Revenue Gap

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The government's budget deficit stands at $893m in the first six months of 2007, exceeding the programmed ceiling by $211m. Global ratings agency Fitch projects that, excluding government assets sales, the deficit could hit $2.7bn, 1.9% of GDP, by the end of the year - well over the 2007 target of $1.3bn, 0.9% of GDP.

Fitch assigned much of the blame to inefficiencies in tax collection. Only Costa Rica, Guatemala and Mexico have lower revenue/GDP ratios than the Philippines.

"With real economic growth expected to have averaged about 6.5% in the first half of the year, the 3.4% increase in tax receipts was rather poor," said James McCormack, head of Asia Sovereigns at Fitch. He said first-half tax receipts were about $1.1bn below target and this year's deficit target is "unlikely to be met".

Recognising its poor performance, the government is taking measures to counteract the shortfall. President Gloria Macapagal Arroyo, in her July 24 state of the nation address, announced larger investments in information technology to help the Bureau of Internal Revenue (BIR) bring in more taxes in the coming months.

The tax authority should be able to monitor revenue collections in real time from the national level down to the examiners, allowing the government to uncover issues of fraud and non-payment "before heads would need to roll", said Arroyo.

"Graft won't be eliminated overnight, but we are making progress," she said.
Even so, the report by Fitch concluded it does not believe the measures introduced by the president will make an impact this year.

"In our view, optimism regarding revenue prospects in the short-term is unwarranted, since various measures to improve tax collection and reduce evasion have been in place for some time, without meaningful results," said McCormick.

Fitch also pointed out that it is critical for government revenue to increase if public spending needs - such as the ambitious infrastructure development programme - are to be met without incurring additional debt. That, in turn, would jeopardise the country's medium-term economic growth outlook, and, ultimately, undermine its sovereign creditworthiness.

Finance Secretary Margarito Teves stressed the fact that in addition to renewed tax collection measures, privatisation efforts and the sale of government assets will serve to bridge the revenue gap.

On July 12, the government reduced its share ownership in the Philippine National Oil Company-Energy Development Corporation (PNOC-EDC) from 60% to 47%, generating gross proceeds of $370m, which will be reflected in the July deficit data.

The administration is also looking to privatise the national power grid as well as power plants within this year. The agency responsible for selling the state-owned power assets said it will, in December, auction a 25-year contract to operate the country's electricity transmission network, which is currently being operated by National Transmission Corp. (Transco).The Power Sector Assets and Liabilities Management Corp.(Psalm) officially launched a bid for the operation of Transco's power transmission assets.
The other upcoming "big ticket" item is the government sale of its 24% stake in San Miguel Corporation, Southeast Asia's largest publicly listed food and beverage conglomerate, expected to take place in September or October. Teves said they are currently "threshed out" the details with farmers' groups, who are claiming the proceeds on the grounds that the San Miguel shares were illegally acquired during deposed dictator Ferdinand Marcos' 20-year rule by using levies imposed on coconut farmers and the Supreme Court ruled they are public funds. Based on the department of finance's "conservative" estimates, the San Miguel sale is expected to raise $1bn in revenue.

Also lined up for sale is the government 30% stake in Philippine National Bank - the country's fourth biggest bank - its 10% stake in Manila Electric - the country's largest power distributor - and the 54.5ha site of the old Iloilo airport.

In the best scenario, Teves said either the San Miguel or PNOC-EDC sale could be "reserved" for next year. "We've had a shortfall in the tax revenues but we're now ahead in our non-tax revenues," said Teves.

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