MANILA - Just when the Philippines has overcome the huge challenge of avoiding an economic recession this year, it must brace itself for another one—averting a fiscal crisis.

According to University of the Philippines economics professor and former budget secretary Benjamin Diokno, the next administration may face a fiscal crisis due mainly to dwindling revenues and legislated tax cuts.

"The next president will inherit a very weak fiscal position. The public debt is very high. There is increasing risk that we are going to have a fiscal crisis because the flexibility of the government will disappear in 2010," Diokno said during the annual meeting of the Management Association of the Philippines on Tuesday.

And unless the government crafts a solid fiscal recovery program consisting of measures to shore up its revenues and manage its spending, the crisis will erupt, he said.

Fiscal crisis

Diokno defined a fiscal crisis as the country's inability to raise enough revenues to cover not only its expenditures but also its debt payments.

He said the country's tax-to-gross domestic product (GDP) ratio is likely to further drop to 11-12% next year from 14% in 2007. This is on the back of additional expenditures arising from the government's reconstruction efforts following the back-to-back typhoons that devastated the country, and revenue-eroding tax measures recently passed.

The last time that the government experienced a fiscal crisis was in 2004 when it wallowed in the red after assuming Napocor's debts. (Read: Lower RP debt: Truth or Spin?)

Reacting to Diokno's statement, Peter Wallace, founder of the Wallace Business Forum, said it was too early to say that a fiscal crisis is looming now. But he noted, "We raised the red flag. There is quite a possibility of such crisis if fiscal discipline is not maintained over the next few months."

Diokno forecasts that the deficit will likely breach the ceiling and hit around P300 billion.

In the first 9 months of the year, the deficit has reached P237.5 billion, resulting in projections by various banks, think tanks, and other analysts that the government will breach its P250 billion target by end-2009. 

Tax collections

The deficit is gaping wide due to increasing government expenses and weak revenue collections.

Joining other governments reeling from the impact of the global economic crisis, the Philippine government also packaged a stimulus plan amounting to P330 billion.

Then the super-typhoons came. "The cost of reconstruction after the typhoons will also be very expensive," Diokno said.

Unlike in 2004, when the fiscal state of the country was a product of the government's own hubris, recent global and local events have made increasing government spending more acceptable.

What analysts and economists are concerned about is the inability of the revenue collecting agencies to be more efficient. (View this interview with an analyst)

For January to September this year, government revenues, mainly from the Bureau of Internal Revenue (BIR) and Bureau of Customs, amounted to P839.8 billion, lower than last year's P879.9 billion.

Diokno noted that revenue collection of the BIR, which accounts for three-fourths of total revenes, and Customs "will be lower (next year)."

But he stressed there is another culprit in lower tax collections.

"There are also laws resulting in losses. The government should stop the passage of these measures," Diokno said.

Congress has so far passed six revenue-eroding measures, namely, the income tax relief law; the National Grid Corp. franchise law, which allowed the firm to pay a 3% franchise tax in lieu of other taxes; the Personal Equity and Retirement Account law; Real-Estate Investment Trusts law; the Tourism Act; and the abolition of the documentary stamp tax on the secondary trading of stocks.

"I am in favor of raising consumption tax and cutting personal income tax. This is taxing people on what they take away from society (consumption) rather than what they give to society (income),” Diokno said.

Balanced budget

The government's target to balance the budget deficit in 2013 is "foolish" and would likely mean cuts on spending for social services.

"It is foolish for the government to plan a balanced budget for 2013. We're not ready for that," Diokno said.

He added: "A 2% or 1% deficit-to-GDP ratio is okay if this would mean providing help to the poor."

The governemnt had targeted to balance the budget in 2008, but pushed this back to 2010, then 2013, due to impact of the global economic crisis.