Deficit could hit P400-B amid weak taxes
By Paolo Luis G. Montecillo, BusinessWorld | 06/17/2009 12:24 AM
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MANILA - The government's budget shortfall may reach P400 billion this year, or an increase of more than half of government estimates, if the country’s tax base continues to shrink due to a slowing global economy, US financial giant Citigroup said.
The forecast is higher than the official state target of P250 billion, equivalent to 3.25% of gross domestic product (GDP), and comes shortly after the government’s confirmation of plans to borrow as much as half a billion dollars through yen-denominated "Samurai" bonds.
"The combination of a weak cyclical environment and a tax to GDP ratio stalled in the range of 12%-13% of GDP (from 14% last year), could lead the fiscal deficit to balloon to P350 billion or roughly 4.5% of GDP," Citigroup Global Markets, Inc. analyst Jun Trinidad said in a commentary on Monday.
However, if the country’s tax base falls to a low 12% this year, the company said "the fiscal gap could expand to more than P400 billion, or 5.3% of GDP."
Still too optimistic
But even this estimate may be too optimistic, Citigroup said.
"Raising this ratio to the range of 12%-13%, still below the tax ratio trend, and without the benefit of new revenue measures, would still be deemed a sanguine scenario," Mr. Trinidad said.
The government’s tax base stood at an even lower 11.5% of GDP as of the first quarter this year.
The Citi forecast is higher than a previous projection by Moody’s Economy.com, the research unit of global debt watcher Moody’s Investor Service, which said that the shortfall could reach P350 billion this year.
The International Monetary Fund had also previously said a deficit of over 3.5% of domestic output would likely "unsettle" foreign investors, leading to credit rating downgrades and higher borrowing costs.
‘Handicaps’
The firm said that, aside from potentially poor tax collections this year due to the economic slowdown, tax "handicaps" like a reduction in corporate income taxes, to 30% from 35%, and higher individual tax exemptions would lead to a higher fiscal gap.
"Low single-digit growth in nominal GDP mirrors potentially lackluster growth of the nominal tax base — a key factor in any revenue slippage," Citigroup said.
The Philippine economy grew by only 0.4% in the first quarter from the same period year — and actually contracted 2.3% from the preceding quarter — as a result of contracting exports and slow growth in private consumption, government data showed. This is lower than the state’s 1.8%-2.8% forecast for that period.
The first quarter results forced a major revamp of the state’s macroeconomic assumptions for the year, with GDP growth now seen at 0.8%-1.8% of GDP, citing continuing global economic uncertainties. This is lower than the previous forecast of growth at 3.1%-4.1% in 2009.
In an earlier research note, Citigroup likewise scaled down its GDP growth forecast for the country to 1% this year, from its previous outlook of 3%.
Among the revenue measures being pushed for in Congress by the government are the reforms in excise tax laws and the rationalization of fiscal incentives.
Both measures are aimed at increasing government revenues, which will determine the state’s ability to spend in areas vital to prodding economic activity.
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