Category : Speeches
Date : July 01, 2019
Title : Game Changing Reforms for Sustainable Development

Carlos G. Dominguez
Secretary of Finance

Pre-SONA Speech
July 1, 2019

Executive Secretary Salvador Medialdea, my fellow cabinet secretaries and workers in government, members of the diplomatic corps, friends and partners in business and financial communities, multilateral and bilateral agencies, academe, civil society, youth organizations and the media, distinguished guests, ladies and gentlemen:

At the halfway mark of the first term of the Duterte administration, the expectations have been met and the promises have been kept.

Over the past three years, the Duterte administration has shown great political resolve. Reforms across a broad spectrum were initiated. Robust economic growth continues to gain momentum. Massive investments in our economy’s competitiveness continue to be made. Ambitious programs have been instituted. Our fiscal position has been strong and is as strong as it has ever been.

While we rank among the best performing economies in this dynamic part of the world, growth is not our final goal. Our ultimate goal is to bring down poverty rates and create more opportunities for all law-abiding Filipinos.

At midpoint, there is much to celebrate but there are also larger goals that we yet have to accomplish. President Rodrigo Duterte enjoys broad and profound support from our people. They appreciate the sincerity, the hard work and the visionary strategy of this administration.

That strong support was yet again expressed in the recently concluded midterm elections. The landslide vote our people delivered in favor of candidates endorsed by the President translates into approval of the reforms the President has launched from the start of his administration.

Today, the Philippine economy is strong and ready to soar. Our economy grew at an average of 6.5 percent during the first 11 quarters of the Duterte administration. This impressive performance was achieved despite increased global uncertainty, a weak agriculture sector, a spike in world oil prices and a brief bout with elevated inflation.

We responded to the problem of elevated inflation rates by decisively implementing measures to increase the food supply, especially rice, which was a major contributor to inflation last year. Inflation rates began to decelerate to 4.4 percent in January and further slowed down to only 3.2 percent in May. We expect to end this year with inflation well within the target range of 2 to 4 percent.

Recently, Standard and Poor’s, one of the world’s most reputable credit rating agencies, raised our sovereign rating from triple B to triple B plus. This is the highest rating we have ever received in our economic history and just one notch away from the sterling “A” rating territory. The upgrade puts the Philippines above countries like Italy and Portugal. This is a strong vote of confidence in the Duterte administration’s reform agenda.

Among the first reform measures pursued by this administration was the comprehensive tax reform program. This is the first time in history the country embarked on revenue reforms without being forced to do so by an external party or an economic crisis.

The first package of the comprehensive tax reform program was passed at the end of 2017. The effects of the TRAIN law were immediate and broadly beneficial, reducing income tax rates for 99 percent of individual taxpayers. Filipinos earning below 250,000 pesos annually are now exempt from paying personal income taxes while almost all workers earning above it now receive about a month’s extra take-home pay each year. We have basically given out a 14th-month pay annually to our wage earners. The increased purchasing power of our consumers resulted in a strong growth in demand and an impressive rise in the profitability of companies involved in retail and real estate.

The measure also removed the value-added tax on medicines for diabetes, hypertension and high cholesterol for all Filipinos suffering from these widespread diseases. We raised excise taxes on petroleum products, which had not been adjusted since 1997 and are disproportionately consumed by higher income households. TRAIN mandated the implementation of a fuel marking program to curb oil smuggling. Estate and donor taxes were lowered to a single tax rate of 6 percent, freeing up real estate to be used more productively for investments and job creation.

TRAIN likewise raised excise taxes on cigarettes and introduced taxes on sweetened beverages. These are meant to discourage the habit of smoking and encourage consumption of healthier products. At present, we are now collecting about 100 million pesos a day from excise taxes on sweetened beverages. In fact, other countries like Indonesia and Vietnam are keen on studying our sweetened beverage tax for them to be able to pass the same legislation.

Another piece of good news is the recent congressional approval of the tobacco tax reform bill. The substantially higher excise taxes on tobacco products are earmarked to augment the huge financing needed for the Universal Health Care program that would especially benefit low-income households. We estimate this program to cost about 1.4 trillion pesos over the next five years. We estimate that we currently can only fund 1 trillion pesos of this. We hope to raise the remaining balance from tobacco taxes, with the subsequent enactment of higher excise taxes on alcohol.

The TRAIN Law is an achievement of this administration. It provided a robust and recurrent revenue flow that supported our economic investments in modern infrastructure and expanded social services. In 2018, we exceeded TRAIN’s revenue goal, collecting 108 percent of the annual target. This provided a solid footing for our infrastructure spending program.

For the first time in our history, we exceeded 5 percent of GDP in infrastructure spending last year. This is double the average spending over the last 50 years. We expect to bring this up further to 7 percent by 2022. Infrastructure modernization will provide a strong stimulus to keep our growth rate high into the foreseeable future.

Combined with better tax administration, the 2018 tax effort rose to 14.7 percent of GDP. This is the highest it has been in over 20 years.

Dividends remitted by Government-Owned and Controlled Corporations or GOCCs also contributed to the more robust revenue flow of the government. In 2018, GOCC dividends amounted to 40 billion pesos, the highest collection ever from state-run firms. In the first 6 months of 2019, dividends have already reached another record amount of 45 billion pesos.

The Department of Finance also made history in 2017 by collecting from a cigarette manufacturer more than 30 billion pesos for non-payment of excise taxes and for use of counterfeit tax stamps. This is the biggest sum on record raised by the government from a tax settlement with a single corporate taxpayer. After the company was sold to a new owner, our collection of excise taxes from that same tobacco company on the same volume grew by an average of 2.5 billion pesos a month. Incidentally, we are the only administration that actually cleaned up the cigarette industry and raised tobacco excise taxes twice. This has never happened in any past administration.

We continue to intensify our campaign against smuggling and tax evasion through the combined efforts of the Bureau of Internal Revenue and Bureau of Customs. For instance, since 2016, the BIR has destroyed more than 33 million packs of counterfeit cigarette brands worth 1.2 billion pesos. Customs destroyed 152 smuggled luxury vehicles worth 96.3 million pesos. The Bureau also seized 9.9 billion peso-worth of illegal drugs. This sends a clear message: this administration will fight smuggling and tax evasion to the end.

Improved revenues have been matched by improved disbursements. For the first time since 2005, the government outperformed in its expenditure program. We have eliminated the problem of underspending that hounded our ability to grow the economy. With its continued growth, our expenditure effort in 2018 reached 19.6 percent of GDP. This is the highest we have ever achieved in the past 28 years. To this, I attribute the good management of Mark Villar in the DPWH and Art Tugade in the DOTr.

In the first quarter of this year, because of the delay in the enactment of the 2019 budget, our growth fell to 5.6 percent from the target of between 6 to 7 percent. Because we were forced to operate on a reenacted budget, government was not able to spend 1 billion pesos a day in the first quarter of this year.

The economic managers have formulated a bold catch-up program to achieve a GDP growth rate of over 6 percent this year. We will accelerate infrastructure disbursements and hasten implementation of projects so that public works spending hits the targeted 5.2 percent of GDP by the end of the year. We will fast-track the implementation of priority socioeconomic programs. We aim to bring up the growth of our agriculture sector to at least 2 percent per annum. We look forward to working closely with Congress to continue improving the ease of doing business.

Among the monumental legislative achievements of this administration is the passage of the Rice Tariffication Act. The liberalization of rice trading was finally achieved after more than thirty years of failed attempts under various administrations. This law has made quality rice more affordable and accessible to Filipino consumers, thereby bringing down inflation. In fact, rice retail prices are now cheaper by five to ten pesos per kilo compared to last year.

Unlike in the past when quantitative restrictions were abused by a select few, the new law ensures that farmers benefit directly from import tariffs by providing at least 10 billion pesos each year for mechanization, high quality seeds, access to credit, and training.

And while the President signed game-changing measures into law, he also vetoed several measures that were not aligned with our public investment priorities or detrimental to our fiscal position. For instance, the 17th Congress proposed 147 bills that would have either eroded revenues and mandatorily added to the budget a total of 977 billion pesos on the year of implementation. Out of the 147 bills, there were 31 bills which proposed to create more tax-free zones in addition to the 546 we already have. We could not afford such measures, unless we scuttle the infrastructure program and condemn our economy to stagnation.

Our development partners fully appreciate this administration’s commitment to fiscal discipline and its determination to see our infrastructure projects done at the soonest possible time. They have thrown their full support behind our strategy for achieving high and inclusive growth.

Both Japan and China have committed 9 billion US dollars each in official development assistance while South Korea has pledged 1 billion US dollars. These complement the strong support we are receiving from the Asian Development Bank, World Bank, and Asian Infrastructure Investment Bank.

Since the start of the administration, the Department of Finance has sealed 17 highly concessional loan agreements with our bilateral and multilateral partners for our big-ticket infrastructure projects under the Build, Build, Build program. This includes the most ambitious single infrastructure project yet--the first phase of the Metro Manila Subway. This is the country’s first ever underground train that will connect Mindanao Avenue in Quezon City to the Ninoy Aquino International Airport in Pasay City.

We have taken great care to ensure that our Build, Build, Build projects yield substantial economic returns and are funded through the most highly concessional financing available. We have also made sure that we diversify our sources of project funding. Thus, speculations that our ambitious infrastructure program will cause us to fall into a debt trap are unfounded.

With strong official development assistance inflows, we were able to shift to a hybrid Public-Private Partnership or PPP model. In this model, we use official development assistance or the government’s own funds instead of waiting for the private sector to raise the financing commercially during the initial stages of a project. This enables us to use cheaper money and move more quickly to get the projects done.

Clark International Airport is the first among the projects to be implemented through this hybrid PPP mode and the fastest to be executed by the government. Before the Duterte administration took over, the expansion of the airport has been on the government’s drawing board for 20 years. It took a former mayor from Mindanao to finally make things happen in Central Luzon. The project won approval from the NEDA Board in June 2017 and broke ground after six months. We are looking forward to this project’s completion ahead of schedule by mid 2020. This is again managed by Art Tugade and Vince Dizon.

When we implement projects, we must remember that when they are delayed, the ones who suffer are the people. Therefore, it should not just be PPP, it should be PPPP--Public-Private Partnership for the People.

Even as we have scaled up our economic investments, we continue to manage our obligations with great prudence. We have brought down our debt-to-GDP ratio to 41.9 percent in 2018 from a high of 74.4 percent in 2004. We project this ratio to continue its downward trend even as we have slightly raised the fiscal deficit ceiling to 3.2 percent this year.

The tight spreads of the country’s latest offshore bond issuances also underline investor confidence in the country’s ability to pay its debts.

In 2017 and 2018, we received a total of 20 billion US dollars in foreign direct investments. For two consecutive years, our foreign direct investments averaged 10 billion US dollars a year, double the inflows that we received in 2015, which was around five billion pesos. This is unprecedented.

The passage of the TRABAHO bill will encourage even more competitive investments to enter our economy. The reduction of corporate income tax rates will bring our tax regime closer to the regional average and the rationalization of fiscal incentives will create a level playing field for our enterprises and attract new players to compete. To be clear, we are not eliminating fiscal incentives. We want to keep granting incentives for the right reasons and for the right investments. We want these incentives to be performance-based, time-bound, specifically targeted and fully transparent.

Across the spectrum of government, reforms are also being introduced to improve efficiency and accountability. The Department of Interior and Local Government, for instance, has streamlined local government processes through the increased use of modern digital technologies. The Department of Trade and Industry, headed by Ramon Lopez, is doing its part in reengineering the processes of starting a business through Project One. We will now have a One Central Business Portal that will be available online and through mobile phone, transforming the business registration experience into a convenient facility that is available 24 hours a day, 7 days a week, including Sundays and holidays. These reforms will greatly enhance the ease of doing business.

Our people are beginning to reap the rewards from a well-managed economy. Unemployment is at its lowest in 40 years. From an average of 6.9 percent in 2010 to 2015, the unemployment rate has averaged 5.5 percent from 2016 to 2018. The latest data for April 2019 showed unemployment has dipped further to 5.2 percent.

The drop in the unemployment rate reflects in the reduction of poverty incidence. From 27.6 percent in the first half of 2015, poverty incidence has significantly declined to 21 percent in the first half of 2018.

The decline in poverty incidence indicated by official figures is confirmed by opinion surveys that measure self-rated poverty. A recent SWS poll showed that the number of Filipinos who consider themselves poor fell to 38 percent, the lowest number ever.

The economic team and Build, Build, Build team stand by our commitment to bring down poverty incidence from 21.6 percent in 2015 to just 14 percent by 2022. We are investing heavily in our human capital to achieve this goal.

Our people will always be our main asset in the journey towards full development of our country. We work hard at getting projects running at the soonest time possible for we know that the reward for all these work we do now is a better future for the next generation of Filipinos.

The Philippine development story has been at its most promising during the past three years. Later this year or early next year, we are expected to graduate to upper middle-income country status ahead of schedule. This is proof that we can beat extreme poverty within a generation, if we stay on course and continue to invest in the right things. The passage of the remaining tax reform packages can surely help bring us to A rating territory within the next couple of years.

The basis for rapid economic expansion is in place. The Duterte administration enjoys broad political support. We have momentum on our side. We expect to perform even better in the coming period by rapidly modernizing not only our infrastructure base but also the policy architecture that will make possible sustained and inclusive growth.

Thank you very much.