Fiscal consolidation to minimize long-term economic scarring from pandemic – DOF

The Department of Finance (DOF) is reviewing the viability of pursuing a fiscal consolidation plan that will minimize whatever long-term economic scarring may occur because of the COVID 19-induced crisis and the budgetary implication of the Supreme Court (SC)’s 2018 ruling that expands the share of local government units (LGUs) on national goverment taxes, which will take effect next year, Finance Secretary Carlos Dominguez III said.

This SC ruling refers to the expanded National Tax Allotment (NTA)—formerly known as the Internal Revenue Allotment (IRA)—for LGUs.

“Tax revenue losses from the pandemic-induced economic slump, the rise in debt to fund our Covid-19 response, the looming revenue impact of our economic recovery measures, and lower spending efficiency as a result of the Supreme Court decision to expand the share of LGUs from the NTA must be adequately addressed by the next administration’s economic team,” Dominguez added.

As a result of the pandemic, the National Government (NG) incurred hefty tax revenue losses amounting to P785.64 billion or 4.4 percent of gross domestic product (GDP) in 2020, according to initial DOF estimates. Before COVID-19 struck at the onset of last year, tax revenues were expected to increase by 16.2 percent in 2020.

Foregone revenues are expected to be even larger in the coming years as the impact of the Corporate Recovery and Tax Incentives for Enterprises (CREATE) and Financial Institutions Strategic Transfer (FIST)– which are both crucial to a quick economic recovery–take effect.

From 2021 to 2024, revenue losses are projected to reach around P1 trillion on average every year because of tax revenue losses from the pandemic and the foregone revenues from CREATE and FIST.

COVID-19 related loans for the pandemic response and budgetary support to finance the deficit have also translated into increased financing costs for the government.

The total financial cost of COVID-19 related loans now amount to US$ 28.91 billion or P1.47 trillion.

The outstanding balance or the principal value of the loans is US$ 22.58 billion or P1.15 trillion, while the projected amount of interest payments until maturity is US$ 6.32 billion or P320.85 billion. These loans will mature between 2024 and 2060.

The High Tribunal’s decision in 2018 to affirm that the LGUs’ “just share” of revenues includes all national government taxes, instead of being limited only to Bureau of Internal Revenue (BIR) collections, will also have implications on the country’s economic growth as it takes effect in 2022.

This SC ruling, which stemmed from the case filed by then-Governors Hermilando Mandanas of Batangas and Enrique Garcia of Bataan, significantly increases the base for computing the NTA, from which the annual allocation for local governments is based.

“Based on our estimates, the implementation of the Supreme Court’s 2018 ruling will yield lower economic growth because local governments spend less efficiently,” Dominguez said.

Spending efficiency is defined as the share of productive spending to total spending.

Productive spending is expenditure that goes back to the economy, generates multiplier effects, creates jobs, stimulates demand and improves the quality of life.

DOF estimates found that implementing the High Tribunal’s 2018 decision will yield 3 percent lower economic growth, because the higher LGU allocation will be subject to a lower spending efficiency. NG spending is more than 2 times as efficient as that of local governments in general. (DOF)