Philippines Seeks Widest Budget Gap Since 2010 With Tax Cuts

  • Incoming budget minister says 3% gap is comfortable target
  • Duterte’s government plans to cut taxes within six months

Philippine President-elect Rodrigo Duterte plans to cut income taxes and widen the fiscal deficit to the highest since 2010 as he ramps up spending on infrastructure, incoming Budget Secretary Ben Diokno said.

A "comfortable deficit target" is 3 percent of gross domestic product, Diokno said in an interview in Manila Wednesday, without specifying a time frame. The new government will seek to cut personal and corporate taxes within six months of Duterte taking office, he said.

Looser fiscal policy is a departure from the more conservative approach adopted by the outgoing administration of Benigno Aquino. That discipline helped to curb the budget shortfall to 0.9 percent of GDP in 2015 from 3.5 percent in 2010 and delivered the nation’s first investment-grade credit ratings. 

Duterte, a firebrand mayor who won the support of voters with promises to fight crime, starts a six-year term on June 30. He has pledged to reform the country’s tax regime to benefit low-income earners.

Diokno said investors may support a widening in the deficit target because the government plans to use the additional fiscal space to spend more on public infrastructure. Authorities will also consider revenue-enhancing measures -- such as higher levies on petroleum products, reduced perks for companies, and an increase in sales tax -- once the effect of income-tax cuts on state coffers can be assessed, he said.

Outgoing Finance Minister Cesar Purisima said May 20 he will submit tax reform recommendations to the new administration, including a proposal to lower personal and corporate income taxes to 25 percent. The corporate income tax rate is currently 30 percent while income tax rates are as high as 32 percent, according to the International Monetary Fund.

Diokno estimated economic growth for the full year of about 6.2 percent, with expansion possibly slowing in the second half as election-related spending tapers off.

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