beyondbrics

Five days after Philippine president Benigno “Noynoy” Aquino III’s appointees took over the government department of finance, the usually staid ministry has left observers wondering whether it has magical powers.

Officials have repeatedly claimed they can increase tax revenues without imposing new taxes – despite international experience that shows its a pretty tall order. Economists are sceptical, but the enthusiastic new team insists that this time it will be different.

On Monday, an undersecretary revealed that the agency was aiming to cut the government debt/GDP ratio by 10 percentage points to just 47 per cent in three years – without new taxes. That followed last week’s announcement by the new finance secretary, Cesar Purisima, that he wanted to halve the budget deficit to just 2 per cent of GDP by 2013, again without additional taxes.

Meanwhile, the new internal revenue chief, Kim Henares, has said the share of taxes in GDP could rise to 15 per cent in a year without imposing any new taxes. The tax take has dropped from 14.3 per cent in 2006 to only 12.3 per cent in the first quarter of 2010.

But some in Manila question whether the new administration’s fiscal strategy is at all feasible.

“How can they say that when they know from international experience that improvements in tax administration could yield revenue gains of 1 per cent of GDP at most?” said a Manila-based economist who knows the finance department officials quite well. He explained that the administration’s reference to experience is limited to a fiscal policy forum in Manila where former tax chiefs from Chile and Guatemala recently spoke and shared stories of boosting tax collection.

Frederic Neumann, regional economist for Asia at HSBC, expressed doubt that the new government will achieve its fiscal targets if it relies exclusively on better tax collection. “History suggests this is rather difficult”, he said. “A higher tax-to-GDP ratio usually requires raising the tax rate or expanding the tax coverage”.

What seems to be driving the new administration’s fiscal strategy are two powerful analogies. First, Aquino likened new taxes to pouring more water into a leaking bucket, a compelling imagery which Purisima and Henares now repeat to argue that new tax measures are not needed.

Second, the president and his fiscal team appear obsessed with the idea of so-called low-lying fruit that is waiting to be picked by the righteous tax collectors. The most delicious-looking of these may be the wholesale inward smuggling of petrol that has grown to be so big it was distorting imports and macroeconomic data.

In 2007, the volume of oil imports fell just when GDP grew by the most in three decades, drawing attention from the International Monetary Fund. The IMF referred to it in a 2008 report as an “under-valuation of imports due to election-related lenience.” However, analysts at Global Source Partners, an investment consultancy, estimate the impact oil smuggling has on GDP is just around 20bn pesos, or 0.3 per cent of GDP in 2007.

So the new administration may have to resort to some fairly black arts, if it really is to boost tax revenues without devising new taxes.