No one loves the value-added tax (VAT). Everyone seeks to make cheap political hay demanding that the tax be abolished.
Over the past two decades or so, however, the VAT has kept our fiscal position anchored despite a chronic inclination to spend beyond our means. When everything else was fluctuating, the tax was a predictable source of revenue.
Because of the VAT, the country won several upgrades in its credit rating. We have pushed to the verge of investment grade.
The upgrades are not insignificant. They allowed the country to refinance its outstanding debt at lower rates. Without those upgrades, given our yawning budget deficit, we might have found ourselves standing on the brink of a debt crisis.
There is some talk that the VAT rate might be escalated to 15 percent next year from the current rate of 12 percent. This is because our budget deficit has been rising due to extensive subsidy programs. Also, public outrage over the gargantuan looting of our infrastructure funds is expected to translate into reluctance to pay taxes.
Our economy is expected to take a hit from the raging corruption scandal. Investments will likely slow down until some political certainty is recovered. Our growth rate will suffer. There will be no improvement in the poverty rate.
We are on the verge of passing an unprecedented national budget for 2026. But slower economic growth will not enable us to outgrow the outstanding debt. Our borrowing escalated over the past few years and we are beginning to test the limits of sustainability.
Lackluster governance and weak leadership put us in real danger of downgrades to our credit risk ratings. Should that happen, it will be more expensive for us to refinance our standing debt – and even harder to find lenders willing to risk exposure to a country that seems headed to prolonged political turbulence.
More than ever, we need the VAT to keep our fiscal position on even keel – poor governance notwithstanding. However, as the economic situation deteriorates, it becomes more tempting for politicians and rabble-rousers to demand abolition of the VAT. It is an issue that easily resonates with a public afflicted with a weak grasp of fiscal issues.
We do have the highest VAT rates in the region. But any rash move to reduce the VAT rate or abolish the tax completely will create even more trouble for our economy. We will be perceived as default-prone. We might have to impose a crippling austerity program across the board. This will bring us back to the stagnation of the eighties and the nineties.
The first thing on our agenda should be to dramatically reduce the volume of corruption. Only after bringing down the volume of corruption can we begin to think about making our taxation a little more benign.
More ghosts
The more we look, the more corruption we see.
Beyond the truly scandalous flood control projects, we now find substandard or ghost projects involving so many other government contracts. Among these is the multibillion-peso Land Transportation Management System (LTMS) that remains incomplete seven years after the contract was awarded to a consortium that includes a foreign partner, Dermalog.
Over the years, the COA raised numerous red flags over inexplicable delays, overpayments, system glitches and other irregularities. Endless hearings have been held at the House and the Senate. The matter has been elevated to the Supreme Court.
Last September, Solicitor General Darlene Berberabe urged the court to ‘void the contract between the LTO and the German Dermalog joint venture’ for the LTMS. She described this contract as ‘unreliable, dangerous and poses a greater threat to the interest of the State and to national security.’
The Solicitor General is likewise pleading that the court stop the LTO from further implementing the LTMS ‘to avoid serious damage to the government and the public, and to stop the LTO from further paying Dermalog.’ The only viable recourse is for the court to order Dermalog to release and turn over the source code and database to the LTO. Anything less would deal the State irreparable harm.
Yet no official linked to this mess nor the foreign contractor faced any legal consequences. Accountability remains elusive.
In the seven years since the contract was awarded, the LTO should be benefitting from more efficient access to information. Such access should propel improvement of services, including online registration of vehicles that spares millions of Filipinos from the hassle of long waits. If this information system was fully functional, it should not have taken more than a few minutes to check the validity of the registration papers of the fleet of luxury vehicles acquired by the Discaya couple.
The faulty system installed by the contractors slowed down efforts to fully digitalize operations at the LTO. It penalizes all those who transact with the LTO – especially as vehicle owners are charged inflated fees. In the end, because this project was funded using taxpayer money, the burden of failure is borne by all taxpayers.
It is time to declare this project an abject failure. The original sin, it appears, is in the decision to award this large contract through regular public bidding instead of through a Public-Private Partnership. All the mishaps that happened derives from this basic error.
For all its lapses, the LTMS must be considered a ghost project.