Philippines Finance Chief May Cede Revenue for Growth

By Clarissa Batino and Karl Lester M. Yap | June 3, 2016 — 4:07 PM CST, Updated on June 5, 2016 — 8:40 PM CST

• Income-tax cuts planned, increase in sales tax unlikely
• Wider budget gap gives room for more infrastructure spending

Carlos Dominguez, who is set to become finance secretary in the Philippines, said the incoming government of President-elect Rodrigo Duterte is willing to initially lose revenue through income-tax cuts to help boost economic growth and reduce poverty.

Lower income levies will be part of a tax reform bill submitted to lawmakers by September, Dominguez, 70, said in an interview on Friday at his office in Manila. The new administration may consider raising duties on alcohol and cigarettes, while an increase in the sales tax is unlikely, he said.

“We won’t look at erosion of revenue as simply erosion of revenue but really, investment in the future and encouraging more business activity,” he said. “If you put more money in people’s pockets they can buy more stuff and when they buy more stuff they pay VAT of 12 percent and companies make a profit.”

Duterte, who takes office on June 30, will inherit an economy that grew faster than China last quarter, won its first investment-grade credit rating and has ample fiscal room for the new government to boost spending. Dominguez will need to sustain those gains while also bolstering investor confidence in the incoming president, who has little economic policy experience and has made headlines for his brashness and often vulgar speech.

Dominguez said widening the budget deficit to 3 percent of gross domestic product from the current goal of 2 percent allows for more investment in human capital and infrastructure, which will support economic growth.

“The Philippines is one of the few countries in Asia that has space to increase spending,” said Trinh Nguyen, a senior economist at Natixis Asia Ltd. in Hong Kong. “Growth in recent years hasn’t trickled down to the poor due to the lack of investment in public goods such as roads and electricity. Its sustainability will, however, depend on the ability of the administration to raise the revenue ratio and expand the tax base over time.”

‘Comfortable’ Target

The new government will target infrastructure spending of 5 percent of GDP, Dominguez said, matching the current administration’s goal. He said he is open to borrowing in foreign and local currency, depending on what is the “better deal.”

Ben Diokno, who will take over the budget portfolio, said in an interview this week the new government is seeking to cut income taxes and borrow more as it widens the budget deficit to a “comfortable” target of 3 percent of gross domestic product.

Outgoing Finance Secretary Cesar Purisima, who helped double government revenue in the past six years, said on Friday that there is sufficient fiscal room to boost spending. The outgoing government of Benigno Aquino had cut the budget deficit to 0.9 percent of GDP in 2015 from 3.5 percent in 2010.

“The administration of Aquino has left us in a very good financial shape and that’s why we believe that we can go into an expansionist policy now,” Dominguez said.