By Rosemarie Francisco
MANILA, May 25 - The new Philippines government may need to impose new taxes and unwind tax exemptions to prevent the 2011 budget deficit blowing out to 4.4 percent of GDP, the outgoing finance minister said on Tuesday.
Senator Benigno Aquino, who is set to be proclaimed president after the May 10 elections, has said he would rather rein in spending, improve collections, and pursue tax cheats to reduce the budget deficit, expected to reach 3.6 percent of GDP this year.
The outgoing finance minister, Margarito Teves, said that may not be enough to do the job. His government, whose term ends June 30, has projected a 2011 fiscal deficit of 3.3 percent.
"Our new president would be facing a tough time. Our spending is increasing and at the same time, they are running out of ammunition to be the able to handle these increasing requirements," Teves said.
"They may need a sort of plan B in case they are short on the expected revenues from purely tax administration, curbing smuggling. They may need to consider and approve enhancement measures that we have recommended and which could be taken up by the new Congress."
Analysts doubt the 2010 budget deficit target of 3.6 percent of GDP, or 293.2 billion pesos, can be met. They forecast a shortfall in excess of 300 billion pesos, which would be a record in peso terms.
"If, in case, they do not agree to these measures, our projection -- if they want to maintain the level of spending that is projected in 2011 -- our deficit as a percent of GDP would rise from the projected 3.3 percent to 4.4 percent," Teves told reporters.
"To cover that deficit, we need to borrow more and if we borrow there will be a consequence on the debt service payments."
Benchmark four-year bond yields were unchanged at 5.91 percent.
"The market is coming around to the view that even this year we will see another record deficit number, but until the new government comes out with its projections, bond yields will be in a narrow range," said a trader in Manila.
Manila had said it will raise $16.8 billion from foreign and local borrowing in 2011 to fund the deficit, 7 percent higher than this year's planned $15.7 billion.
TARIFF CUTS
On Tuesday, the government approved import tariff reductions on various products, including crude oil and petroleum, that would cost up to 4 billion pesos in foregone revenues.
Manila removed a 3 percent import tariff on crude oil and 7 percent tariff on steel coils as part of trade deals with its Southeast Asian neighbours, but maintained a 40 percent duty on rice imports.
Last month, Teves recommended the new government raise the value-added tax rate to 15 percent from 12 percent and rescind some new tax exemptions to improve finances. [ID:nSGE63D092]
Teves had recommended the next Congress approve bills to rationalise fiscal incentives to investors and restructure excise taxes on tobacco and alcohol products, among others.
