Philippines

National government (NG) outstanding debt reached a historic high in 2021 at PhP11.728 trillion, equivalent to 60.5 per cent of GDP. This is almost twice the PhP6 trillion in 2016, the year when former President Rodrigo Duterte started his term. According to World Bank data, external public debt also reached a historic peak in 2022, at more than US$62 billion, following a steep increase in 2020 in the wake of the Covid-19 pandemic. While average annual growth of NG debt from 2013 to 2019 was only 5.2 per cent, it jumped during the pandemic years: 26.7 per cent in 2020 and 19.7 per cent in 2021. Lockdowns and mobility restrictions imposed to contain the pandemic quickly hit the economy and led to a 9.5 per cent contraction of GDP in 2020 and the government justified the massive borrowings to fight Covid-19. Citing the spending priorities, CSOs contend that the rapid rise in debts did not translate to commensurate increases in pandemic response. By September 2021, a total of Php570 billion was reported to have been disbursed for the Covid-19 response, a much smaller amount than infrastructure spending of PhP1.8 trillion and debt service payments of PhP2.17 trillion. Attention should be paid to Covid-19 loans, as Congress investigations on pandemic response funds raised controversy over claims of misuse and corruption.

Despite the increase in debt due to the Covid-19 pandemic, the Philippines was ineligible for the DSSI due to its classification as a lower-middle-income country, although it would not have been likely to participate even if it had met the eligibility requirements. The government’s economic managers have made clear its stance to honour all its debts and to maintain creditor confidence. Preserving the image of creditworthiness drives fiscal policy decisions as the government increases its reliance on securities as the more preferred lending instrument. However, participating in the DSSI would not have brought many savings to the Philippines because most of its external debt is owed to private (44%, mainly bondholders) and multilateral (40.56%, mainly the Asian Development Bank – 21.6% – and the World Bank – 17%) creditors, which did not participate in the DSSI. Bilateral external debt is only 15.4 per cent of Philippine debt, mostly owed to Japan (12.3%).

The change in administration following the May 2022 presidential election is not expected to bring forth a paradigm shift from fiscal managers. Continued accumulation of public debts is expected along with greater fiscal vulnerability. The global shocks due to the Ukraine–Russia conflict, including runaway price hikes for food and fuel, do not augur well for the country’s ability to shore up foreign exchange from trade and investments.

In the fiscal year 2021, the tax revenue of the Philippines amounted to 18.1 per cent of GDP, which is below the Asian average of 19.8 per cent for the same year.

A VAT was introduced in 1988. In 2007, it was increased from 10 to 12 per cent, and it has since remained at that level. From 1995 to 2019, the share of VAT and excise taxes in total revenues has remained high at an average of 32 per cent. Except for a brief period from 2010 to 2015, consumption tax revenues have exceeded the share of revenue collected from taxes on corporate income and property.

Since 2020, the Philippine government has implemented several tax and fiscal measures. With a focus on corporate-driven growth as key to rebuilding the economy, the government enacted the Corporate Recovery and Tax Incentives for Enterprises Act (CREATE), considered to be one of the first tax reform packages that recognises its provisions to be revenue-eroding.

In addition to the above-mentioned lowering of the corporate income tax rate from 30 to 25 per cent, CREATE also exempts foreign-sourced dividends from taxation, as long as they are reinvested in a domestic corporation for purposes including the payment of dividends to shareholders. While the former accelerates the race to the bottom in corporate tax rates, the latter makes the Philippine economy more vulnerable to hot money and illicit financial flows by establishing a channel for investors to gain profits from capital income tax-free.

In the report State of Tax Justice 2023, Tax Justice Network has estimated that cross-border tax abuse is costing the Philippines a total of US$3,223.1 million annually, corresponding to over 60 per cent of the country’s health expenditures. Of this loss, it is estimated that US$2,996.4 million stems from corporate tax abuse and the remaining US$226.7 million from offshore wealth.