MANILA, June 3, 2005
 (STAR) By Des Ferriols -  The government’s budget deficit is expected to go down to as low as P151 billion at the end of 2005 and further down to only P89 billion in 2006.

Sources said yesterday the dramatic reduction in the budget deficit would result from the combined effects of the increase in the value-added tax (VAT) rate, the lifting of exemptions from the VAT, savings from the streamlining of the government bureaucracy and the administrative measures being implemented to improve tax collection.

Based on the data presented by government officials to global ratings agency Standard & Poors (S&P), it was indicated that the national budget deficit would go down to 2.8 percent of gross domestic product (GDP) this year and to 1.5 percent in 2006.

At this level, the 2005 deficit would be much lower than the P184.5-billion deficit target for the year, equivalent to 3.6 percent of GDP.

By 2006, the deficit was originally projected to go down to P161.769 billion, equivalent to about 2.9 percent of GDP.

This early, the Arroyo administration has already reported a P3-billion monthly budget surplus for the first time since 2,000, arising from record tax collection in April after a deficit of P7.8 billion a year earlier.

According to sources, the emerging 2005 and 2006 national deficit assumed a conservative tax collection rate of only 70 percent for the VAT, indicating that the deficit could go even lower if collection is improved as planned.

Sources said the estimates also assumed only the impact of legislative and administrative measures already in place. Pending measures, they said, would not be factored in until Congress actually ratifies them.

The projections made by the Arroyo administration are better-than-expected but S&P said it was withholding judgment until it sees the actual implementation of the new VAT law and the allocation of the proceeds from increased revenue collections.

According to Philippe Sachs, S&P senior analyst who joined the recent Philippine review team, the credit rating agency wanted to see how the Arroyo administration would allocate its revenues to bring down the country’s debt burden.

"We have not even begun to look at debt reduction, we are only looking at the stabilization of debt because it has been spiking up faster than we anticipated," Sachs said. "Before any rating action is considered, we would like to see this trending down because the Philippines is more highly leveraged externally than other similarly-rated countries."

Sachs said S&P would want to see efforts to stabilize the country’s debt burden and significantly improve its debt ratios to alleviate the concerns over the country’s ability to continue meeting its obligations.

"These numbers are all encouraging but we are withholding judgment because a large part of it is a function of economic activity," Sachs said.

Reported by: Sol Jose Vanzi

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