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Philippines Fiscal Policy
Historically, the government has taken a rather conservative
stance on fiscal activities. Until the 1970s, national government
expenditures and taxation generally were each less than 10
percent of GNP. (Total expenditures of provincial, city, and
municipal governments were small, between 5 and 10 percent of
national government expenditures in the 1980s.) Under the Marcos
regime, national government activity increased to between 15 and
17 percent of GNP, largely because of increased capital
expenditures and, later, growing debt-service payments. In 1987
and 1988, the ratio of government expenditure to GNP rose above
20 percent (see
table 4, Appendix). Tax revenue, however,
remained relatively stable, seldom rising above 12 percent of GNP
(see
table 5, Appendix). Chronic government budget deficits were
covered by international borrowing during the Marcos era and
mainly by domestic borrowing during the Aquino administration.
Both approaches contributed to the vicious circle of deficits
generating the need for borrowing, and the debt service on those
loans creating greater deficits and the need to borrow even more.
At 5.2 percent of GNP, the 1990 government deficit was a major
consideration in the 1991 standby agreement between Manila and
the IMF.
Over time, the apportionment of government spending has
changed considerably (see
table 6, Appendix). In 1989 the largest
portion of the national government budget (43.9 percent) went for
debt servicing. Most of the rest covered economic services and
social services, including education. Only 9.1 percent of the
budget was allocated for defense. The Philippines devoted a
smaller proportion of GNP to defense than did any other country
in Southeast Asia.
The Aquino government formulated a tax reform program in 1986
that contained some thirty new measures. Most export taxes were
eliminated; income taxes were simplified and made more
progressive; the investment incentives system was revised; luxury
taxes were imposed; and, beginning in 1988, a variety of sales
taxes were replaced by a 10 percent value-added tax--the central
feature of the administration's tax reform effort. Some
administrative improvements also were made. The changes, however,
did not effect an appreciable rise in the tax revenue as a
proportion of GNP.
Problems with the Philippine tax system appear to have more
to do with collections than with the rates. Estimates of
individual income tax compliance in the late 1980s ranged between
13 and 27 percent. Assessments of the magnitude of tax evasion by
corporate income tax payers in 1984 and 1985 varied from as low
as P1.7 billion to as high as P13 billion. The latter figure was
based on the fact that only 38 percent of registered firms in the
country actually filed a tax return in 1985. Although collections
in 1989 were P10.1 billion, a 70 percent increase over 1988, they
remained P1.4 billion below expectations. Tax evasion was
compounded by mismanagement and corruption. A 1987 government
study determined that 25 percent of the national budget was lost
to graft and corruption.
Low collection rates also reinforced the regressive structure
of the tax system. The World Bank calculated that effective tax
rates (taxes paid as a proportion of income) of low-income
families were about 50 percent greater than those of high-income
families in the mid-1980s. Middle-income families paid the
largest percentage. This situation was caused in part by the
government's heavy reliance on indirect taxes. Individual income
taxes accounted for only 8.9 percent of tax collections in 1989,
and corporate income taxes were only 18.5 percent. Taxes on goods
and services and duties on international transactions made up 70
percent of tax revenue in 1989, about the same as in 1960.
The consolidated public sector deficit--the combined deficit
of national government, local government, and public-sector
enterprise budgets--which had been greatly reduced in the first
two years of the Aquino administration, rose to 5.2 of GNP by the
end of 1990. In June 1990, the government proposed a
comprehensive new tax reform package in an attempt to control the
public sector deficit. About that time, the IMF, World Bank, and
Japanese government froze loan disbursements because the
Philippines was not complying with targets in the standby
agreement with the IMF. As a result of the 1990-91 Persian Gulf
crisis, petroleum prices increased and the Oil Price
Stabilization Fund put an additional strain on the budget. The
sudden cessation of dollar remittances from contract workers in
Kuwait and Iraq and increased interest rates on domestic debt of
the government also contributed to the deficit.
Negotiations between the Aquino administration and Congress
on the administration's tax proposals fell through in October
1990, with the two sides agreeing to focus on improved tax
collections, faster privatization of government-owned and
government-controlled corporations, and the imposition of a
temporary import levy. A new standby agreement between the
government and the IMF in early 1991 committed the government to
raise taxes and energy prices. Although the provisions of the
agreement were necessary in order to secure fresh loans, the
action increased the administration's already fractious relations
with Congress.
Data as of June 1991
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