Fiscal issues

VAT: Defending The Indefensible In The Name Of Foreign Debt

Gloria's SONA speech illustrates how defensive Malacanang is over the VAT (Photo from Reuters)

First published in Paninindigan, Ang Pahayagan ng Bayan, Jul-Sep 2008 – In her latest State of the Nation Address (SONA), Gloria Arroyo spent a considerable portion of her speech defending the value added tax (VAT), calling it the means for Filipinos to ride out the world food and energy crisis. The speech illustrates how defensive Malacañang is over the unpopular and regressive tax, which various sectors and some lawmakers want scrapped as food and fuel prices escalate. It aggressively hypes the so-called Katas ng VAT program to justify the VAT and show that it provides concrete and direct benefits for the poor.


Arroyo is forced to uphold the VAT in particular on oil and power despite growing clamor against it as the International Monetary Fund (IMF) and the World Bank have both warned the government against cancelling or even reducing the VAT. Malacañang could not afford to let go of what the Finance department described as the “biggest tax measure since the birth of the Republic”.


Indeed, Arroyo’s VAT reform agenda, realized through Republic Act (RA) 9337 that increased from 10 to 12 percent the VAT rate and further expanded to include oil and power among others, have notably increased government’s tax revenues. Total RVAT (reformed VAT under RA 9337) collections from 2006 to the first half of 2008 have already reached P219.08 billion. Of this amount, oil accounted for P122.4 billion or almost 56 percent while power, P24.04 billion or just below 11 percent. For the second half of 2008, government expects to collect P51.6 billion in VAT on oil and P8.4 billion from power.


Malacañang is determined to protect these revenues to maintain its good standing among the foreign creditors, who get their signal from the IMF’s assessment of a country’s fiscal position. In 2007, no less than the former managing director of the IMF hailed the Philippine government for its fiscal progress and described the VAT as Arroyo’s “central achievement”. Days before the SONA, the IMF strongly warned the Philippines of the adverse fiscal effects of tax cuts in response to the run-up of oil prices.


In her last SONA, Arroyo went as far as to say that scrapping the VAT will only benefit the non-poor (i.e. may kaya) who supposedly consume “84 percent of oil and 90 percent of power”. Thus, the poor according to the government, do not shoulder a heavy burden of the VAT but even gain from it through programs such as the P7.5-billion Katas ng VAT. The Finance department, however, later said that the poor (i.e. low-income) refers to those earning less than P80,000 a year – a ridiculously low standard to measure poverty.


Nonetheless, the Katas program has been widely discredited as its various components merely offer one-time dole-outs such as the P500-subsidy for small power users. Its frivolity was fully exposed when the Budget department announced that it is no longer funding the program next year. It cited the falling prices of petroleum for its decision and said that the program will only resume if global oil prices top $200 per barrel next year. Such is the character of the Katas program, which the Arroyo administration hyped so much to counter calls to scrap the VAT on oil and power. At its core, it is an empty publicity and stopgap measure of an embattled government scrambling to justify its anti-poor policies.


No matter how Malacañang packages the VAT as a pro-people fiscal measure, it still could not conceal how the regressive tax puts undue additional burden on the consumers. In the case of oil, the VAT has become even more unjustifiable as pump prices soared to record levels, with diesel peaking at P60 per liter in July. Though oil prices have eased in the last couple of weeks, VAT still comprises between P6 to 7 per liter, a significant amount for ordinary income earners especially in these times of double-digit inflation.


Arroyo of course also claims that with increased revenues, there are now more funds for the poor – a blatant lie easily exposed by official records. Bureau of Treasury data, for instance, show that from 2001 to 2005, the annual allocation for education was 15.6 percent of the national budget; health, 1.7 percent; housing, 0.2 percent; and debt servicing (interest), 27.8 percent. Comparing these levels with the RVAT period (2006-2007), the share of education even fell by 1.4 percentage points and health by 0.1, while housing slightly increased by 0.2. Interest payments as a portion of the national budget, in contrast, rose by 1.2 percentage points.


But Arroyo and her economic managers could not care less, obsessed as they are to achieve fiscal stability and keep the foreign loans flowing. As of first quarter 2008, the country’s foreign debt stood at $54.6 billion, up from $54 billion in the same period a year ago. Government expects to incur an additional foreign debt of $2.3 billion for the whole year, and another $2.5 billion in 2009. Consequently, Malacañang will allocate increasing amounts to pay for these loans – P636.1 billion this year and P681.2 billion next year.


What’s in store for Arroyo and her cabal from these debts? Well, think of the botched NBN-ZTE, the Northrail and Southrail, and other projects funded by foreign debt wherein multimillion dollar tongpats abound. This is how the vicious onerous taxes – foreign debt – corruption cycle milk the Filipino people dry.


This vicious cycle must end and it is only possible through direct political actions by the people. The series of protests against the VAT in the past months and the favorable public opinion it has created have obviously helped to compel the House ways and means committee to propose the targeted scrapping of the VAT on power. Of course, this is not enough and thus, the people’s campaign to remove the VAT on oil and power must continue and intensify. (END)


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