3 Impact On The Economy PPT 08172017 PDF

DRAFT FOR DISCUSSION. SUBJECT TO CHANGE.
Tax Reform for

Acceleration and Inclusion
Package 1 – Impact on the economy
As of August 17, 2017 7:49 AM
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 effectRevenue
impact
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 By 2040
(6 years from now) (23 years or one
generation from now)
21.6% 13-15%
Poverty rate reduced
Extreme poverty
(6 million Filipinos uplifted) eradicated
3,500 5,000 3,500
at least
11,000
USD USD USD USD
Increase in Gross National Increase in Gross National
Income (GNI) Income (GNI)
(Achieve upper-middle income status (Achieve high income status where
where Thailand and China are today) 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
investment
o From 80% consumption and 20% investment
o To 70% consumption and 30% investment
• Massively invest in
o The people to become globally competitive
o Infrastructure to raise productivity.
• Focus investment on
o Health
o Education
o Life-long training
o Social protection
o Infrastructure
o Research and development


• 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


Ways to raise Complementary
additional investments economic reforms
Sustainable Budget Secure

Enhance
borrowings reforms property
competition
rights
Tax & customs Tax policy Improve food Simplify

administration reform security regulations
reform

How to fund the investment deficit

• Compared to Thailand or
Vietnam, the Philippines is Tax policy reform Tax administration
underinvesting by around 10 ₱366 billion (22%) ₱433 billion (26%)
percent of GDP annually. [2.3% of [2.7% of
GDP] GDP]
• Even with substantial Investment
deficit compared
improvements in tax and
to Thailand:
customs administration,
underspending addressed,
Borrowing
₱1.7 trillion Customs
administration
and sustainable borrowing, ₱478 billion ₱208 billion (12%)
PHP 366 billion (2.3 percent (28%) [1.3% of GDP]
of GDP) annually is still [3% of GDP] 100% spending
efficiency
needed to catch-up starting ₱188 billion (11%)
2017. [1.2% of GDP]
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 comparison
Reform 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 GDP
growth as more tax revenues are invested into the
economy.
Real GDP
9
Percent diff. from steady state
8
7
6
5
4
3
2
1
0
DOF amended HB5636 Base

Solid macroeconomic
fundamentals

Strong macroeconomic indicators

Growth and inflation rates Debt, international reserves, and remittances
12 100 25
1990s 2000s 2010s 1990s 2000s 2010s
10 9.6 77.9
80 20
Percent of GDP and USD billion

63.0 16.3
8
60 15
Percent
54.2
USD billion
6
48.1
4.9 10.7
4.5 40 10
4
3.1 23.7
2.4
20 3.8 5
2
7.9
0.4
0 0 0
Per capita growth Inflation rate Debt (left, percent of International reserves Remittances (right,
GDP) (left, USD billion) USD billion)
Sources: PSA, BSP, DOF s taff estimates Sources: PSA, BSP, DOF s taff estimates

Nominal GDP and real GDP growth
Nominal GDP and real GDP growth
30 9
7.6
7.1 6.9 7.0 7.0 7.0 7.0 7.0
6.7 6.6 6.7 6.5
25 6.1 6.1 7
5.2 5.2
5.0 4.8
20 4.4
4.2 5
3.6 3.7
PHP trillions
Percent
3.1 2.9
15 3
1.1
10 1
-0.6
5 -1
GDP (current PHP), left Real GDP growth, right

0 -3
Sources: PSA, BSP, DOF staff estimates
8/17/2017 14
GDP per capita (PHP)
GDP per capita (current PHP)
250 232
214
197
200
181
167
154
PHP thousands
150 142
132
127
118
110
103
97
100 86 88
77
72
66
61
55
46 49 52
50 40 43
34 37
8/17/2017 15
GDP per capita (USD)
GDP per capita (current USD)
5,000 4,647
4,500 4,276
3,935
4,000
3,622
3,500 3,335
3,071
2,907
3,000 2,786
2,605
2,372 2,982
USD
2,500 2,871
2,145
1,923
2,000 1,679
1,395
1,500 1,285 1,839
1,040 1,001 1,080
967
1,000 1,197
1,249
1,088 958 1,011
500
8/17/2017 16
Overall and food inflation
8/17/2017 17
Overall balance of payments
8/17/2017 18
Current account balance
Current account balance
14 7
5.7
5.4
12 5.0
4.2 5
10 3.6 3.8
2.8
8 2.5 2.5 3
1.5 1.8 1.9
6
Percent of GDP
USD billions
0.3
0.1 0.2 1
4 -0.3
2
-1
-2.3
0 -2.7
-3.5
-2 -3
-4 -4.9
-6.0 Current account balance, left -5
-6
Current account balance (percent of GDP), right
-8 -7
8/17/2017 19
Remittances
Remittances
35 12
11.3
30 11
10.4 10.4 10.3
10.2
9.7 9.8 9.7
9.5 9.6 9.7 10
25 9.4 9.3 9.3
9.0
9
Percent of GDP
8.5
USD billions
20
7.9
7.5
8
7.3
15
7
6.3
10
6
5 4.7 5
Remittances, left Remittances (percent of GDP), right
0 4
8/17/2017 20
Total exports
Goods and services exports
90 65
60
60
80
53 55
50
70 47 50
46
Percent of GDP
45 46
45
USD billions
43 45
60 39
37 40
36
50 35
32
31 30
29 29 30
28 28 28 30
40
25
G/S exports (BOP), left G/S exports (BOP - percent of GDP), right
30 20

8/17/2017 21
Total imports
Goods and services imports
120 65
60
59 59
110 60
56 56 55 55
55
100 55
90 48
47
50
Percent of GDP
44
USD billions
80 45
40 41
70 40
36 36
34 35 35
34 33
60 32
35
50 30
40 25
G/S imports (BOP), left G/S imports (BOP - percent of GDP), right
30 20

8/17/2017 22
Foreign direct investment
Foreign direct investment
9
7.9
8
6.8
7
6 5.6
USD billions
4
2.9 2.9
3 2.4 2.4
2.2
1.9 2.0 1.9
1.8
2 1.5 1.5 1.5
1.2 1.2 1.3
1 0.7
0.5
0.2

8/17/2017 23
Gross international reserves
8/17/2017 24
Philippine credit rating
0
Baa2
0 Investment
grade
Baa3
0 Ba1
0 Ba2
0 Ba3
0 B1
Credit rating (Moody's), right
0
Source: Moody's investors service
8/17/2017 25
Philippine interest rate spread
7
5.9
6
5.1 5.1
5 4.5 4.5
4.4
4.1
4.0
3.8
4
Percent
3.4
3.3
3
2.3
2.1 2.0
1.8 1.8
2 1.5
1.4
1.1 1.1
1
8/17/2017 26
Major progress made on the lives of
the people but much more needed
8/17/2017 27
Official poverty headcount rates

Official poverty incidence rates of the population
60
1992 Methodology 2003 Methodology
55
2011 Methodology 2012 Methodology
50
45
Percent
40
35
30
25
20
Source: PSA
8/17/2017 28
The proposed reforms can help the

Philippines improve its poverty rates and
catch-up with its neighbors
Poverty rate (at US$ 1.9/day) Poverty rate (at US$ 3.1/day)
60 90
PHL VNM PHL VNM THA
80
50
THA MYS MYS IDN CHN
70
40 IDN CHN
60
Percent
Percent
30 50
40
20
30
10 20
0 10
0
Source: World Development Indicators Source: World Development Indicators

Note: Poverty ra tes are based on national household s urveys. Due to differences i n s urvey Note: Poverty ra tes are based on national household s urveys. Due to differences i n s urvey
yea rs , the figures presented a re l umped into 3-year intervals based on the Philippine survey yea rs , the figures presented a re l umped into 3-year intervals based on the Philippine survey
s chedule. s chedule.

Poverty, unemployment, and

underemployment rates
Poverty headcount rates Unemployment and
40 36.8
9 underemployment rates 23
35 32.7 32.0
8
30 26.6 21
26.3
25.2 25.3
25 21.6 7
Percent
Percent
Percent
20 19
14.5 6
15
10.9 10.6 17
10 5
6.6
5
4 15
0
2006 2009 2012 2015
Unemployment rate (LHS) Underemployment rate (RHS)
National International $1.9/day International $3.1/day
Sources: PSA and World Bank Source: PSA
8/17/2017 30
Unemployment and
underemployment rates
Unemployment and underemployment (PSA)
10 28
26
9
24
8
22
Percent
Percent
7
20
6
18
5
16
Unemployment (PSA, left)
Underemployment (PSA, right)
4 14
Source: PSA
8/17/2017 31
Dramatic fiscal turnaround,
but much more needed to move
from stability to prosperity
8/17/2017 32
National government revenue
National government revenue
5.0 19
NG revenue, left
NG revenue (percent of GDP), right
4.5 18.1
Baseline scenario 17.2 17.8 18
17.5
17.4
4.0
17.1 17.0
3.5 16.5
17
Percent of GDP
3.0 15.8
PHP trillions
15.7 15.6 15.6 15.6 16.4 16

16.0
2.5 15.1 15.2 15.7
14.9 15.5
14.7 15
14.6 14.5 15.3
2.0 14.4 14.4 15.215.1
14.1 14.0 14.0
1.5 13.8 13.8
14
13.4
1.0
13
0.5
0.0 12
8/17/2017 33
National government tax revenue
5.0 18
NG tax revenue, left 17.4
4.5 NG tax revenue (percent of GDP), right 17.0
Baseline scenario 16.6 17

4.0 16.3
16.1
3.5 16
15.315.3
Percent of GDP
15.7
3.0
PHP trillions
14.5
15.3 15
2.5 14.9
14.1
13.6 14.6
13.7 13.6 13.7 14.3 14
2.0 13.513.6
13.3 13.3 14.1
12.9 13.7
1.5 12.8
12.7 13
12.4 12.4
12.212.1
1.0 12.112.1
11.8
12
0.5
0.0 11
8/17/2017 34
National government expenditure
6 22
NG expenditure, left 21.1
NG expenditure (percent of GDP), right 20.4
Baseline scenario 20.8 21
5
20.2
20.0
20
4
Percent of GDP
PHP trillions
18.8 18.6
19.4 19
18.4 18.5 19.0
3 18.218.1
18.7
18.5
17.7 17.6 18.3 18
17.5 17.5 18.1
17.4
2 17.0 16.9 17.6
16.8 16.8 16.7
16.716.7 17
16.5
16.3
16.0
1 15.7 16
0 15
8/17/2017 35
National government
expenditure breakdown
National government expenditure breakdown
6
Education Health Social protection
Infrastructure Rest of expenditure
5
4
PHP trillions

Note: Figures for 2017 to 2022 are DBCC projections.
8/17/2017 36
breakdown (percent of GDP)
8/17/2017 37
National government deficit
8/17/2017 38
National government
primary expenditure
National government primary expenditure
6 20
19.2
NG primary expenditure, left 18.8
18.4 19
NG primary expenditure (percent of GDP), right
5 18.018.2
Baseline scenario 18
4 16.5 17.5 17
17.1
Percent of GDP
16.8
PHP trillions
15.5 16.3
16.5 16
3 16.0
14.9
14.6
14.4 14.4
15.5 15
14.2 14.2
14.0 13.9 13.9
2 13.6 13.5 13.6 13.5 14
13.2 13.1
12.812.9
12.4
13
1
11.711.7 12
0 11
8/17/2017 39
National government
interest payment
National government primary expenditure
6 20
19.2
NG primary expenditure, left 18.8
18.4 19
NG primary expenditure (percent of GDP), right
5 18.018.2
Baseline scenario 18
4 16.5 17.5 17
17.1
Percent of GDP
16.8
PHP trillions
15.5 16.3
16.5 16
3 16.0
14.9
14.6
14.4 14.4
15.5 15
14.2 14.2
14.0 13.9 13.9
2 13.6 13.5 13.6 13.5 14
13.2 13.1
12.812.9
12.4
13
1
11.711.7 12
0 11
8/17/2017 40
National government debt service
National government debt service
900 16
13.6
800 14
11.8 12.0
700 12
10.3
Percent of GDP
600 10
PHP billions
8.9
8.5
7.9 7.8 7.7 7.4
500 7.1 8
6.9
6.4
6.0
400 5.5 6
4.8
4.1
300 4
NG debt service, left

200 2
8/17/2017 41
National government debt
National government debt
7 80
74 74
75
6
68
67 70
5
65
61 61
Percent of GDP
61
4
PHP trillions
60
55 55 55
54
3 52 55
51 51 51
50
49
48 50
2 45 45
42 45
1
40
NG total debt, left NG total debt (percent of GDP), right
0 35
8/17/2017 42
National government
debt breakdown
National government debt breakdown
7
6 NG foreign debt NG domestic debt
3.9
4
PHP trillions
3.9
3.5 3.7 3.8
2.9
2.7
2.5
3 2.4
2.0 2.2 2.2
1.7 2.2
2 1.5
1.2
1.1
1.0
1 0.7 0.9 1.9 2.0 2.1 2.0 1.9 1.9 2.1 2.2
0.7 1.7 1.8 1.7 1.7 1.8
1.3 1.5
1.1 1.1
0.6 0.6 0.8
0.4
0
8/17/2017 43
National government
debt breakdown (shares)
National government debt breakdown (shares)
100
80
49 52 52 51 52
56 57 55 56 56 57 56 58 58
59
64 64 66 67 65 65
60
Percent
40
51 48 48 49 48
44 43 45 44 44 43 44 42 42
20 36
41
36 35 35
34 33
NG foreign debt share NG domestic debt share
8/17/2017 44
Debt profile remains sustainable
even with Dutertenomics
Debt scenarios
45
40
35
30
25
Percent
20
15
10
5
Debt/GDP business as usual Debt/GDP with BBB
0

8/17/2017 45
GDP is growing faster
than debt accumulation
GDP and debt growth
25
20
15
10
Percent
-5
Debt growth Nominal GDP growth

-10
8/17/2017 46
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

Labor: Capital: CIT, Consumption: VAT, sugar,
PIT CaIT, RPT tobacco, alcohol, and oil excises
Lump sum and others Education

Tax-financing
Tariffs Health
Consumption
Social services
Fiscal policy Investment
Infrastructure
Transfers (e.g., CCT)

Debt-financing
Local borrowings Foreign borrowings

Fiscal policy impact

External economy
Current account balance, gross international
Tax-financing reserves, foreign direct investments, and
portfolio investments
Real economy
Debt- Gross domestic product (consumption,
financing investment, exports, imports), jobs, income,
and poverty
Monetary sector
Government
Money supply and demand,
Expenditures
and interest rates

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
Provisions of the House

Amended DOF proposal
Description Bill 5636 as passed last No policy change
in response to HB 5636
May 31, 2017
Additional 2.1, of which 0.2 are 2.1, of which 0.2 are

1.1, no transfers
investment target transfers for four years 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
80 percent 60 percent 80 percent
efficiency
Increase in risk
5 basis points 10 basis points 0 (baseline)
premium
GDP: The amended DOF proposal shows higher GDP
growth as more tax revenues are invested into the
economy.
Real GDP
9
8
7
6
5
4
3
2
1
0

Consumption: The amended DOF proposal initially sees a dip
in consumption due to higher consumption taxes but later on
catches up well as investments make people more productive.
Real consumption
4
-1
-2

Investment: Over the medium-term, public investment
stimulates private investment in the amended DOF proposal.
Higher risk premium which leads to higher interest rates
reduce investments in the base case.
Real investment
8
-2
-4

Government spending: Amended DOF represents both
an increase in the level and efficiency of government
spending (i.e., spending leads to asset accumulation).
Government spending
23
21
19
17
15
13
11
9
7
5

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

1.8
PPT diff. from steady state
1.6
1.4
1.2
1
0.8
0.6
0.4
0.2
0
-0.2

Inflation with monetary response: But higher
inflation can be moderated by appropriate monetary
policy and the BSP has an excellent track record.
Inflation with monetary response
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0

Real wages: Tax-financed public investments encourages
more job-generating private investment that raises
productivity and wages.
Real wages
7
6
5
4
3
2
1
0
-1

Real interest rate: amended DOF proposal shows
lower long-term interest rate as tax financing does not
crowd out capital.
Real interest rates
1.8
1.6
1.4
1.2
1
0.8
0.6
0.4
0.2
0
…

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

25
20
15
10
…

Assumptions

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

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
Less budget Poverty
Breach the Credit rating Higher debt
and fewer Malnutrition
deficit downgrade servicing
investments Traffic
No or
diluted tax
reform
Low gov’t Fewer Poverty

spending to investments Malnutrition
maintain deficit Traffic
8/17/2017 68
The Philippines enjoys
investment grade rating
Philippines current credit rating
Date last
Scenarios Rating category Outlook
reviewed
Baa2
Moody’s (one notch above stable June 27, 2017
investment grade)
BBB-
March 29,
Fitch (at investment positive
2017
grade)
BBB
Standard and (one notch above
stable April 28, 2017
Poor’s investment grade)

The Philippines is now
above investment grade
0
Baa2
0 Investment
grade
Baa3
0 Ba1
0 Ba2
0 Ba3
0 B1
Credit rating (Moody's), right
0
Source: Moody's investors service

8/17/2017 70
8/17/2017 71
0
BBB+
0
BBB
0 Investment
grade
BBB-
0 BB+
0 BB
0 BB-
0 B+
Credit rating (Fitch), right
0
Source: Fitch Ratings
8/17/2017 72
As a result, interest rate spreads have narrowed…
7
5.9
6
5.1 5.1
5 4.5 4.5
4.4
4.1
4.0
3.8
4
Percent
3.4
3.3
3
2.3
2.1 2.0
1.8 1.8
2 1.5
1.4
1.1 1.1
1

8/17/2017 73
…making borrowing and interest
payments more affordable
National government interest payment
550 5.5
500 5.0
450
4.5
400
Percent of GDP
4.0
PHP billions
350
3.5
300
3.0
250
2.5
200
150 2.0
NG interest payment, left NG interest payment (percent of GDP), right
100 1.5
8/17/2017 74
S&P warns against the tax
reform agenda stalling
“Standard and Poor’s…

may even cut the rating
if the government’s
reform agenda stalls.”
8/17/2017 75
Moody’s also notes
risk to credit outlook
“…lack of clarity in the
government’s revenue
improvement… could pose
a risk to the Philippines’
credit outlook.”
8/17/2017 76
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)
Shock to foreign
Shock to interest Shock to foreign
Scenarios amortization Total
rates interest payments
payments
PHP 631 billion USD 2.0 billion USD 1.7 billion
Base average
national foreign interest foreign amortization
interest rate: 4%
government gross payment or PHP payment or PHP 79.4
[USD 1 = PHP 48]
financing 94.2 billion billion
1% increase in
interest rates, 6.3 2.0 1.7 9.9
1-peso depreciation
2% increase in
interest rates, 12.6 3.9 3.3 19.9
2-peso depreciation
3% increase in
interest rates, 18.9 5.9 5.0 29.8
3-peso depreciation

The private sector and households
will also be negatively affected
• 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.
8/17/2017 78
Impact on jobs,
GDP and inflation
From the National Economic and
Development Authority

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.
Package 1 impact on growth (percent)
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
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.
Package 1 impact on employment

2018 2019 2020 2021 2022 Average
Additional jobs 315,694 574,387 568,729 478,501 671,708 521,804

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.
Package 1 impact on inflation (NEDA estimate)

2018 2019 2020 2021 2022
Percentage points increase 0.42 0.04 0.01 0.05 0.00

General price effects

Price effect of excise on inflation
2018 (maximum effect)
Share of Net impact of excise to prices
Share petroleum (%)2,3
CPI Inflation
Commodity of CPI products
2016 rate (%)4,5
(%) as input
(%) 1 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 0.9
Notes:
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 2016
4. Weighted net impact of the increase in excise tax on each commodity computed based on weights below using HECS 2011
5. Overall inflation computed from the weighted average of commodity inflation based on the share of CPI

CPI Inflation
2016 rate (%)4,5
(%) as input
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
Total 100 144 0.5
Notes:
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 2018
CPI Inflation
2016 rate (%)4,5
(%) as input
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
Total 100 144 0.3
Notes:
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 2019
Lessons from the past
Inflation remains low and stable despite significant
increase in diesel prices in 2016
Sources: PSA, DOE

*January y-o-y change
in diesel price
Jan 25-29 2016: 18.25
Jan 29 2017: 32.10
Overall inflation has been relatively stable
despite substantial swings in oil prices
Diesel price changes and overall inflation
60
Annual diesel price changes Overall inflation
50 47
40 34 33
30
20 18
14 13 16
Percent
11
8 8
10 7 5 5
7 5
4 4 5 3 3 4
3 2 3 1 2
0
0
-10 -6
-10 -10
-20
-21
-30 -28
-40
Sources: PSA, DOE, DOF staff estimates

Food inflation has been relatively stable
Diesel price changes and food inflation
60
Annual diesel price changes Food inflation
50 47
40 34 33
30
20 18
14 13 16
13
Percent
11
8
10 7 6 6 5 6
4 5 2 3
7
4 4 3 2
0 2 1
0
-10 -6
-10 -10
-20
-21
-30 -28
-40

Transport inflation has been relatively stable
Diesel price changes and transport inflation
60
Annual diesel price changes Transport inflation
50 47
40 34 33
30
20 18
14 13 16
Percent
11
8 7 8 6
10 7
5 5 5 5
4 4 4 2
0 2 2 2
0
-1 0
-10 -6
-10 -10
-20
-21
-30 -28
-40

Utilities inflation has been relatively stable
Diesel price changes and gas, electricity, and water inflation
60
Annual diesel price changes Gas, electricity, and water inflation
50 47
40 34 33
30
20 18 17
14 13 16
13
Percent
11 12 11
8 9
10 7 6
3 4 2 1 1
0 2 1 1 0
0
0
-10 -6
-10 -10
-20
-21
-30 -28
-40

Overall inflation has been on the
downtrend in the past few months
Overall inflation
4.0
3.5
3.4 3.4
3.0 3.3
3.1
2.5 2.8
Percent
2.7 2.7
2.6
2.5
2.0 2.3 2.3
1.9 1.9
1.5 1.8
1.6
1.0 1.3
1.1 1.1
0.9
0.5
2016 2017
Source: PSA a nd BSP

Food inflation has been on the
downtrend in the past few months
Food inflation
4.5
4.0 4.2
4.1
4.0
3.5 3.8
3.6
3.5
3.4 3.4 3.4
3.0 3.3
Percent
3.1
2.9
2.5 2.7
2.4
2.0 2.3
1.5 1.7
1.6 1.6
1.5
1.0
2016 2017

Overall and food inflation have been mostly
stable despite large swings in retail oil prices
Overall inflation, and gas and diesel price changes
50
40
30
20
10
Percent
-10
-20
-30
-40 Overall inflation Gas y-o-y price change

Diesel y-o-y price change
-50

Overall and food inflation have been mostly
stable despite large swings in retail oil prices
Food inflation, and gas and diesel price changes
50
40
30
20
10
Percent
-10
-20
-30
-40 Food and non-alc bev inflation Gas y-o-y price change
Diesel y-o-y price change
-50

A comparison
Reform 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.
Deficit (2018 values, with
Deficit (2018 values)
complementary measures)
-4.5 -4.5
-4.0 -4.2 -4.0 -4.2
-3.5 -3.5
-3.7 -3.6
-3.6 -3.5
-3.0 -3.3 -3.3
-3.0
Percent
-2.5
Percent
-2.5
-2.0 -2.0
-1.5 -1.5
-1.0 -1.0
-0.5 -0.5
0.0 0.0
DOF package 1 House Bill 5636 Senate Bill 1408 No reform 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.
Package 1 will raise much more
revenues to fund our infrastructure
and anti-poverty programs.
Revenues (2018 values, with
Revenues (2018 values) complementary measures)
170
170
160 169.1
160
150 157.2
150
140
140
Billion pesos
Billion pesos
130
130 133.8
120 120
110 115.0 110
100 103.3 100
90 90
91.4
80 80
DOF package 1 House Bill 5636 Senate Bill 1408 DOF package 1 House Bill 5636 Senate Bill 1408
legally binding.
Personal income tax
PIT revenue loss in billion PIT revenue loss as percent of
pesos (2018 values) GDP (2018 values)
-115
-0.7
-125 -125.9
Billion pesos
-0.7
Percent
-0.8
-135 -137.0 -0.78
-0.81
-141.4
-145 -0.9

VAT
VAT revenue in billion pesos VAT revenue as percent of
(2018 values) GDP (2018 values)
95 0.6
0.5
0.51 0.51
0.46
89.3 89.3 0.4
Billion pesos
Percent
85 0.3
0.2
81.0
0.1
75 0.0
legally binding.
Oil excise
Oil excise revenue in billion Oil excise revenue as percent
pesos (2018 values) of GDP (2018 values)
80 0.5
0.4 0.4 0.4 0.4
74.4 74.4
73.7
Billion pesos
0.3
Percent
70
0.2
0.1
60 0.0
DOF package 1 House Bill 5636 Senate Bill 1408

Auto excise
Auto excise revenue in billion Auto excise revenue as
pesos (2018 values) percent of GDP (2018 values)
30 0.2
24.9
24.0
0.14 0.14
Billion pesos
Percent
20 0.1
0.08
14.1
10 0.0

SSB
SSB revenue in billion pesos SSB revenue as percent of
(2018 values) GDP (2018 values)
60 0.4
50
0.3
47.0 47.0 47.0
Billion pesos
40 0.3 0.3 0.3
Percent
0.2
30
0.1
20
10 0.0

Revenue Impact: SB 1408
Package 1 SB1408 revenue estimates (PHP billions)
2018 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

Revenue Impact: HB 5636
Package 1 HB5636 (PHP billions)
2018 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
Revenue Impact: DOF amended
Package 1 DOF amended revenue estimates (PHP billions)
2018 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
High end revenue impact in 2018

DOF amended
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
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.
High end revenue

HB5636
impact in 2018
House bill 5636 (in billion pesos) Loss Gain Net
Estate and donor tax -3.1
Sugar sweetened beverage excise 47.0
House user's
Motor vehicle bill 5636 (% of GDP)
charge Loss Gain
12.9 Net
Package
Estate tax1:amnesty
PIT and consumption 6.0 0.8
Estate and donor tax 0.0
Sugar sweetened beverage excise 0.3
Note: 40% of the incremental revenue
Motor vehicle fromcharge
user's oil will be earmarked to social mitigating measures,
0.1 and the rest will be softly earmarked
only to investment, education, health, and social protection.
8/17/2017
Estate tax amnesty DEPARTMENT OF FINANCE
0.0 121
If no tax reform, less revenue to
finance needed investments
5.0 18
NG tax revenue, left
4.5 With tax reform (percent of GDP), right
No tax reform 17
4.0
3.5 16
Percent of GDP
3.0
PHP trillions
15
2.5
14
2.0
1.5 13
1.0
12
0.5
0.0 11
8/17/2017 122
If no tax reform, less revenue to
finance needed investments
6 22
NG expenditure, left
With tax reform (percent of GDP), right
No tax reform 21
5
20
4
Percent of GDP
PHP trillions
19
3
18
2
17
1
16
0 15

8/17/2017 123

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DRAFT FOR DISCUSSION. SUBJECT TO CHANGE.

Tax Reform for

8/17/2017 DEPARTMENT OF FINANCE 2

8/17/2017 DEPARTMENT OF FINANCE 3

Vision for the Philippines

8/17/2017 DEPARTMENT OF FINANCE 4

How to achieve the vision

8/17/2017 DEPARTMENT OF FINANCE 5

How to achieve the vision

8/17/2017 DEPARTMENT OF FINANCE 6

How to achieve the vision

Sustainable Budget Secure

Tax & customs Tax policy Improve food Simplify

8/17/2017 DEPARTMENT OF FINANCE 7

How to fund the investment deficit

Sources: DBM, PSA, DOF staff estimates

8/17/2017 DEPARTMENT OF FINANCE 9

DOF amended HB5636 Base

17/08/2017 DEPARTMENT OF FINANCE 11

8/17/2017 DEPARTMENT OF FINANCE 12

Strong macroeconomic indicators

Percent of GDP and USD billion

8/17/2017 DEPARTMENT OF FINANCE 13

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

Sources: PSA, BSP, DOF staff estimates

Sources: PSA, BSP, DOF staff estimates

Sources: PSA, BSP, DOF staff estimates

Sources: PSA, BSP, DOF staff estimates

Sources: PSA, BSP, DOF staff estimates

Sources: PSA, BSP, DOF staff estimates

Sources: PSA, BSP, DOF staff estimates

Sources: PSA, BSP, DOF staff estimates

Source: Moody's investors service

Sources: PSA, BSP, DOF staff estimates

Official poverty headcount rates

The proposed reforms can help the

Source: World Development Indicators Source: World Development Indicators

8/17/2017 DEPARTMENT OF FINANCE 29

Poverty, unemployment, and

15.7 15.6 15.6 15.6 16.4 16

Sources: PSA, BSP, DOF staff estimates

Baseline scenario 16.6 17

Sources: PSA, BSP, DOF staff estimates

Sources: PSA, BSP, DOF staff estimates

Sources: PSA, BSP, DOF staff estimates

Sources: PSA, BSP, DOF staff estimates

Sources: PSA, BSP, DOF staff estimates

NG debt service, left

Sources: PSA, BSP, DOF staff estimates

Sources: PSA, BSP, DOF staff estimates

6 NG foreign debt NG domestic debt

Sources: PSA, BSP, DOF staff estimates

NG foreign debt share NG domestic debt share

Sources: PSA, BSP, DOF staff estimates

Sources: PSA, BSP, DOF staff estimates

Debt growth Nominal GDP growth

Sources: PSA, BSP, DOF staff estimates

8/17/2017 DEPARTMENT OF FINANCE 47

8/17/2017 DEPARTMENT OF FINANCE 48

Fiscal policy summary

Lump sum and others Education

Transfers (e.g., CCT)

Local borrowings Foreign borrowings