Sustained growth, creditworthiness hinge on tax reform
John Matthew Cruz
THE Philippine economy’s sustained growth and creditworthiness hinge largely on the ability of the government to raise more revenues to fund much-needed infrastructure and improve labor productivity, analysts said in an economic briefing on Thursday.
At the Financial Executives Institute of the Philippines (Finex) economic briefing in Makati City, Monetary Board member Felipe Medalla said the Philippine economy could sustain 6 percent to 7 percent growth in gross domestic product (GDP), citing a central bank projection on the country’s potential output growth.
“The estimated rate of growth that is consistent with stable inflation is that the Philippine economy can grow 6 percent to 7 percent and not overheat,” the former socioeconomic planning chief and UP economics professor said.
He cautioned however that the ability to sustain growth does not rely completely on having more workers, but on productivity per worker, he said.
Citing BSP data, Medalla said the incremental capital output ratio (ICOR) of the country continues to surpass total factor productivity (TFP).
TFP is the portion of output not explained by the amount of inputs used in production. As such, its level is determined by how efficiently and intensely the inputs are utilized in production.
ICOR is a metric that assesses the marginal amount of investment capital necessary for an entity to generate the next unit of production. A higher ICOR value is not preferred because it indicates that the entity’s production is inefficient.
BSP estimates showed that in 2010 up to the third quarter of 2016, ICOR in the Philippines was higher at 3.5 percent, compared with the 2.3 percent TFP.
To improve labor productivity, improving the country’s infrastructure is necessary, Medalla said.
“A source of optimism is that the government plans to increase infrastructure [spending]as a share of GDP from 5.3 percent right now  to 7.3 percent [by 2022]from the 3.5 percent of the previous administration,” he said.
“The question is can they finance this? And the very key to this is tax reform. If it happens, then we can now say it’s more fun investing in the Philippines,” he said.
COL Financial Group Inc. vice president and head of research April Lynn Tan sees sustained 7 percent to 8 percent GDP growth, which should be driven by higher infrastructure spending and more foreign direct investments.
She noted however that infrastructure spending in Philippines was low compared with other countries in the region.
“I don’t think anybody can say at this point that there is over-investment in terms of infrastructure in the country. And then of course although FDIs have been rising, it fails in comparison to those in other countries. Definitely there is room to spend more on investment in the country,” she said.
Tan shared Medalla’s view that it was important to increase labor productivity and make Filipino workers globally competitive.
“But that is not going to be cheap. That would require a lot of money. Which is why the passage of the Tax Reform for Acceleration and Inclusion Bill is very important,” she said.
Tan said that one of the benefits of the tax reform program is that 93 percent of 5.3 million taxpayers would get 20 percent more take-home pay because of lower personal income tax. “So that is an additional boost to disposable income,” she said.
Tan also said the Philippines could receive a credit rating upgrade if the government would keep its budget deficit in line with its target of 3 percent of GDP.
“If they can do all that without exceeding the deficit target, potentially, we could enjoy a ratings upgrade…it is a possibility when you have faster economic growth. It is something that is more sustainable,” she explained.
“A rating upgrade could mean lower borrowing cost and more investor interest. Again, a virtuous cycle for the Philippines,” Tan said.