Thursday, April 15, 2010

Next president will inherit near-empty gov’t coffers

By Daxim Lucas
Philippine Daily Inquirer
First Posted 01:32:00 04/15/2010

Filed Under: State Budget & Taxes, Government, Elections, Eleksyon 2010, Economy and Business and Finance

Original Story:

MANILA, Philippines—The country’s next president will face the daunting task of running an economy with near-empty government coffers while pushing for crucial and unpopular reform programs, according to some of the country’s leading economic minds.

More importantly, whoever the next president will be must ram these reform measures through Congress early in his term if he is to avoid having to contend with populist lawmakers, professors at the UP School of Economics said on Wednesday.

“The next president will inherit a system that is nearing fiscal collapse,” economist Benjamin Diokno said at an Ayala Corp.-sponsored forum, titled “Elections 2010: The Morning After (Economic Issues for the Next President).

“He will have to make some choices that are hard, and some that are harder,” he added.

Diokno, who served as budget secretary under the abbreviated Estrada presidency, said the next administration would also have to broaden the tax base and increase tax revenues to support economic growth.

He pointed out that the recent years’ underspending in infrastructure—an area that could boost state coffers through economic growth—meant that resources would have to come from higher taxes.

Cut taxes, raise VAT

Diokno stopped short, however, of proposing an outright tax hike, suggesting instead that the next administration implement a mix of tax-rate adjustments that would see lower corporate and personal income taxes, while raising easy-to-collect levies like the value-added tax (VAT).

“We can reduce corporate income tax from 30 to 18 percent, but has to be accompanied by rationalizing fiscal incentives,” he said.

He added that the personal income tax rate should also be brought down to an average of 18 percent.

In general, lower tax rates tend to boost consumption as people’s disposable incomes increase.

However, the next president will almost certainly have to compensate for the reduced income taxes with an increase in the unpopular VAT from 12 to 15 percent, Diokno said.

Taxes in first 100 days

He said the next president should also press Congress to reform excise taxes on cigarettes and tobacco or the so-called “sin taxes,” which met significant opposition from lobbyists during past attempts to reform them.

“The next taxes must be approved by the new Congress within the first 100 days,” Diokno said. “Postponing tax reforms would be wrong. People should see it as part of a package of reforms that will benefit everyone eventually.”

UP economics professor Felipe Medalla—another Estrada administration Cabinet official, who served as socioeconomic planning secretary—laid out a menu of priority investment programs that the next administration must implement to jump start economic growth.

Invest in power

The former chief of the National Economic and Development Authority said the government should focus on bringing in investments to the power sector, regardless of the controversies that such deals often entail.

In particular, Medalla noted that a lack of state resources would almost certainly mean that the government would have to guarantee a certain level of return for any prospective power-plant builder.

“What we have to agree on is not to punish utilities when we use 20/20 hindsight on [power-demand] forecasts that were made using available assumptions at present,” Medalla said. “We need at least one [new] major power plant in Luzon.”

Toll roads, LRT lines

Medalla also said the incoming president must prioritize more build-operate-transfer deals for toll roads around the country and new light rail transit lines that will crisscross Metro Manila. The new leader should also prioritize investments in new sources of potable water.

These big-ticket projects, Medalla said, would have the benefit of creating new jobs and spurring other industries that support them.

For his part, economist Arsenio Balisacan pointed out that the next administration should focus on improving the agricultural sector where two-thirds of the country’s poorest earn their living.

Food security

Government policies, however, should move away from some antiquated concepts like achieving self-sufficiency in rice, and instead focus on the broader goal of food security.

The next president should focus state resources on improving agricultural productivity because the development that flows from this sector is crucial to sustaining economic growth, Balisacan added.

As for balancing the national budget, Diokno said this elusive goal may have to be pushed back even further than the 2013 goal being envisioned by the Arroyo administration.

“The next president may want to balance budget by the end of his term” to have enough flexibility to invest in infrastructure and spend funds on socially important programs, he said.

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