Public policies attempt to fulfill one or more of the following objectives: efficiency, equity, and stability. Efficiency and stability are necessary conditions for sustainable growth while equity helps make development inclusive.
This is the second article in our series following the 2nd SGV Tax Symposium, which focused on how a sustainable and effective tax ecosystem can advance the sustainability agenda for both the public and private sectors.
In this article, we will discuss the Philippine strategy for sustainable development.
GROWTH THROUGH TRADE AND INVESTMENT
The Philippine Development Plan (PDP) 2023-2028 aims for a deep economic and social transformation to reinvigorate job creation and accelerate poverty reduction by steering the economy back to a high-growth path. In this regard, two main performance indicators are identified and will be monitored by the National Government.
The first is for the country to graduate into upper middle-income class status within the term of the current administration. For this, the economy must grow its per capita income above the threshold set by the World Bank, which means a gross national income (GNI) per capita of at least $4,466. In 2022, the Philippines achieved a GNI per capita of $3,950.
The second is to lower the poverty level from 18.1% in 2021 to single digits by 2028 — the end of the term of the current administration. Both indicators require high growth rates. For the next year through 2028, the government pencils the growth rate between 6.5% and 8%.
Growth is expected to be investment-led with the implementation of structural changes such as the Corporate Recovery and Tax Incentives for Enterprises (CREATE) law, which lowered the corporate income tax rate, and the amendments to the Public Service Act (PSA), Foreign Investment Act (FIA), and Retail Trade Liberalization Act (RTLA), which further liberalized the economy. The new legislation is expected to attract more local and foreign investment, especially in the liberalized sectors. For the energy sector in particular, amendments to the PSA are envisioned to help raise the capital needed to speed up the energy transition of the country to renewables.
In addition, the Regional Comprehensive Economic Partnership (RCEP), a trading bloc that encompasses the ten members of the Association of Southeast Asian Nations (ASEAN) and the ASEAN Plus One Free Trade Agreement (FTA) partners Japan, China, South Korea, Australia, and New Zealand, is already in force for the Philippines, helping ease market access through trade and investment rules and supporting global and regional supply chains. The Philippines can potentially position itself as a regional manufacturing hub if the right incentives and policy measures are put in place to encourage local and foreign investors to participate. Together, trade and investment are expected to play an important role in attaining economic transformation, the second goal of the PDP.
HUMAN CAPITAL AND INFRASTRUCTURE
The ability of people to take advantage of market opportunities arising from investment rests on human capital. To this end, the first goal of the PDP is social transformation which includes, among others, sustained expenditure on social services, mainly education, health, and social protection.
The first two goals of the PDP help attain the developmental objectives of efficiency and equity, which rest on the pillars of sustainability and resilience. The third fosters societal resilience: an enabling environment encompassing institutions, macroeconomic stability, and the physical and natural environment.
Institutions are vital to economic acceleration, which is why the government’s steps to enhance the ease of doing business are most welcome. Infrastructure development also enables an economy to sustain higher levels of growth, which, in turn, catalyzes yet more investment. The Public-Private Partnership (PPP) Act is up for the signature of President Marcos and, if approved, is expected to further enhance the business atmosphere in mobilizing private resources for infrastructure development.
The government aims to sustain its infrastructure program at 5-6% of GDP through 2028 amid a six-year medium-term fiscal framework. This plan gradually narrows the deficit to 3% of GDP by 2028, down from 7.3% in 2022, such that the debt-to-GDP ratio is reduced from nearly 61% in 2022 to a more sustainable level of at most 53% by 2028.
The National Government’s debt was less than 40% before the pandemic struck. It expended much of its fiscal space combatting the pandemic, incurring debt and large budget deficits. While the current 61% debt-to-GDP ratio may be manageable for an emerging economy like the Philippines for some time, the country may not have the fiscal space to respond to another potential domestic or external shock. If the debt continues to rise more than the economy, risks will increase, and the government may “crowd out” private investment as it competes with the private sector for funds to service its debt.
The planned fiscal consolidation entails harmonizing the revenue needs with the promotion of investment through the structure and administration of the reformed incentive system. The National Government plans to raise more revenue to finance the country’s socio-economic needs, largely through a progressive and simplified tax system, more efficient and effective tax collection measures through digitalization and, to some extent, from policy measures such as value-added tax on digital service providers and excise tax on sweetened beverages and junk food.
Achieving fiscal stability presupposes the sustainability of fiscal policy, and fiscal stability helps “crowd in” private investment.
PRICE STABILITY AND INFLATION
In his second State of the Nation Address (SONA), President Ferdinand Marcos, Jr. singled out inflation as the country’s most pressing problem. In the first nine months of 2023, inflation averaged 6.6% — far above the upper end of the target range of 2-4% set by the BSP. If left unchecked, inflation could undermine growth. Not only does this increase costs to organizations, but it also sets in motion second-round effects as workers start demanding higher wages, consequently increasing business costs and discouraging investments.
Inflation is partly driven by supply-side issues and the government is allocating more resources to the agriculture sector to boost production. Mr. Marcos also mentioned that the National Government had distributed 28,000 new tools and machinery to farmers. An additional 600 km of farm-to-market roads were laid down to support the 14 million hectares of farmland, enhancing farmer access to markets. In addition, he signed Executive Order No. 28 in May, forming the Inter-Agency Committee on Inflation and Market Outlook, which is tasked to keep inflation within government targets and boost the economy.
ENHANCING CLIMATE RESILIENCE
While price stability and fiscal sustainability are important macroeconomic issues, environmental sustainability is increasingly gaining importance. Climate change uncertainties and challenges need to be managed and both the Philippine government and the private sector are hard-pressed to deliver their commitments to addressing them. Despite climate change risks, the Philippines has the opportunity to position itself as a prime destination of foreign investments against climate change or environmental, social, and governance (ESG) investments.
The government calls for embedding resilience, sustainability, and nature-based solutions in infrastructure planning and investment to enhance climate resilience. Likewise, investments in renewable energy are expected not only to enhance energy security but also reduce greenhouse gas (GHG) emissions.
From an economic vantage point, GHG emissions are economic “bads” and are a cause of inefficiency as they get over-produced. Their effects, however, go beyond national borders, and while the Philippines contributes minimally to global GHG emissions, the World Risk Index 2022 report identifies the Philippines as the most disaster-prone country in the world.
The government envisions that by 2028: (1) Climate and disaster risk resilience of communities and institutions will increase (2) Ecosystem resilience will be enhanced, and (3) A low-carbon economy transition is enabled.
To ensure that these are realized, the government is set to safeguard cross-sectoral convergence and implement a comprehensive risk management approach to address the adverse consequences posed by climate change. It will also promote a green and blue economy coupled with improved governance to guarantee long-term climate and disaster resilience.
BUILDING RESILIENCE THROUGH SUSTAINABLE DEVELOPMENT
Coming off from the pandemic and with the current global economic climate, it is opportune for the government to proactively drive for actionable policies and programs that focus on building the resiliency of the economy through sustainable development with greater emphasis given to addressing climate change.
Navigating external and domestic economic headwinds will not be an easy feat for the administration, but the private sector will be an important catalyst for sustainable development. With the private sector sharing industry knowledge, resources and potentially even leading certain socio-economic programs and projects of the National Government, it is to be hoped that AmBisyon Natin 2040 of long and healthy lives for Filipinos that are strongly rooted, comfortable, and secure will be achieved.
This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the author and do not necessarily represent the views of SGV & Co.
Noel P. Rabaja the strategy and transactions (SaT) service leader of SGV & Co.