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As debt-to-GDP ratio bloats to 63.5%, economists tell new admin to raise taxes, avoid populist projects

The Philippine government’s running debt stock relative to the size of the economy or debt-to-gross domestic product (GDP) ratio has ballooned to its highest level in 17 years as of the first quarter of 2022, breaching further the internationally accepted “manageable” threshold, data from the Bureau of the Treasury (BTr) showed.

Treasury data showed that as of end-March this year, the country’s debt-to-GDP ratio stood at 63.5%, well over the internationally recommended threshold of 60% of the economy.

This is the highest debt-to-GDP ratio since 2005, during the Arroyo administration, when it hit 65.7%.

In particular, the government’s outstanding debt as of end-March 2022 totaled P12.679 trillion, 4.8% higher than the P12.09 trillion recorded as of end-February 2022 amid continued borrowing efforts to boost the state’s war chest for COVID-19 recovery measures coupled with a weaker local currency during the period.

Meanwhile, the Philippine economy as of 2021 is valued at over P19 trillion, according to the Philippine Statistics Authority.

The administration of presumptive president Ferdinand Marcos Jr. will inherit the trillions of pesos of debt accumulated during the Duterte administration and will be tasked to manage the country’s debt levels.

For Rizal Commercial Banking Corp. chief economist Michael Ricafort, the next administration should “intensify tax revenue collections as well as [implement] new tax reform measures in able to better manage the country's fiscal performance especially the country's overall debt management to make it more sustainable over the long-term and for the coming generations.”

“Further intensify tax revenue collections through stricter enforcement of existing tax laws, as well as new tax reform measures such as the upward adjustment/updating of the assessed value of real estate, long overdue after many years in few of property price appreciation over the years in able to collect more property/real estate taxes, simplification/easier taxation for the capital markets, higher taxes on sin products/sugary drinks to better align with other countries in the region, among others, all of which to increase the recurring tax revenue sources of the government,” Ricafort said.

“Other measures include anti-wastage/anti-leakages/anti-corruption measures to better manage the government's expenditures, starts and ends with good governance as a matter of policy,” he added.

Finance Secretary Carlos Dominguez III earlier said the Department of Finance (DOF) is preparing its fiscal consolidation proposal which would likely involve tax hikes to repay the country’s increasing debt.

Dominguez also said that the DOF has “already started” transition talks with the Marcos camp as well as with other presidential bets in the last elections to discuss ways how to manage the trillions of pesos in government debt the next presidency will inherit from the incumbent administration.

ING Bank Manila’s senior economist Nicolas Antonio Mapa, for his part, said the new administration “will need to convince investors that debt consolidation will be top priority.”

“Projects that generate near term revenue must be prioritized and populist projects that are costly and have limited revenue impact should be avoided,” Mapa added.

Union Bank of the Philippines chief economist Ruben Carlo Asuncion, likewise, said in dealing with high debt levels, “the upcoming administration with its vast political capital must find ways to better collect taxes and eventually widen the tax base.”

However, Asuncion said that while additional taxes may be the easier way or it can be explored since there is political capital, it may not be timely for the beginning of a new administration.

University of the Philippines labor and industrial relations professor Rene Ofreneo said the next administration should not pass on additional tax burden to the masses and implement a progressive tax system, wherein those who earn more should be taxed higher and a wealth tax should be imposed.

“Further reduction of the debt-to-GDP ratio, in view of the international threshold of 60%, would help keep the country's relatively favorable credit ratings, at around one to three notches above the minimum investment grade, as has been sustained despite the pandemic over the past two year to ensure relatively lower borrowing costs and also at better terms,” Ricafort said.

If the country’s credit ratings are downgraded due to higher debt beyond manageable levels, the government will have to borrow at higher cost or interest rates.

“Having a debt-to-GDP ratio at these levels keeps the Philippines susceptible to ratings action at least for Fitch. A downgrade of course makes borrowing more costly,” Mapa said.

Moving forward, Asuncion said the next administration should put back the economy to a better growth trajectory from the impacts of the COVID-19 pandemic.

“Secondly, rising inflation should be dealt with so that the purchasing of the Filipino will not be further harmed,” Asuncion added.—AOL, GMA News