Economists have proposed reforms in the country's tax system, mainly the increase in the value-added tax rate from 12 to 15 percent, to allow the next government to continue with an ambitious spending program without the budget deficit rising beyond comfortable levels.

Dante Canlas, Benjamin Diokno and Felipe Medalla, economic professors at the University of the Philippines, told a group of businessmen on Wednesday that any stimulus spending next year would be hard to justify with the country's weakening finances due to the slowing economy.

Diokno, who served as budget secretary from 1998 to 2001, noted that when President Arroyo's term ends in mid-2010, the next administration will be left with a large debt, ranging from P4.5-P4.8 trillion.

Thus, he said, first on the agenda should be to broaden the curent tax base by raising the VAT rate.

"The success of the next administration's development agenda depends on the availability of resources. A basic tax reform for 2010 is to broaden the tax base as this would allow for the lowering of tax rates which would lead to efficiency, higher revenues and reduction in the deficit," said Diokno.

To offset the higher VAT, Diokno said fixed income earners should be given a 3-percent tax credit while the corporate income tax should be reduced from 30 to 25 percent.

"Hard work should be rewarded and too much consumption should be penalized," he noted.

Apart from the increase in VAT, the economist also called for the reduction in fiscal incentives, the long-delayed restructuring of the excise tax on sin products and the increase in property tax rates.

Diokno said additional revenues from these new tax measures should go to infrastructure and social services, particularly the conditional cash transfer program, which serves as incentive to poor families who keep their children in school.

Medalla, meanwhile, said the country can afford a budget deficit of around P200-P300 billion, provided that debts incurred by the government "are well-spent and spent for future growth."

"If the money is well spent, I believe the Philippine economy can outgrow its debts," he remarked.

In 2005, increasing the VAT rate from 10-12 percent was the focus of the Arroyo administration's fiscal reform agenda, helping it to trim its budget deficit from a high of P210 billion in 2002 to only P12.4 billion in 2007.

The government eyed to balance the budget in 2010 but decided to abandon the target due to the global economic crisis.

On Tuesday, economic planning chief Ralph Recto said the budget gap could widen to as much as P257 billion this year if tax collections are lower than expected and the government fails to sell assets.

But finance secretary Margarito Teves maintained that the country's fiscal deficit ceiling for 2009 would stay at P177.2 billion, or 2.2 percent of gross domestic product. This was raised from the earlier target of P102 billion to allow for higher state spending to boost the local economy and create more jobs.