies (PIDS) also pointed out that the country’s uncompetitiveness in agriculture is due to the lack of mechanization, technical skills, financial literacy, and access to cheap credit, which hinders farmers to diversify their crops to those of higher value. It said the availability and accessibility of irrigation is also a challenge, as well as the lack of postproduction facilities and related infrastructure.

Mr. Lambino said the government is working to promote agribusiness through the TRABAHO bill, which gives the sector an additional two years of fiscal incentives.

Another initiative to help the agriculture industry is the rice tariffication bill, which is already up for signing by President Rodrigo R. Duterte. The bill mainly imposes tariffs on imported rice, doing away with an import quota. It also features a P10-billion rice fund to finance farmers’ mechanical equipment, propagate and promote inbred rice seeds, establish a credit facility, and implement further skill development.

“I guess we look at ways by which producers can capture a little more of the value chain, because they are being left out. After the farmgate — when they no longer control the product — they no longer earn. So how do we get them to capture more of that value chain?” Mr. Lambino said, partly in Filipino.

Mr. Duterte has also clamped down on agriculture choke points by issuing administrative orders and memorandum orders to facilitate and boost the importation of agricultural products, remove non-tariff barriers, liberalize permits of food traders, close the gap between farmgate and retail prices, and have a close watch on market prices.

“The DoF pushes for reforms that are evidence-based and anchored on AmBisyon Natin 2040 — the collective long-term vision, and aspirations of Filipinos for themselves and for the country in the next 22 years,” Mr. Lambino said.

While the economic team, led by the DoF, will push for the development of the agriculture sector, the Department of Budget and Management (DBM) said it targets to ensure that delivering projects, from allotments to actual completion, will be efficient and transparent.

The 2019 budget marks the first time the government will use a cash-based budgeting system following years of using obligation-based spending plans. This mandates that the awarding of contracts, implementation, and disbursement, should occur in one fiscal year.

“Under the old system, agencies may obligate their budget for up to two years. So it was common practice for agencies to select a contractor up to the end of year two; the implementation of the project will be done in year three, and with payment only being disbursed in year four,” Budget Secretary Benjamin E. Diokno said in an e-mailed response to questions.

“Clearly, this old system led to a slowdown in public service delivery. Worse, the ‘good’ contractors who have better alternatives are discouraged from doing business with the government,” he added.

A common misconception about new spending plan is that allotments for projects are reduced and multi-year projects are not allowed. But under the system, allotments and disbursements are simply staggered for multiple years, depending on the project, which seeks to address how in the past, some line agencies got their programmed budgets every year but only spent a portion of the amount — causing underspending.

Under the cash-based system, government agencies can only ask for funds that they are capable of disbursing in a given year. Tracking of agencies’ spending performance is also easier with the new setup.

“Cash-based budgeting is our best response to the slow, inefficient, and opaque budgeting system that has hindered the government for decades. The problems of our budgeting system are encapsulated with recent experiences of underspending, defined as the deviation of actual spending from program spending, leading to a slowdown in the delivery of public services and implementation and completion of projects,” Mr. Diokno said.

About three-fourths of the 36 Organization for Economic Co-operation and Development high-income member countries already use cash-based budgets.

The DBM seeks to institutionalize the budget through the Budget Reform Bill to have it in effect in every administration.

The government also remains focused on bridging the infrastructure gap and fast-tracking projects further to complete as much during Mr. Duterte’s term, Mr. Diokno said.

Among large-scale projects that the government will begin construction in 2019 include: the Metro Manila Subway Project Phase 1 (Quirino Highway-North Avenue), the Philippine National Railways (PNR) North 2 (Malolos-Clark); PNR South Commuter Line (Tutuban-Calamba); PNR South Long Haul (Manila-Bicol); the Cavite Industrial Area Flood Management Project; Subic-Clark Railway Project; Ambal-Sinuay River and Rio Grande de Mindanao River Flood Control Projects, and the Mindanao Rail Project Phase 1 (Tagum Davao Digos Segment).

“Infrastructure projects follow an ‘S curve.’ There is some gestation period with the feasibility studies, detailed engineering design, and the other stages of project preparation. Progress accelerates afterwards with construction until the said projects are completed. Finally, the pace of implementation tapers off once it reaches its maximum pace,” said Mr. Diokno. — Elijah Joseph C. Tubayan