Tax Reform for Acceleration and Inclusion...within the 2-4% target of the Bangko Sentral ng Pilipinas, and monetary policy tools can be used to target inflation. 8/17/2017 DEPARTMENT

Tax Reform for Acceleration and Inclusion

Package 1 – Impact on the economy

As of August 17, 2017 7:49 AM

DRAFT FOR DISCUSSION. SUBJECT TO CHANGE.

Table of contents

1. Key messages

2. Macroeconomic data

3. Dynamic stochastic general equilibrium (DSGE) model

4. Credit rating and fiscal impact

5. Jobs impact

6. Inflation and general price effectRevenueimpact

8/17/2017 DEPARTMENT OF FINANCE 2

Key messages


1. Macroeconomic fundamentals are good thanks to prudent macro-

fiscal management by the current and previous administrations.

2. With the tax reform, we can further strengthen our macroeconomic

position to create an environment more conducive to high growth

and investment, good job creation, and faster poverty reduction.

3. If we only pass the popular reforms, we risk our current

macroeconomic stability. Rating agencies have warned against the

stalling of the tax reform and a possible downgrade.

4. Tax reform will allow the government to invest in the people

through infrastructure, education, health, housing, and social

protection.

5. Fears of spikes in inflation are unfounded. Inflation will still be

within the 2-4% target of the Bangko Sentral ng Pilipinas, and

monetary policy tools can be used to target inflation.


Vision for the Philippines

By 2022(6 years from now)

By 2040(23 years or one

generation from now)


21.6% 13-15%

Poverty rate reduced(6 million Filipinos uplifted)

3,500USD

5,000USD

Increase in Gross National Income (GNI)

(Achieve upper-middle income status where Thailand and China are today)

Extreme poverty

eradicated

3,500USD

at least

11,000USD

Increase in Gross National Income (GNI)

(Achieve high income status where Malaysia and South Korea are today)

How to achieve the vision

• Sustain economic growth of at least 7% every year for one generation.

• Shift the source of growth from consumption to investmento From 80% consumption and 20% investmento To 70% consumption and 30% investment

• Massively invest ino The people to become globally competitiveo Infrastructure to raise productivity.

• Focus investment on o Healtho Educationo Life-long trainingo Social protectiono Infrastructureo Research and development



How to achieve the vision• Investment-led growth of 7 to 10 percent

• Over the long-term, all these investments require additional funds of around 1 trillion pesos per year in 2016 prices on top of the current 1.7 trillion pesos.

• Over the medium term, the government will need to raise some 366 billion per year between 2016 and 2022 (or 2.2 trillion pesos in total).



Current and additional investment needed per year


How to achieve the vision

Ways to raise additional investments

Complementary economic reforms


Budget

reforms

Tax policy

reform

Tax & customs

administration

reform

Simplify

regulations

Improve food

security

Secure

property

rights

Enhance

competition

Sustainable

borrowings

Tax administration

₱433 billion (26%)

[2.7% of

GDP]

Customs

administration

₱208 billion (12%)

[1.3% of GDP]

100% spending

efficiency

₱188 billion (11%)

[1.2% of GDP]

Borrowing

₱478 billion

(28%)

[3% of GDP]

Tax policy reform

₱366 billion (22%)

[2.3% of

GDP]Investment

deficit compared

to Thailand:

₱1.7 trillion

How to fund the investment deficit

• Compared to Thailand or Vietnam, the Philippines is underinvesting by around 10 percent of GDP annually.

• Even with substantial improvements in tax and customs administration, underspending addressed, and sustainable borrowing, PHP 366 billion (2.3 percent of GDP) annually is still needed to catch-up starting 2017.



Sources: DBM, PSA, DOF staff estimates

Note: The investment deficit was estimated as the difference between the investment levels of the Philippines and a benchmark country (Thailand). The

difference of around 10 percent of GDP, which is equivalent to 1.7 trillion in 2017, can be funded by improvements in tax and customs administration,

spending efficiency, and borrowing. However, these are not enough. The country needs an additional PHP 366 billion or 2.3 percent of GDP from tax

policy reform to fully fund the gap.


Stocks respond to the tax reform


A comparisonReform of VAT in 2005 and oil price shock in 2011:

We managed well and became much stronger.


VAT reform Oil price shock

Indicator 2004 2005 2006 2010 2011 2012

Effective VAT rate 0 10 12 12 12 12

Dubai crude (US dollars) 34 49 61 78 106 109

GDP growth 6.7 4.8 5.2 7.6 3.7 6.7

Consumption 6.0 4.4 4.2 3.4 5.6 6.6

Overall Inflation 4.8 6.5 5.5 3.8 4.6 3.2

Food inflation 6.0 6.4 5.2 4.0 5.5 2.4

Transport inflation 11.5 16.8 10.7 3.7 6.0 2.3

Electricity inflation 3.8 7.5 5.9 5.1 5.2 4.6

Gasoline (in pesos) 20.1 26.5 30.0 35.5 48.1 48.6

Diesel (in pesos) 18.0 25.9 30.2 31.4 41.3 41.7

Inflation remained moderate even with the increase

in VAT and a significant increase in crude price

GDP: The amended DOF proposal shows higher GDPgrowth as more tax revenues are invested into theeconomy.

…


0

1

2

3

4

5

6

7

8

9

Perc

ent

dif

f. fr

om

ste

ady

stat

e

Real GDP

DOF amended HB5636 Base

Solid macroeconomic fundamentals



Strong macroeconomic indicators



0.4

9.6

2.4

4.94.5

3.1

0

2

4

6

8

10

12

Per capita growth Inflation rate

Per

cen

t

Growth and inflation rates

1990s 2000s 2010s

Sources: PSA, BSP, DOF staff estimates

54.2

7.9

63.0

23.7

48.1

77.9

3.8

10.7

16.3

0

5

10

15

20

25

0

20

40

60

80

100

Debt (left, percent ofGDP)

International reserves(left, USD billion)

Remittances (right,USD billion)

USD

bil

lio

n

Per

cen

t o

f G

DP

an

d U

SD b

illi

on

Debt, international reserves, and remittances

1990s 2000s 2010s


Nominal GDP and real GDP growth

8/17/2017 14

5.2

-0.6

3.1

4.4

2.9

3.6

5.0

6.7

4.85.2

6.6

4.2

1.1

7.6

3.7

6.77.1

6.1 6.1

6.96.5

7.0 7.0 7.0 7.0 7.0

-3

-1

1

3

5

7

9

0

5

10

15

20

25

30

Perc

ent

PHP

tri

llion

s

Nominal GDP and real GDP growth

GDP (current PHP), left Real GDP growth, right


GDP per capita (PHP)

8/17/2017 15

34 37 40 43 46 49 52 5561

6672

7786 88

97103

110118

127132

142

154

167

181

197

214

232

0

50

100

150

200

250

PHP

tho

usan

ds

GDP per capita (current PHP)


GDP per capita (USD)

8/17/2017 16

1,285

1,249

967

1,088

1,040

958

1,001

1,011

1,080

1,197

1,395

1,679

1,923

1,839

2,145

2,372

2,6052,786

2,871

2,907

2,982

3,071

3,335

3,622

3,935

4,276

4,647

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

USD

GDP per capita (current USD)


Overall and food inflation

8/17/2017 17

Overall balance of payments

8/17/2017 18

Current account balance

8/17/2017 19

-4.9

-6.0

1.5

-3.5

-2.7-2.3

-0.3

0.3

1.8 1.9

5.75.4

0.1

5.0

3.6

2.52.8

4.23.8

2.5

0.2

-7

-5

-3

-1

1

3

5

7

-8

-6

-4

-2

0

2

4

6

8

10

12

14

Pe

rce

nt

of

GD

P

USD

bill

ion

sCurrent account balance

Current account balance, left

Current account balance (percent of GDP), right


Remittances

8/17/2017 20

4.7

6.3

10.2

7.37.5

7.9

8.5

9.09.4

10.4 10.4

9.79.5

11.3

10.3

9.8

9.3 9.39.6 9.7 9.7

4

5

6

7

8

9

10

11

12

0

5

10

15

20

25

30

35

Pe

rce

nt

of

GD

P

USD

bill

ion

sRemittances

Remittances, left Remittances (percent of GDP), right


Total exports

8/17/2017 21

43

53

60

45

50

4546 46 47

3739

36

32

2931

2930

2830

28 28

20

25

30

35

40

45

50

55

60

65

30

40

50

60

70

80

90

Pe

rce

nt

of

GD

P

USD

bill

ion

s

Goods and services exports

G/S exports (BOP), left G/S exports (BOP - percent of GDP), right


Total imports

8/17/2017 22

48

59 59

55

60

56 56 55 55

47

44

40 41

3436

35 35

32

34 33

36

20

25

30

35

40

45

50

55

60

65

30

40

50

60

70

80

90

100

110

120

Pe

rce

nt

of

GD

P

USD

bill

ion

s

Goods and services imports

G/S imports (BOP), left G/S imports (BOP - percent of GDP), right


Foreign direct investment

8/17/2017 23

1.51.2

1.8

1.2

2.2

0.2

1.5

0.50.7

1.9

2.9 2.9

1.5

2.0

1.3

1.9

2.4 2.4

6.8

5.6

7.9

0

1

2

3

4

5

6

7

8

9

USD

bill

ions

Foreign direct investment


Gross international reserves

8/17/2017 24

Philippine credit rating

8/17/2017 25

B1

Ba3

Ba2

Ba1

Baa3

Baa2

0

0

0

0

0

0

0

0


Credit rating (Moody's), right

Source: Moody's investors service

Investmentgrade

Philippine interest rate spread

8/17/2017 26

3.8

5.1

4.0

5.1

5.9

4.4 4.5 4.5

4.1

2.3

1.8

3.33.4

2.1 2.01.8

1.51.4

1.1 1.1

0

1

2

3

4

5

6

7

Pe

rce

nt



8/17/2017 27

Major progress made on the lives of the people but much more needed

Official poverty headcount rates

8/17/2017 28


20

25

30

35

40

45

50

55

60

Perc

ent

Official poverty incidence rates of the population

1992 Methodology 2003 Methodology

2011 Methodology 2012 Methodology

Source: PSA

The proposed reforms can help the Philippines improve its poverty rates and

catch-up with its neighbors



0

10

20

30

40

50

60

Per

cen

t

Poverty rate (at US$ 1.9/day)

PHL VNM

THA MYS

IDN CHN

Source: World Development IndicatorsNote: Poverty rates are based on national household surveys. Due to differences in survey years , the figures presented are lumped into 3-year intervals based on the Philippine survey schedule.

0

10

20

30

40

50

60

70

80

90

Per

cen

t

Poverty rate (at US$ 3.1/day)

PHL VNM THA

MYS IDN CHN

Source: World Development IndicatorsNote: Poverty rates are based on national household surveys. Due to differences in survey years , the figures presented are lumped into 3-year intervals based on the Philippine survey schedule.

Poverty, unemployment, and underemployment rates

8/17/2017 30


15

17

19

21

23

4

5

6

7

8

9

Per

cen

t

Per

cen

t

Unemployment and underemployment rates

Unemployment rate (LHS) Underemployment rate (RHS)

Source: PSA

26.6 26.325.2

21.6

14.5

10.9 10.6

6.6

36.8

32.7 32.0

25.3

0

5

10

15

20

25

30

35

40

2006 2009 2012 2015

Pe

rce

nt

Poverty headcount rates

National International $1.9/day International $3.1/day

Sources: PSA and World Bank

Unemployment and underemployment rates

8/17/2017 31


14

16

18

20

22

24

26

28

4

5

6

7

8

9

10

Per

cen

t

Per

cen

t

Unemployment and underemployment (PSA)

Unemployment (PSA, left)Underemployment (PSA, right)

Source: PSA

8/17/2017 32

Dramatic fiscal turnaround, but much more needed to move

from stability to prosperity

National government revenue

8/17/2017 33

17.1

17.5

15.7

14.7

14.414.6

13.814.1

13.8

14.4

15.6

16.5

15.6

14.0

13.4

14.0

14.5

14.915.1

15.8

15.2

15.6

17.0

17.217.4

17.818.1

15.215.115.3

15.515.7

16.0

16.4

12

13

14

15

16

17

18

19

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

Perc

ent

of G

DP

PH

P t

rilli

on

s

National government revenue

NG revenue, leftNG revenue (percent of GDP), rightBaseline scenario


National government tax revenue

8/17/2017 34

15.315.3

14.1

13.3

12.812.7

12.112.111.8

12.4

13.713.513.6

12.212.112.4

12.9

13.313.6

13.613.7

14.5

16.116.3

16.6

17.0

17.4

13.7

14.114.3

14.6

14.9

15.3

15.7

11

12

13

14

15

16

17

18

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

Per

cen

t o

f G

DP

PH

P t

rilli

on

s


NG tax revenue, leftNG tax revenue (percent of GDP), rightBaseline scenario


National government expenditure

8/17/2017 35

16.8

17.517.4

18.218.118.4

18.818.5

17.5

17.0

16.716.716.5

17.7

16.9

16.0

16.8

16.3

15.7

16.7

17.6

18.6

20.020.2

20.420.8

21.1

17.6

18.118.3

18.518.7

19.0

19.4

15

16

17

18

19

20

21

22

0

1

2

3

4

5

6

Per

cen

t o

f G

DP

PH

P t

rilli

on

sNational government expenditure

NG expenditure, leftNG expenditure (percent of GDP), rightBaseline scenario


National government expenditure breakdown

8/17/2017 36

0

1

2

3

4

5

6

PH

P t

rilli

on

s

National government expenditure breakdown

Education Health Social protection

Infrastructure Rest of expenditure

Sources: PSA, BSP, DOF staff estimatesNote: Figures for 2017 to 2022 are DBCC projections.

National government expenditure breakdown (percent of GDP)

8/17/2017 37

National government deficit

8/17/2017 38

National government primary expenditure

8/17/2017 39

13.6

14.6

14.0

14.9

14.213.9

14.4

13.5

12.4

11.711.7

12.812.9

14.2

13.6

13.2

13.913.5

13.1

14.4

15.5

16.5

18.018.218.4

18.819.2

15.5

16.016.3

16.516.8

17.117.5

11

12

13

14

15

16

17

18

19

20

0

1

2

3

4

5

6

Per

cen

t o

f G

DP

PH

P t

rilli

on

s


NG primary expenditure, left

NG primary expenditure (percent of GDP), right

Baseline scenario


National government interest payment

8/17/2017 40

13.6

14.6

14.0

14.9

14.213.9

14.4

13.5

12.4

11.711.7

12.812.9

14.2

13.6

13.2

13.913.5

13.1

14.4

15.5

16.5

18.018.218.4

18.819.2

15.5

16.016.3

16.516.8

17.117.5

11

12

13

14

15

16

17

18

19

20

0

1

2

3

4

5

6

Per

cen

t o

f G

DP

PH

P t

rilli

on

s


NG primary expenditure, left

NG primary expenditure (percent of GDP), right

Baseline scenario


National government debt service

8/17/2017 41

6.4

7.1

8.5

10.3

11.8 12.0

13.6

8.9

7.9 7.8 7.7 7.46.9

4.8

4.1

6.05.5

2

4

6

8

10

12

14

16

200

300

400

500

600

700

800

900

Pe

rce

nt

of

GD

P

PH

P b

illio

ns

National government debt service

NG debt service, left


National government debt

8/17/2017 42

48

50 51

55

6161

67

74 74

68

61

54 55 55

5251 51

49

45 45

42

35

40

45

50

55

60

65

70

75

80

0

1

2

3

4

5

6

7

Pe

rce

nt

of

GD

P

PH

P t

rilli

on

s

National government debt

NG total debt, left NG total debt (percent of GDP), right


National government debt breakdown

8/17/2017 43

0.4 0.6 0.6 0.81.1 1.1 1.3

1.7 1.8 1.7 1.7 1.51.8 1.9 2.0 2.1 2.0 1.9 1.9 2.1 2.2

0.70.7 0.9

1.0

1.11.2

1.5

1.72.0 2.2 2.2

2.2

2.42.5

2.72.9

3.5 3.7 3.83.9 3.9

0

1

2

3

4

5

6

7

PH

P t

rilli

on

s

National government debt breakdown

NG foreign debt NG domestic debt


National government debt breakdown (shares)

8/17/2017 44

3644 43 45

51 48 48 49 48 44 44 41 43 44 42 4236 34 33 35 35

6456 57 55

49 52 52 51 52 56 56 59 57 56 58 5864 66 67 65 65

0

20

40

60

80

100

Per

cen

t

National government debt breakdown (shares)

NG foreign debt share NG domestic debt share


Debt profile remains sustainable even with Dutertenomics

8/17/2017 45

0

5

10

15

20

25

30

35

40

45

Perc

ent

Debt scenarios

Debt/GDP business as usual Debt/GDP with BBB


GDP is growing faster than debt accumulation

8/17/2017 46

-10

-5

0

5

10

15

20

25

Pe

rce

nt

GDP and debt growth

Debt growth Nominal GDP growth


Dynamic Stochastic General Equilibrium (DSGE)Global Integrated Monetary and Fiscal Model



Notes on DSGE• DSGE stands for Dynamic Stochastic General

Equilibrium:o Dynamic: the model deals with economic variables that

evolve over time.

o Stochastic: the model deals with random shocks that affect

these variables.

o General Equilibrium: these variables are assumed to

eventually achieve a state of general equilibrium.

• DSGE is used to analyze the long-term impact of the

tax reform package on the economy.

• DSGE simulates over several time periods while the

older/simpler Computable General Equilibrium (CGE)

model simulates for only one time period.

• The simulations are performed using MATLAB.




Fiscal policy summary

Fiscal policy

Tax-financing

Debt-financing

Capital: CIT,

CaIT, RPT

Labor:

PITConsumption: VAT, sugar,

tobacco, alcohol, and oil excises

Lump sum and others

Tariffs

Local borrowings Foreign borrowings

Consumption

Investment

Transfers (e.g., CCT)

Social services

Infrastructure

Education

Health


Tax-financing

Debt-

financing

Government

Expenditures

Current account balance, gross international

reserves, foreign direct investments, and

portfolio investments

Gross domestic product (consumption,

investment, exports, imports), jobs, income,

and poverty

Money supply and demand,

and interest rates

External economy

Real economy

Monetary sector


Fiscal policy impactDRAFT FOR DISCUSSION. SUBJECT TO CHANGE.


Scenarios:

1. DOF amended proposal: the shocks that will occur if the amended tax reform package 1 as proposed by the Department of Finance is passed and implemented.

2. HB5636: the shocks that will occur if House Bill 5636 is passed and implemented.

3. Base: the shocks that will occur if no change in tax policy occurs.


Cases (percent of GDP unless otherwise specified)HB 5636 case Base case DOF amended

Description

Provisions of the House

Bill 5636 as passed last

May 31, 2017

No policy changeAmended DOF proposal

in response to HB 5636

Additional

investment target

2.1, of which 0.2 are

transfers for four years1.1, no transfers

2.1, of which 0.2 are

transfers for 1 year

Tax policy financed 1.0 0 1.1

Tax admin financed 0.3 0.1 0.3

Deficit financed 0.83 1.0 0.75

Public investment

efficiency80 percent 60 percent 80 percent

Increase in risk

premium5 basis points 10 basis points 0 (baseline)


GDP: The amended DOF proposal shows higher GDPgrowth as more tax revenues are invested into theeconomy.

…


0

1

2

3

4

5

6

7

8

9

Perc

ent

dif

f. fr

om

ste

ady

stat

e

Real GDP


Consumption: The amended DOF proposal initially sees a dipin consumption due to higher consumption taxes but later oncatches up well as investments make people more productive.


-2

-1

0

1

2

3

4

Pe

rce

nt

dif

f. fr

om

ste

ad

y st

ate

Real consumption


Investment: Over the medium-term, public investmentstimulates private investment in the amended DOF proposal.Higher risk premium which leads to higher interest ratesreduce investments in the base case.


-4

-2

0

2

4

6

8

Pe

rce

nt

dif

f. f

rom

ste

ad

y st

ate

Real investment


Government spending: Amended DOF represents bothan increase in the level and efficiency of governmentspending (i.e., spending leads to asset accumulation).

…


5

7

9

11

13

15

17

19

21

23

Perc

ent

dif

f. fr

om

ste

ady

stat

e

Government spending


Inflation without monetary response for 1 year:in the amended DOF proposal, inflation increases by 1.6ppt due to higher consumption taxes.

…


-0.2

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

PPT

dif

f. fr

om

ste

ady

stat

e

Inflation without monetary response


Inflation with monetary response: But higher inflation can be moderated by appropriate monetary policy and the BSP has an excellent track record.

…


0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

PP

T d

iff.

fro

m s

tea

dy

sta

te

Inflation with monetary response


Real wages: Tax-financed public investments encouragesmore job-generating private investment that raisesproductivity and wages.

…


-1

0

1

2

3

4

5

6

7

Pe

rce

nt

dif

f. fr

om

ste

ad

y st

ate

Real wages


Real interest rate: amended DOF proposal showslower long-term interest rate as tax financing does notcrowd out capital.

…


0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

PP

T d

iff.

fro

m s

tea

dy

sta

te

Real interest rates


Government debt: The amended DOF proposal, which relies on tax financing, achieves a sustainable debt path.

…


0

5

10

15

20

25

PP

T d

iff.

fro

m s

tea

dy

sta

te

Debt to GDP ratio


Assumptions




Variable Steady state value

Government consumption 13.2 Government investment 2.6 Tax revenue from consumption taxes 5.8 Tax revenue from capital taxes 4.2 Tax revenue from labor taxes 2.0 Tax revenue from lump-sum taxes and non-tax revenues 3.2 Government debt 42.6 Total investment 20.0

For the model calibration, steady state values were derived by averaging the values of the different variables from 2012 to 2016


Shocks to the DOF amended case


Shocks to the HB5636 case


Shocks to the base case

Credit rating and fiscal impact


If no or diluted tax reform, there are only 2 choices that will lead to the same outcome

8/17/2017 68

No or

diluted tax

reform

Poverty

Malnutrition

Traffic

Poverty

Malnutrition

Traffic

Breach the

deficitCredit rating

downgrade

Higher debt

servicing

Less budget

and fewer

investments

Fewer

investments

Low gov’t

spending to

maintain deficit

The Philippines enjoys investment grade rating


Philippines current credit rating

Scenarios Rating category OutlookDate last

reviewed

Moody’sBaa2

(one notch above

investment grade)

stable June 27, 2017

Fitch

BBB-

(at investment

grade)

positiveMarch 29,

2017

Standard and

Poor’s

BBB

(one notch above

investment grade)stable April 28, 2017

The Philippines is nowabove investment grade

8/17/2017 70

B1

Ba3

Ba2

Ba1

Baa3

Baa2

0

0

0

0

0

0

0

0


Credit rating (Moody's), right

Source: Moody's investors service

Investmentgrade

The Philippines is nowabove investment grade

8/17/2017 71

The Philippines is now above investment grade

8/17/2017 72

B+

BB-

BB

BB+

BBB-

BBB

BBB+

0

0

0

0

0

0

0

0


Credit rating (Fitch), right

Source: Fitch Ratings

Investmentgrade

As a result, interest rate spreads have narrowed…

8/17/2017 73

3.8

5.1

4.0

5.1

5.9

4.4 4.5 4.5

4.1

2.3

1.8

3.33.4

2.1 2.01.8

1.51.4

1.1 1.1

0

1

2

3

4

5

6

7

Perc

ent



…making borrowing and interest payments more affordable

8/17/2017 74

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

100

150

200

250

300

350

400

450

500

550

Perc

ent

of G

DP

PHP

bil

lion

s

National government interest payment

NG interest payment, left NG interest payment (percent of GDP), right


S&P warns against the tax reform agenda stalling

8/17/2017 75

“Standard and Poor’s…

may even cut the rating

if the government’s

reform agenda stalls.”

Moody’s also notes risk to credit outlook

8/17/2017 76

“…lack of clarity in the

government’s revenue

improvement… could pose

a risk to the Philippines’

credit outlook.”

Government will spend up to PHP 30 billion more 0n debt servicing


Additional debt servicing as a result of a credit rating downgrade (PHP billion)

ScenariosShock to interest

rates

Shock to foreign

interest payments

Shock to foreign

amortization

payments

Total

Base average

interest rate: 4%

[USD 1 = PHP 48]

PHP 631 billion

national

government gross

financing

USD 2.0 billion

foreign interest

payment or PHP

94.2 billion

USD 1.7 billion

foreign amortization

payment or PHP 79.4

billion

1% increase in

interest rates,

1-peso depreciation

6.3 2.0 1.7 9.9

2% increase in

interest rates,

2-peso depreciation

12.6 3.9 3.3 19.9

3% increase in

interest rates,

3-peso depreciation

18.9 5.9 5.0 29.8

The private sector and households will also be negatively affected

8/17/2017 78

• Private firms and households could see an additional PHP 60 to 120 billion in

borrowing cost as interest rates go up.

• These estimates represent the lower bound are there this doesn’t include loans by

credit cooperatives, pawnshops, etc.

Impact on jobs, GDP and inflationFrom the National Economic and Development Authority


2018 2019 2020 2021 2022

Real GDP 0.27 0.59 0.83 0.97 1.29

Household consumption 0.02 0.12 0.24 0.36 0.48

Capital formation 0.25 0.47 0.61 0.62 0.83

Agriculture 0.01 0.04 0.06 0.08 0.11

Industry 0.22 0.45 0.58 0.63 0.84

Services 0.03 0.11 0.19 0.26 0.34

Nominal GDP 0.41 0.74 0.98 1.10 1.43

Package 1 impact on growth (percent)

Package 1 will grow the economy by 1.3% by 2022

• GDP will be boosted as a result of higher household consumption due to lower income tax and the cash transfers.

• Increased economic activity is buoyed by increased household consumption and increased investments.


Source: National Economic and Development Authority

Package 1 will create 2.6 million jobs in the next 5 years• Increased infrastructure investment through

the revenues from the tax reform will lift employment by around half a million Filipinos annually.


2018 2019 2020 2021 2022 Average

Additional jobs 315,694 574,387 568,729 478,501 671,708 521,804

Package 1 impact on employment


Increase in inflation is low and within the BSP’s target range• Increase in excise taxes will raise inflation by

0.42% in 2018 but will quickly dissipate in succeeding years.


2018 2019 2020 2021 2022

Percentage points increase 0.42 0.04 0.01 0.05 0.00

Package 1 impact on inflation (NEDA estimate)


General price effects



Price effect of excise on inflation 2018 (maximum effect)


Commodity

Share

of CPI

(%)

CPI

2016

Share of

petroleum

products

as input

(%) 1

Net impact of excise to prices

(%)2,3

Inflation

rate (%)4,5

Diesel Gasoline LPG Kerosene

Food 36 163 10 1.1 0.6 0.7 0.9 0.9

Transportation 6 128 30 3.3 1.9 2.0 2.7 2.8

Electricity 7 124 7 0.8 0.4 0.5 0.6 0.7

Others 51 135 6 0.7 0.4 0.4 0.6 0.6

Total 100 144 0.9Notes:

1. Transportation share is the daily average of jeepney and bus operation in Metro Manila based on the National Tax Research Center computation. Electricity share is based on the Department of Energy power statistics.

2. The net impact of the excise is obtained by multiplying the share of oil as input and the price increase as a result of the excise.3. The increase in the price of the petro products as a result of an increase in excise tax using the petro prices in Metro Manila in 20164. Weighted net impact of the increase in excise tax on each commodity computed based on weights below using HECS 20115. Overall inflation computed from the weighted average of commodity inflation based on the share of CPI



Commodity

Share

of CPI

(%)

CPI

2016

Share of

petroleum

products

as input

(%) 1


(%)2,3

Inflation

rate (%)4,5


Food 36 163 10 0.7 0.4 0.4 0.6 0.6

Transportation 6 128 30 2.0 1.3 1.3 1.7 1.8

Electricity 7 124 7 0.5 0.3 0.3 0.4 0.4

Others 51 135 6 0.4 0.3 0.3 0.4 0.4



2. The net impact of the excise is obtained by multiplying the share of oil as input and the price increase as a result of the excise.3. The increase in the price of the petro products as a result of an increase in excise tax using the assumed

petro prices in Metro Manila as of December 20184. Weighted net impact of the increase in excise tax on each commodity computed based on weights below using HECS 20115. Overall inflation computed from the weighted average of commodity inflation based on the share of CPI



Commodity

Share

of CPI

(%)

CPI

2016

Share of

petroleum

products

as input

(%) 1


(%)2,3

Inflation

rate (%)4,5


Food 36 163 10 0.3 0.2 0.2 0.3 0.3

Transportation 6 128 30 0.9 0.6 0.6 0.8 0.8

Electricity 7 124 7 0.2 0.1 0.1 0.2 0.2

Others 51 135 6 0.2 0.1 0.1 0.2 0.2



2. The net impact of the excise is obtained by multiplying the share of oil as input and the price increase as a result of the excise.3. The increase in the price of the petro products as a result of an increase in excise tax using the assumed

petro prices in Metro Manila as of December 20194. Weighted net impact of the increase in excise tax on each commodity computed based on weights below using HECS 20115. Overall inflation computed from the weighted average of commodity inflation based on the share of CPI


Lessons from the pastInflation remains low and stable despite significant

increase in diesel prices in 2016

Sources: PSA, DOE

*January y-o-y change

in diesel priceJan 25-29 2016: 18.25

Jan 29 2017: 32.10


Overall inflation has been relatively stable despite substantial swings in oil prices


-6

14 13

34 33

7

18

-10

0

11

16

-10

8

-28

-21

47

53 2

57 5

3

84 4 5 3 3 4

1 2

-40

-30

-20

-10

0

10

20

30

40

50

60

Perc

ent

Diesel price changes and overall inflation

Sources: PSA, DOE, DOF staff estimates

Annual dieselprice changes Overall inflation

Food inflation has been relatively stable despite substantial swings in oil prices


-6

14 13

34 33

7

18

-10

0

11

16

-10

8

-28

-21

47

42 1

6 6 5 4

13

64 5

2 37

3 2

-40

-30

-20

-10

0

10

20

30

40

50

60

Perc

ent

Diesel price changes and food inflation


Annual dieselprice changes Food inflation

Transport inflation has been relatively stable despite substantial swings in oil prices


-6

14 13

34 33

7

18

-10

0

11

16

-10

8

-28

-21

47

74 4 4

8 62

52

5 5 52 2

-1 0

-40

-30

-20

-10

0

10

20

30

40

50

60

Perc

ent

Diesel price changes and transport inflation


Annual dieselprice changes Transport inflation

Utilities inflation has been relatively stable despite substantial swings in oil prices


-6

14 13

34 33

7

18

-10

0

11

16

-10

8

-28

-21

47

13

23

12

17

11

1

9

14

62 1 1

0

0

-40

-30

-20

-10

0

10

20

30

40

50

60

Perc

ent

Diesel price changes and gas, electricity, and water inflation


Annual dieselprice changes Gas, electricity, and water inflation

Overall inflation has been on the downtrend in the past few months

1.3

0.9

1.1 1.1

1.6

1.9 1.91.8

2.3 2.3

2.52.6

2.7

3.33.4 3.4

3.1

2.72.8

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

2016 2017

Per

cen

t

Overall inflation

Source: PSA and BSP


Food inflation has been on the downtrend in the past few months

1.7

1.51.6 1.6

2.3

2.9

2.7

2.4

3.1

3.43.3

3.6

3.4

4.14.0

4.2

3.8

3.53.4

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

2016 2017

Per

cen

t

Food inflation

Source: PSA and BSP


Overall and food inflation have been mostly stable despite large swings in retail oil prices

-50

-40

-30

-20

-10

0

10

20

30

40

50

Per

cen

t

Overall inflation, and gas and diesel price changes

Overall inflation Gas y-o-y price change

Diesel y-o-y price change

Source: PSA and BSP


Overall and food inflation have been mostly stable despite large swings in retail oil prices

-50

-40

-30

-20

-10

0

10

20

30

40

50

Per

cen

t

Food inflation, and gas and diesel price changes

Food and non-alc bev inflation Gas y-o-y price change

Diesel y-o-y price change

Source: PSA and BSP



A comparisonReform of VAT in 2005 and oil price shock in 2011:

We managed well and became much stronger.


VAT reform Oil price shock

Indicator 2004 2005 2006 2010 2011 2012

Effective VAT rate 0 10 12 12 12 12

Dubai crude (US dollars) 34 49 61 78 106 109

GDP growth 6.7 4.8 5.2 7.6 3.7 6.7

Consumption 6.0 4.4 4.2 3.4 5.6 6.6

Overall Inflation 4.8 6.5 5.5 3.8 4.6 3.2

Food inflation 6.0 6.4 5.2 4.0 5.5 2.4

Transport inflation 11.5 16.8 10.7 3.7 6.0 2.3

Electricity inflation 3.8 7.5 5.9 5.1 5.2 4.6

Gasoline (in pesos) 20.1 26.5 30.0 35.5 48.1 48.6

Diesel (in pesos) 18.0 25.9 30.2 31.4 41.3 41.7

Inflation remained moderate even with the increase

in VAT and a significant increase in crude price

Revenue estimates under the reform


Package 1 will keep deficit in check; but not enough. Other

packages needed soon.


-3.7-3.6 -3.6

-4.2

-4.5

-4.0

-3.5

-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

Pe

rce

nt

Deficit (2018 values)

DOF package 1 House Bill 5636 Senate Bill 1408 No reform

-3.3-3.5

-3.3

-4.2

-4.5

-4.0

-3.5

-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

Pe

rce

nt

Deficit (2018 values, with complementary measures)

DOF package 1 House Bill 5636 Senate Bill 1408 No reform

HB 5636 revenue estimates assume that the generic repeal of VAT exemptions is

legally binding.

157.2

133.8

169.1

80

90

100

110

120

130

140

150

160

170

Bill

ion

pe

sos

Revenues (2018 values, with complementary measures)

DOF package 1 House Bill 5636 Senate Bill 1408

Package 1 will raise much more revenues to fund our infrastructure

and anti-poverty programs.



legally binding.

91.4

115.0

103.3

80

90

100

110

120

130

140

150

160

170

Bill

ion

pe

sos

Revenues (2018 values)


Personal income tax


-137.0

-141.4

-125.9

-145

-135

-125

-115

Bil

lio

n p

eso

s

PIT revenue loss in billion pesos (2018 values)


-0.78

-0.81

-0.7

-0.9

-0.8

-0.7

Pe

rce

nt

PIT revenue loss as percent of GDP (2018 values)


VAT



legally binding.

0.51

0.46

0.51

0.0

0.1

0.2

0.3

0.4

0.5

0.6

Pe

rce

nt

VAT revenue as percent of GDP (2018 values)


89.3

81.0

89.3

75

85

95

Bill

ion

pe

sos

VAT revenue in billion pesos (2018 values)


Oil excise


74.473.7

74.4

60

70

80

Bil

lio

n p

eso

s

Oil excise revenue in billion pesos (2018 values)


0.4 0.4 0.4

0.0

0.1

0.2

0.3

0.4

0.5

Pe

rce

nt

Oil excise revenue as percent of GDP (2018 values)


Auto excise


0.14

0.08

0.14

0.0

0.1

0.2

Per

cen

t

Auto excise revenue as percent of GDP (2018 values)


24.0

14.1

24.9

10

20

30

Bill

ion

pe

sos

Auto excise revenue in billion pesos (2018 values)


SSB


47.0 47.0 47.0

10

20

30

40

50

60

Bill

ion

pe

sos

SSB revenue in billion pesos (2018 values)


0.3 0.3 0.3

0.0

0.1

0.2

0.3

0.4

Pe

rce

nt

SSB revenue as percent of GDP (2018 values)



Revenue Impact: SB 14082018 2019 2020 2021 2022

Personal income tax -125.9 -138.4 -152.3 -211.3 -232.4

Compensation income earners -136.3 -149.6 -164.3 -219.9 -241.6

Self employed and professionals 8.3 9.1 10.0 6.4 7.1

Removal of ROHQ rate 0.3 0.3 0.4 0.3 0.3

Lottery and sweepstakes 1.7 1.7 1.7 1.7 1.7

Fringe benefits 0.0 0.0 0.0 0.2 0.2

Estate and donor's tax -3.1 -3.2 -3.4 -3.5 -3.7

Estate tax -1.9 -1.9 -1.9 -1.9 -1.9

Donor's tax -1.2 -1.3 -1.4 -1.6 -1.7

VAT 89.3 128.7 141.4 155.3 170.7

Senior citizen leakage 0.0 4.2 4.6 5.0 5.5

Cooperatives 5.4 6.0 6.5 7.2 7.9

Housing 6.2 6.9 7.5 8.3 9.1

Power transmission 3.1 3.4 3.7 4.0 4.5

Other VAT exemptions 75.9 83.4 91.6 100.6 110.6

VAT zero rating 0.0 26.5 29.1 32.0 35.2

VAT threshold increase -1.4 -1.5 -1.7 -1.8 -2.0

Petroleum excise 74.4 125.8 152.6 162.3 172.3

Automobile excise 24.9 28.3 30.0 31.8 33.7

Complementary measures 65.8 63.7 67.6 71.9 76.5

Motor vehicle user's charge 12.9 14.4 15.9 17.6 19.5

Sugar-sweetened beverages 47.0 49.3 51.8 54.4 57.1

Estate tax amnesty 6.0 0.0 0.0 0.0 0.0

Tax administration 43.8 57.7 69.7 83.5 99.5

TOTAL 169.1 262.5 305.8 290.1 316.6

Source: DOF staff estimates

Package 1 SB1408 revenue estimates (PHP billions)


Revenue Impact: HB 56362018 2019 2020 2021 2022



Self employed and professionals -2.4 -2.7 -4.0 -4.0 -4.3



Fringe benefits -0.5 -0.6 -0.7 -0.7 0.2


Estate tax -1.9 -1.9 -1.9 -1.9 -1.9

Donor's tax -1.2 -1.3 -1.4 -1.6 -1.7

VAT 81.0 123.1 135.2 148.5 163.1


Cooperatives 0.2 0.3 0.3 0.3 0.3

Housing 3.1 6.9 7.5 8.3 9.1



VAT zero rating 0.0 26.5 29.1 32.0 35.2









TOTAL 133.8 233.6 272.9 253.0 269.9


Package 1 HB5636 (PHP billions)


Revenue Impact: DOF amended2018 2019 2020 2021 2022



Self employed and professionals -2.2 -2.4 -2.6 -8.0 -8.8



Fringe benefits -0.5 -0.6 -0.7 0.2 0.2


Estate tax -1.9 -1.9 -1.9 -1.9 -1.9

Donor's tax -1.2 -1.3 -1.4 -1.6 -1.7

VAT 89.3 128.7 141.4 155.3 170.7


Cooperatives 5.4 6.0 6.5 7.2 7.9

Housing 6.2 6.9 7.5 8.3 9.1



VAT zero rating 0.0 26.5 29.1 32.0 35.2









TOTAL 157.2 249.4 291.4 272.7 295.7


Package 1 DOF amended revenue estimates (PHP billions)


High end revenue impact in 2018 DOF amended


Note: 40% of the first year incremental revenue from oil will be earmarked to social mitigating measures, and the rest will be allocated

only to investment, education, health, and social protection.

DOF amended (in billion pesos) Loss Gain Net

Package 1: PIT and consumption 157.2

Tax policy measures -140.1 187.7 47.6

Lower personal income tax rate -137.0

Estate and donor tax -3.1

VAT base expansion 89.3

Automobile excise 24.0

Petroleum excise 74.4

Tax administration measures 43.8 43.8

Complementary measures 65.8 65.8

DOF amended (% of GDP) Loss Gain Net




Estate and donor tax 0.0







High end revenue impact in 2018 HB5636


Note: 40% of the incremental revenue from oil will be earmarked to social mitigating measures, and the rest will be softly earmarked

only to investment, education, health, and social protection.

House bill 5636 (in billion pesos) Loss Gain Net




Estate and donor tax -3.1




Sugar sweetened beverage excise 47.0



Motor vehicle user's charge 12.9

Estate tax amnesty 6.0

House bill 5636 (% of GDP) Loss Gain Net




Estate and donor tax 0.0




Sugar sweetened beverage excise 0.3



Motor vehicle user's charge 0.1

Estate tax amnesty 0.0

If no tax reform, less revenue to finance needed investments

8/17/2017 122

11

12

13

14

15

16

17

18

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

Perc

ent

of G

DP

PHP

tri

llion

s


NG tax revenue, leftWith tax reform (percent of GDP), rightNo tax reform


If no tax reform, less revenue to finance needed investments

8/17/2017 123

15

16

17

18

19

20

21

22

0

1

2

3

4

5

6

Perc

ent

of G

DP

PHP

tri

llion

s

National government expenditure

NG expenditure, leftWith tax reform (percent of GDP), rightNo tax reform


Documents

Tax Reform for Acceleration and Inclusion...within the 2-4% target of the Bangko Sentral ng Pilipinas, and monetary policy tools can be used to target inflation. 8/17/2017 DEPARTMENT