Manila, July6, 2003 By Des Ferriols (Star) The combined long-term effect of government’s over-eager trade liberalization and compromises in the tax reform program, exacerbated by the 1997 Asian financial crisis, has led to the uncontrolled decline in revenue base that could lead to a debt crisis if not reversed soon enough, finance officials warned.

In an interview, Finance Secretary Jose Isidro Camacho criticized key tax, trade and investment policies over the last 10 years, saying that these had created the present deficit problem and the attendant threat of a debt crisis.

Although these policies might have been well-intentioned, Camacho said the policies of the past 10 years that led to fiscal deterioration had a profound impact that brought the country inevitably to where it is today.

"At the start of the 1990s, the Philippines took the lead in trade liberalization and reduced tariffs at a pace even faster than our international commitments under the World Trade Organization and the ASEAN Free Trade Agreement," Camacho noted.

"In our analysis, the tariff reduction program over the last decade eroded our revenues by as much as four percent of GDP," he pointed out. "As a clear illustration of this, the Bureau of Customs’ revenue to GDP declined from 5.6 percent in 1993 to last year’s 2.4 percent."

In addition, Camacho said government provided generous fiscal incentives to promote investments and trade, including numerous special-interest groups and sectors. This further reduced tax revenues to GDP by about one percent of GDP.

To further boost the economy, Camacho said several tranches of tax reforms were legislated during the last decade, including the reduction of income tax rate from a maximum of 35 percent to 32 percent and the imposition of specific taxes without indexation for such commodities as tobacco, alcohol and petroleum products.

Several revenue-generating measures were also deferred or not implemented such as the value-added tax (VAT) on professional services and limits on certain deductible expenses.

"All told, the various components of the comprehensive tax reform program of the 1990s probably resulted in over one percent of GDP in lost revenues," Camacho said.

Camacho said these policy directions might have been well-intended but whatever gains were quickly dissipated in the wake of the 1997 financial crisis.

"The 1997 crisis did not only prevent the fiscal harvest, it also damaged the existing tax revenue base," Camacho said. "Corporate taxes declined from 3.4 percent of GDP in 1997 to 2.5 percent in 2002 with the financial sector alone reducing its tax contribution by 0.6 percent during this period."

Camacho explained that aside from eroding the tax base, the 1997 crisis also increased the Camacho warns country’s debt service for foreign-currency denominated public debt because of the peso depreciation.

"In interest payment alone, this resulted in increasing our budgeted interest expenses by three percent of GDP," he said. "It also bloated our level of public debt in absolute number and as a percent of our GDP."

Privatization was a big contributor in 1990s but since they were non-recurring revenues, Camacho said the proceeds were not nearly enough to support the economy over the long term.

Add to these are the legislative measures that were passed by Congress without matching revenue measures such as the Agriculture and Fisheries Modernization Act.

"Given the above factors that eroded our revenues and added to our expenditures, it is a wonder that our fiscal deficit is only 5.3 percent of GDP and revenues have only eroded by as much," he said. "Everything else being equal, the fiscal deficit should have widened even more."

Reported by: Sol Jose Vanzi

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