The Duterte administration’s twin pillars for economic inclusion—the comprehensive tax reform program and massive infrastructure buildup under its “Build, Build, Build” initiative—will “produce a revolution” in the country’s economic development and raise per-capita income to the level of high-middle income economies by 2022, according to Finance Secretary Carlos Dominguez III.
Dominguez said the combined effect of these reforms in the country’s economic expansion will be both “breathtaking and irreversible,” and would be instrumental in achieving President Duterte’s ultimate goal of bringing down poverty incidence by a third from the 2015 level of 21.6 percent to 14 percent by the end of his term.
“This will be a dramatic achievement. It will be a sea change. As soon as we are able to reduce poverty to that level, the task of completely liberating our people from misery becomes a lot easier,” Dominguez said on Thursday during the Rotary Club of Manila’s continuing celebration of its Centennial Year held at the New World Hotel in Makati City.
The centennial celebration was led by RCM president Susing Pineda and was attended by, among others, former Prime Minister Cesar Virata, former Speaker Jose de Venecia, and Ambassador Victor Garcia.
“Both the tax reform and the ambitious infrastructure program will produce a revolution in our economic development. Their combined effect on our economic expansion will be breathtaking and irreversible,” Dominguez said. “These two programs will help elevate our per capita national income to the level of high middle-income economies in the medium term.”
Dominguez said the government’s development efforts will become meaningful only if it manages to accomplish this goal.
“We intend to take a giant stride in that direction during our watch. That will be the most important benchmark of our success or failure,” said Dominguez.
According to new thresholds released on July 1 by the World Bank, a country should have a Gross National Income (GNI) per-capita of between $3,896 to $12,055 to be classified as an upper middle-income economy.
The Philippines is currently classified as a lower middle-income economy or a country with GNI per capita between $996 and $3,895. As of 2017, the Philippines’ GNI per capita was $3,660, according to World Bank data.
Given that the Philippines is racing against time to modernize its infrastructure network and make it on the par with those of the region’s most prosperous economies, Dominguez said the Duterte administration is moving ahead with innovative ways to implement the “Build, Build, Build” program.
Such moves, he said, include tapping Official Development Assistance (ODA) financing from development partners like Japan, China and South Korea; and investments from multilateral institutions like the Asian Development Bank (ADB), World Bank and Asian Infrastructure Investment Bank (AIIB); as well as issuance of bonds at investment-grade rates and implementation of “hybrid” Public-Private Partnership (PPP) ventures to roll out its flagship projects at a much shorter time and cheaper costs, Dominguez said.
He said tax reform, of which its first package—the Tax Reform for Acceleration and Inclusion (TRAIN) Law—is now producing impressive results in terms of revenue collection and increasing the spending power of Filipinos, has become “a powerful instrument for transforming our economy and making it more competitive.”
After the TRAIN reduced personal income tax (PIT) rates for 99 percent of taxpayers, Dominguez said the Duterte administration will also seek to modernize investment incentives and lower corporate income tax (CIT) rates under the second tranche of its tax reform program to further empower consumers and produce conditions more conducive to job-creating investments, especially outside Metro Manila.
Dominguez said the Duterte administration also expects to further improve revenue collections by proposing a tax amnesty program that will help clear the tax dockets and enable the transfer of real properties to make these economically productive.
He said the proposal of the Department of Finance will include an estate tax amnesty in which the government will collect only 6 percent tax on the net undeclared estate of those deceased before January 1, 2018; a general amnesty on all unpaid internal revenue taxes excluding those arising from importation and customs duties; an amnesty on tax delinquencies in which the taxpayer pays 50 percent of the basic tax excluding surcharges and interest fees; and an amnesty for those facing criminal cases in court, with a rate of 80 percent on the basic tax.
Dominguez said the Department of Finance will also propose that the value-added tax (VAT) be treated purely as a consumption tax rather than as an investment incentive. Hence, the VAT will be collected at the point of consumption or sale, and refunded when consumption is done outside the Philippines.
“The tax reform program will assure us of sufficient revenues to fund the infrastructure modernization and expand social services. These are long-term investments in our people’s future,” Dominguez said.
While pursuing tax reform, Dominguez said the government will also ensure that the poorest families are given social protection in the form of cash transfers and other mitigating measures, which is why up to 30 percent of incremental revenues from the TRAIN will go to social services.
As a result of improvements in tax administration, and in large part, of TRAIN, which made the tax system simpler, fairer and more efficient, the Bureau of Internal Revenue (BIR) improved its collection by a remarkable 15.5 percent over the same period in 2017, while the Bureau of Customs (BOC) increased its collection by 31.2 percent in the first five months of 2018. From January to May, revenue collections grew by 19 percent over the same period last year.
He noted that Standard and Poor’s had raised the Philippines’ credit rating from BBB Stable to BBB Positive, which recognizes that the government’s policymaking settings support a track record of more sustainable public finances and balanced growth over the next 24 months.
“This year, we are holding on to the target of growing the economy at 7 percent. Unless the trade war worsens, the price of oil goes through the roof or a serious calamity befalls the nation, we have a fighting chance of achieving that target,” Dominguez said.
According to Dominguez, public spending for infrastructure last year rose to 5.4 percent of GDP, which is slightly above the regional average and more than twice the share of the gross domestic product (GDP) invested in our infrastructure over the last three decades.
From January to May, the government has already spent P281 billion on infrastructure, an increase of 42 percent over the same period last year.
With this sustained spending on infrastructure, Dominguez said the government expects this to reach to 6.3 percent of GDP this year and to 7.3 percent by 2022. The government will invest between P8 trillion and P9 trillion in infrastructure over the medium term.
He said “Build, Build, Build,” which consists of 75 flagship projects, will include irrigation systems, extensive road networks, construction and rehabilitation of key regional airports, railways and long-span bridges to dramatically enhance connectivity.
Infra investments will be done mostly outside Mega Manila, but the government will also address the congestion in the country’s major urban hub through projects such as the Mega Manila Subway, almost a dozen more bridges across the Pasig River, and the development of New Clark City which will soon become the next big “smart and green” metropolis, Dominguez said.
“The infrastructure program will also provide a strong stimulus to our rapid economic expansion. It will create numerous jobs and open new economic opportunities,” he said, as he pointed out that as of April this year, 625,000 new jobs were created, of which 605,000 were in the manufacturing and construction sectors.
Dominguez said the government must invest in infrastructure now while the beneficial conditions enjoyed by the economy are still available, and while there is still time to take advantage of low-interest rates in the market.