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NEWS UPDATES 6 July 2010

Philippines fiscal gap scares investor

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FINANCIAL market pundits warned that a wider fiscal gap risks scaring off investors, and prodded the Aquino administration to reconsider its vow not to raise taxes. In a report titled “A Good Start,” Global Source Partners said that while the smooth turnover of the reins of government has reduced the country’s political risk, difficulties remain.

The consultancy firm said President Aquino’s choice of economic managers has bolstered confidence, as they are known to be competent old hands, who can “hit the ground running.”

“With good drivers at the wheel, we should expect a relatively smooth ride for the economy going forward. However, this does not mean there won’t be bumps ahead that will need to be maneuvered,” Global Source said.

It highlighted the new administration’s no-new tax policy, which would severely limit the government’s ability to manage its finances in the face of its promise to raise social spending.

“To improve the country’s fiscal situation, more is needed beyond administrative improvements in revenue collection and what the new president labels as ‘zero-based budgeting’ with a focus on weeding out non-essential expenditures, and recouping what had been lost previously to corruption,” Global Source said.

The consultancy firm said anti-smuggling efforts and improved tax administration won’t be enough to meet the new government’s stated goal of raising the tax effort to 15 percent from the current 13 percent.

Global Source said international experience showed that raising revenues to one percent of gross domestic product (GDP) in a year “would already be a feat,” citing the record of the first Aquino administration and the succeeding Ramos government, both of which raised the tax effort by just 0.6 percent and 0.5 percent, respectively.

“Mr. Aquino has announced that he would consider raising taxes only if anti-evasion and anti-smuggling measures fail to shrink the national deficit. But there is little time to waste, especially as financial market sentiment is becoming less forgiving of growing fiscal deficits and debt ratios with the world eventually exiting recession and reversing from a fiscal stimulus mode,” Global Source said.

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