Finance Secretary Ralph Recto has this warning.
Reducing the value-added tax (VAT) rate to 10 percent from 12 percent would have this consequence, according to Finance Secretary Ralph Recto.
Lowering the VAT rate from 12% to 10% may sound attractive, but the Department of Finance (DOF) cautions that it could greatly affect government revenues, fiscal stability, and economic fairness. This proposal could lead to weakened efforts to achieve fiscal consolidation and primarily advantage wealthier households.
This could roughly cost the government PHP 330 billion annually, as warned by the DOF.
“If we have a target of 5.5 percent fiscal deficit this year, with the reduction of VAT to 10 percent, our fiscal deficit will be at 6.5 percent. So definitely, we will not be able to do fiscal consolidation because our fiscal deficit last year was only 5.7 percent,” Finance Undersecretary Karlo Adriano said.
To make up for the lost money, the government would have to cut its spending by about P330 billion a year.
Finance Secretary Ralph Recto spoke about the matter and echoed the same warning. During the Senate budget hearing, Recto shared that if the revenue is further reduced, we might end up borrowing even for the current operating expenses.
“I leave it to Congress. If you pass a bill, my warning will be: that there will be a possible credit rating downgrade,” he added. Recto said this when he attended the hearing for his agency’s proposed ₱37.8 billion budget for next year. The amount was approved by the Senate.
Economists and tax experts have the same warning. Cutting VAT may trigger a fiscal or even an economic crisis. Foundation for Economic Freedom President Calixto V. Chikiamco said that the proposal is “feasible but insane.”
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