On 6 August 2021 the IMF published a staff report following consultations with the Philippines under article IV of the IMF’s articles of agreement. A selected issues paper was also published, taking a more detailed look at certain issues including the need to raise more tax revenue.
The IMF report notes that the fiscal deficit is estimated to increase to around 9.6% of projected GDP in 2021, as a result of the slow recovery in revenue and further increases in spending to provide support in the pandemic. There is expected to be a push for infrastructure projects in relation to the Build Build Build program. The fiscal stimulus is expected to be gradually withdrawn in 2022 when the tax revenues have begun to recover and the current pandemic support measures expire.
Rebuilding Fiscal Space
The IMF suggests that the government needs to follow a fiscal strategy to balance the continued pandemic support measures in the short term with building up fiscal space in the medium term. Initially fiscal policy must retain flexibility to support the economic recovery, but more fiscal space must be built up in the medium term. Policies in support of strong economic growth, including the pursuit of structural reforms, are important in the strategy to increase fiscal space and reduce the effects of economic scarring after the pandemic.
Implementing tax reforms
The implementation of the remaining tax reforms is seen as important in supporting increased spending for longer-term growth and creating more fiscal space. The Philippines must strengthen revenue mobilization as the revenue-to-GDP ratio is is currently below the average for ASEAN countries and is below that of many emerging market economies. The first package of the Comprehensive Tax Reform Program (CTRP) was implemented in 2018, with excise tax increases for select products and widening of the VAT tax base. The second package of the CTRP was implemented in March 2021, reducing the corporate income tax at a faster pace than in the original plan introduced in response to the pandemic. The remaining priorities for the revenue-raising reform include the broadening of the tax base for property-related taxes; and simplification of taxes in relation to financial services.
Improving revenue administration
The effect of the tax reforms can be strengthened by the continued push to improve revenue administration. Revenue administration can be built up by maintaining the tax compliance of profitable firms; and bringing into use new digital products and services that can help to increase revenue mobilization.
Monitoring and evaluation of tax incentives
Under the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act, the Fiscal Incentives Review Board (FIRB) will establish the target performance metrics that private firms as well as government owned corporations will be required to meet if they are to receive tax incentives. The FIRB will perform monitoring and evaluation of investment and non-investment tax incentives, using tools such as cost-benefit analysis to determine the impact of incentives on the economy and to determine if the performance targets have been met. This will improve the design and monitoring of the current tax incentive regime, making it more accountable and more effective in promoting business investment and creation of employment.
