The Duterte administration is aware of the potential risk of lowering Philippine income taxes. This is how he might manage the Philippines’ tremendous national debt—in the face of rising interest rates.
Ever wondered how much is the Philippines’ total debt?
Can you guess without Googling it? No?
HOW MUCH DO WE OWE?
As of September 2016, our national government debt stood at 6.087 trillion pesos.
Yes, that’s trillion—and not a typo.
Economists, however, don’t see this as a huge concern given our country’s strong economic growth. They say our national debt has actually “declined” over the years, and is now just 44% of our country’s annual GDP.
Our 44% compares favorably with many of our peers—like Vietnam’s at 50%, Brazil’s at around 66%, or that of our previous colonizer, Spain (99%).
To note, our country’s credit rating has reached “investment-grade” level since 2013, and with that came lower interest rates for our government.
From a high of 17% (parang 20% or “5-6”), the market rate for Philippine government’s 10-year dollar bonds has gone down to 12% by 2005, to 8% by 2009, under 5% by 2012, to as low as 3.5% at the start of this year.
Remarkable.
HOW DOES IT AFFECT US?
But the aggregate amount of our national debt can’t be ignored. As we speak, our interest payments alone are at least Php 300 – Php 400 billion per year. More importantly, an increasing number of investment banks are saying that interest rates have nowhere to go now but up. And from a low of 3.5% back in January this year, the market rate has now shot right back up to 5% for the 10-year bonds.
With our debt at Php 6 trillion, just an extra 1% could mean an additional Php 60 billion in interests.
Ouch.
To better appreciate the magnitude of the risk we face, bear in mind the current proposals to cut income tax for individuals is estimated to reduce personal income tax collections by 180 billion pesos. So if rates do eventually rise in the coming years (say 1 or 2%) this can mess up government’s budget. At that point, what would be the more likely scenario? Would government then close down public schools or hospitals or reduce government workers’ salaries? Or will taxes or government fees go back up?
The good thing is the Duterte administration is aware of this potential risk. That is why the proposed tax reform package covers “revenue-generating” measures to offset the impact of the lower tax collections from personal income tax. And these “revenue-generating” measures do include intensified tax collection efforts aimed at pulling in those who have never registered with the BIR or what we call the “shadow” or underground economy.
So to those belonging to the shadow economy, do pay attention to the business section of your morning paper or just add “finance” or “economy” to your newsfeed.
Watch out if interest rates continue to go up; someone’s about to pay you a visit.