Duterte plans wider Philippine deficit in fiscal reversal

[MANILA] The incoming administration of Philippine President-elect Rodrigo Duterte signaled its willingness for looser fiscal policy and higher borrowing as it seeks to ramp up spending on infrastructure and cut taxes.

Ben Diokno, who will be Mr Duterte's budget secretary when the new government takes office on June 30, said a fiscal shortfall of 3 per cent of gross domestic product is a "comfortable deficit target."

That would be the highest since 2010 and a departure from the more conservative approach adopted by Benigno Aquino, which resulted in the nation's first investment-grade credit ratings.

Mr Duterte, a firebrand mayor who won support with promises to fight crime and fix transport bottlenecks, has pledged to reform the country's tax regime. The new government plans to cut personal and corporate taxes within six months of taking office and borrow more, said Mr Diokno.

"I don't mind borrowing now, because it's quite cheap," he said. "Rates now are a lot lower than before." He questioned why the nation wasn't borrowing more, adding that "we need to fund and invest in infrastructure and social capital."

Investors may support a widening in the deficit target because the government plans to use the additional fiscal space to improve public infrastructure, Mr Diokno, 68, said.

He is currently a professor at the University of the Philippines' School of Economics and was also budget chief under president Joseph Estrada.

"Investors would be willing to look past any potential increase in the deficit depending on the details of the fiscal policy," said Michael Wan, an economist at Credit Suisse Group AG in Singapore.

"A broad overhaul of the tax structure could put more money in the hands of consumers while more spending on infrastructure, education and health would boost the Philippines' growth potential."

The new government's immediate priorities include building infrastructure faster, solving Manila's traffic woes and investing in agriculture, incoming Economic Planning Secretary Ernesto Pernia said in an interview with ABS-CBN News Channel Thursday.

Mr Aquino's administration had cut the budget deficit to 0.9 per cent of GDP in 2015 from 3.5 per cent in 2010.

A key concern for Fitch Ratings is the nature of the planned higher spending, as a wider budget deficit would be a shift from trends seen in the past few years.

"We would be waiting to see more details regarding this planned higher deficit," Sagarika Chandra, Fitch sovereign ratings associate director in Hong Kong, said in an e-mailed reply to questions.

"Also, it remains to be seen whether the targeted level of spending would be achieved. In the past, government spending has typically been below what has been budgeted."

Outgoing Finance Minister Cesar Purisima said May 20 he will submit tax reform recommendations to the new administration, including a proposal to lower personal and corporate income taxes to 25 per cent. The company rate is currently 30 per cent while personal rates are as high as 32 per cent, according to the International Monetary Fund.

Authorities will consider revenue-enhancing measures - such as higher levies on petroleum products, reduced perks for companies, and an increase in sales tax - once the effect of income-tax cuts on state coffers can be assessed, Mr Diokno said.

Mr Diokno estimated economic growth for the full year of about 6.2 per cent, with expansion possibly slowing in the second half as election-related spending tapers off.

BLOOMBERG