MANILA, February 1, 2006
 (MALAYA) By GENIVI FACTAO - Finance Secretary Margarito Teves said yesterday the government will raise today the sales tax rate to 12 percent from 10 percent to bring in more revenues and narrow its budget deficit.

The higher VAT will raise revenues by P75 billion this year to enable the government to keep the deficit within target at P125 billion.

A host of government officials yesterday lined up the measures to be implemented to blunt the expected increase in prices due to the higher tax.

"EVAT is expected to help lower interest rates for business looking to borrow money to grow their business. It will also improve investor confidence in the Philippines, which will result in increased levels of foreign investments," Teves said.

Teves added the country has made steady progress over the past year, achieving a deficit reduction figure that was 18.6 percent below the 2005 target.

Teves said the government target deficit for this year is P125 billion, or 2.1 percent of the gross domestic product (GDP).

Budget undersecretary Laura Pascua said beyond the deficit reduction, the additional revenue generated by VAT will be used in infrastructure and to pay debts.

The infrastructures, she said will increase the country’s competitiveness to encourage foreign investments that create jobs, she said.

Pascua said 30 percent of the P75 billion will be used to pay debts. The ratio will then be increased by five percent yearly until it reaches 50 percent by 2010

Trade secretary Peter Favila, said the DTI is closely monitoring prices.

But Teves cut the estimate of extra revenues this year from the sales tax reform to P75 billion ($1.44 billion) from the previous P80 billion, saying the government had missed one month of collections at the higher rate in January.

Analysts have said the higher value-added tax (VAT), a key part of the government’s fiscal reform program, would improve the chances of the Philippines getting an upgrade from credit rating agencies this year.

But some said the anticipated gains from the expansion of the sales tax last November and the higher rate might not be achieved fully due to chronic evasion, corruption and inefficiency.

Prior to the November imposition of the expanded VAT, the government’s VAT collections were estimated to be about 30 to 40 percent below target.

"Tomorrow marks the implementation of the value-added tax rate hike," Teves said at a briefing. "The government will use the new revenues to reduce the budget deficit and place public finances on a sustainable footing."

The government — which had a budget deficit last year of P146.5 billion, or about 2.8 percent of gross domestic product — expects the VAT changes to help narrow this year’s shortfall to P125 billion, or 2.1 percent of GDP.

The government’s capital outlays this year would increase to P133.2 billion, or 2.3 percent of gross domestic product, from P96.7 billion, or 1.85 percent of GDP, in 2005.

But the Philippines’ increased capital outlay this year will still be below its regional neighbors’ capital spending of about 5 to 7 percent of GDP.

The three major rating agencies cut their outlooks to negative from stable last year over concerns about delays in the reform agenda as President Arroyo faced a political crisis over allegations of fraud in the 2004 election.

Moody’s Investors Service rates Philippine debt at four notches below investment grade, with Standard & Poor’s at three below and Fitch Ratings at two below.

The Philippines is Asia’s largest issuer of sovereign bonds after Japan and has total government debt of about $75 billion.

After a four-month delay due to court challenges, the government broadened the scope of goods and services covered by the VAT in November.

Retailers are expected to adjust their cash registers to reflect the VAT rate hike.

Some economists say the VAT increase may dampen consumer spending in the first half, as consumers are already struggling with higher oil, electricity and transport costs. Consumption makes up 70 percent of Philippine GDP.

The economy is projected to grow 5.7 to 6.3 percent this year from 2005. GDP grew 5.1 percent last year from 2004

Chief News Editor: Sol Jose Vanzi

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