By Jun Vallecera
BusinessMirror Reporter
 
Manila needs to work harder on its falling tax-effort ratio if it expects to attain its expenditure-driven balanced budget program this year, the International Monetary Fund said on Thursday.

At a briefing at the Bangko Sentral ng Pilipinas, IMF resident representative Reza Baqir said the ratio has to rise, or there won’t be enough revenues coming in to balance the budget or for allocation in the  identified priority areas of infrastructure and social services.

“The tax-effort ratio determines the amount of additional resources that government may devote for the priority areas and achieve a balanced budget,” Baqir said.

He noted that tax-effort ratio, which mirrors how well the government collects the tax due, fell to just 14.03 percent of local output or the gross domestic product last year versus 14.2 percent of GDP in 2006.

Both the IMF and the government found it difficult to explain the collection downturn that they variously attributed to election-related tax evasion, discontent among tax collectors, decline in compliance due to repeated tax-amnesty programs, the lifting of the input value-added tax cap, the strong peso and greater smuggling activities at the various ports and airports.

Baqir gave copies of the public information notice, or PIN, that the IMF released as a consequence of its visit to Manila in November last year under the annual Article Four consultations.

The IMF said a higher tax effort was needed even though Manila’s fiscal accounts have improved significantly in recent years.

It noted the reforms implemented under the value-added tax system had been short-lived no matter that the deficit has narrowed.

While the deficit may have been financed by asset-sale proceeds just last year, “no progress was made in reducing the debt-to-revenue ratio which is high relative to other countries,” the IMF said.

Nonfinancial public sector debt was seen to fall over the medium term, but will remain high at 43 percent of GDP in 2013.

“While the debt dynamics are favorable overall, they remain vulnerable to shocks, especially to the exchange rate and, to a lesser extent, growth,” the IMF said.

No new tax measures have been introduced apart from the proposed reduction in the minimum corporate income tax in 2009.

It sought an acceleration in tax administration reforms, pegging of the sin tax rates to inflation and rationalization of the universe of business tax incentives to eliminate tax redundancies and encourage more business activities.