Tax effort in the Philippines, or the ratio of tax collection to gross domestic product, is seen to fall to 12.8 percent this year, the same level before the Reformed Value Added Tax law was implemented in 2002, the World Bank said.
The tax effort ratio would be much lower than 14.1 percent in 2008, 14 percent in 2007 and 14.3 percent in 2006, according to World Bank, which added that the target of achieving a balanced budget by 2013 would not be as easily achieved as the government wanted.
The bank said 0.7 percent of GDP stemmed from permanent tax cuts and base eroding measures such as the reduction in the corporate income tax rate by 5 points to 30 percent, the lower personal income tax base, and other measures.
“The remaining 0.5 percent of GDP in lower tax effort is due to a combination of a cyclical weakness in the economy, and worsening voluntary tax compliance,” it said.
“Due to the recent weakening of the structural fiscal balance, medium-term fiscal frameworks also clearly point to the limited fiscal space available to reach fiscal balance by 2013 [under realistic revenue projections] unless the tax effort structurally and noticeably improves,” it said.
World Bank added that “the potentially large Ondoy and Pepeng-related reconstruction and rehabilitation needs that could arise in 2010 makes the revenue agenda even more pressing.”
The World Bank, in its Philippines Quarterly Update, said the national government’s fiscal deficit might reach 3.8 percent of gross domestic product this year, “before narrowing to 3.1 percent of GDP in 2010.”
On the revenue side, World Bank forecast the tax effort to be lower by 1.2 percent of GDP than budgeted, representing 14.0 percent of GDP this year.
“The resulting tax effort would be the same as in 2002 [before the E-VAT reforms],” it said.
The World Bank projected that government expenditures would amount to 18.4 percent of GDP in 2009, or 1 percent of below the government’s program.
“This is projected to be achieved through a combination of postponement of non-priority discretionary spending and savings from systematically over-budgeted expenditures such as interest rate bill,” the bank said.
