Interview: Carlos Dominguez
To what extent has the country’s fiscal strategy prepared it for the planned P6trn ($119.3bn) worth of borrowings in 2020-21 to address the crisis?
CARLOS DOMINGUEZ: The core of our strategy has been to protect both lives and livelihoods. This, of course, comes with significant economic costs at a time when revenue collection is understandably lower because of the pandemic-induced economic downturn. Fortunately, when Covid-19 struck, the Philippines was financially ready. We owe this in large part to President Rodrigo Duterte’s prudent fiscal policy and political will to pursue reform since the start of his term. Prior to Covid-19, our debtto-GDP ratio was at a historic low and we received our highest-ever credit ratings. In the pandemic, our ratings have endured a global tide of downgrades and have been affirmed at the same level. Further, due to strong macroeconomic fundamentals, we were able to quickly access funds from our development partners and commercial markets at very low rates and tight spreads, and for longer repayment periods. Considering that we are now in a low-interest global financing environment, the Philippines is in a very strong debt-management position. The Department of Finance collected record dividend contributions from government-owned or -controlled corporations, partly due to the good corporate governance efforts we have undertaken. As a result, our revenue agencies were able to exceed their collection targets despite the pandemic.
How can the government boost economic growth while keeping the deficit within manageable limits?
DOMINGUEZ: We have solid footing in terms of our fiscal position, so we can afford a responsible level of deficit spending. Nevertheless, we will not abandon the administration’s prudent fiscal management. Though our tax collection will not be as high as initially projected, we are mindful of the need to increase deficit spending within prudent levels to finance our Covid-19 response. Because of our strong track record in debt management and fiscal responsibility, we expect our deficit-to-GDP ratio to remain within the median range of our ASEAN neighbours and credit rating peers, even after factoring in our economic recovery programme.
The cornerstone of our economic recovery is the Build, Build, Build programme. Investments in infrastructure have the highest multiplier effect on the economy and create immediate job opportunities, encourage investment and spur domestic demand. Over time these investments will broaden our tax base and generate more revenue to pay off our debts.
We are also pushing measures that aim to help the private sector continue operations and retain jobs. To this end, the Senate approved the Corporate Recovery and Tax Incentives for Enterprises (CREATE) bill. This will be the largest fiscal stimulus programme for enterprises in our country’s history. The reduction in the corporate income tax rate – currently the highest in the region, at 30% – will help more than 99% of our enterprises retain workers and continue their operations. CREATE will also modernise the tax incentive system and help attract more strategic investments. The Senate also passed the Financial Institutions Strategic Transfer Act, which will let banks offload soured loans and assets, allowing them to extend more credit to sectors impacted by Covid-19.
In what ways is the government planning to increase revenue collection to compensate for the corporate income tax rate cut contained in CREATE?
DOMINGUEZ: The enacted packages of our tax reform programme enabled us to raise our revenue to 16.1% of GDP in 2019 – the highest in over two decades. With efforts aimed at shoring up business and consumer confidence in the new economy, tax collection will continue to benefit from these reforms. Enacting the remaining tax reform bills on financial taxes and real property valuation will also help us expand our capital markets and ultimately improve revenue potential.
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