Lower VAT puts fiscal goals at risk

Reducing the value-added tax (VAT) to 10 percent from the current 12 percent would erode the government's fiscal consolidation, with total revenues expected to decline by an average of ₱330 billion annually, or one percent of the country's economic output.

- DERCO ROSAL

"From our estimates, the reduction of VAT from 12 percent to 10 percent is around one percent of GDP [gross domestic product], more or less ₱330 billion a year on average," Finance Undersecretary Karlo Fermin S. Adriano said during the Philippine Tax Academy (PTA) Convention last week.

This would push the deficit to about 6.3 percent of GDP, above the government's 5.3-percent target under its 2023-2027 fiscal program and wider than last year's 5.6 percent.

This was based on a scenario posed by Adriano, who said that if the government has a target of a 5.5-percent fiscal deficit this year, the gap will jump to 6.5 percent should the VAT rate be reduced to 10 percent—a bill filed in Congress on the grounds that VAT is regressive.

"[As such], we will not be able to do fiscal consolidation because our fiscal deficit last year was only 5.7 percent. If we cannot show that we are capable of fiscal consolidation, interest payments will also increase," Adriano said.