VAT cut to 10% could hurt government finances – DOF

MANILA — Reducing the value-added tax (VAT) rate to 10 percent from 12 percent could cost the government roughly P330 billion annually, derail fiscal consolidation efforts and disproportionately benefit high-income earners, the Department of Finance (DOF) warned.

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While the proposal to cut VAT rate to 10 percent has gained public attention, Finance Undersecretary Karlo Adriano said the reduction is equivalent to one percent of gross domestic product or around P330 billion a year on average.

“If we have a target of 5.5 percent fiscal deficit this year, with the reduction of VAT to 10 percent, our fiscal deficit will be at 6.5 percent. So definitely, we will not be able to do fiscal consolidation because our fiscal deficit last year was only 5.7 percent,” Adriano said.

Adriano warned that a wider deficit could weaken the country’s creditworthiness and raise borrowing costs.

“If we cannot show that we are capable of fiscal consolidation, what will happen? Interest payments will also increase because our credit rating will be lower. When it gets worse, all our debts will increase. And that’s a cycle of more debt,” he said.