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Debt and taxes

Asian Development Bank president Masatsugu Asakawa urged developing countries in the Asia Pacific region to focus on boosting the mobilization of their domestic resources and reduce dependence on foreign borrowings during the 54th Annual Meeting of its Board of Governors.

Developing member economies should focus on domestic resource mobilization (DRM) which is the process through which countries raise and spend their own funds to provide for their people and is considered to be the long-term path to sustainable development finance.

The pandemic and its socioeconomic impact has put countries under enormous pressure in terms of budget and public debt resulting from large-scale fiscal expenditures. Asakawa said the increasing fiscal vulnerability of developing countries makes the DRM initiative very crucial.

“It will be a good idea for developing countries to try to rely on more and more domestic resources, by reducing their dependency on external finance,” he added.

While borrowing is needed and is not a bad thing, he argued that the accumulation of public debt, especially if is denominated in US dollars, can be a cause of concern. Interest rate hikes in the context of monetary policy normalization could cause huge impacts on heavily indebted developing countries.

The Philippines, where the national government’s gross borrowings doubled to P1.38 trillion as of the first quarter of 2021, should seriously consider Asakawa’s advice and work on domestic resource mobilization by focusing on taxation and tax revenues.

In developing Asia, tax yields only average at about 17.6 percent of GDP, well below the regional average of 24.9 percent. Even before the pandemic, many economies had low levels of tax income with inequitable tax systems, high levels of tax evasion, and weak tax administration.

The ADB maintains that options to mobilize fresh resources are wide. Creatively managed economies have removed exemptions for personal income tax, imposed wealth and intergenerational taxes, put in place carbon and environmental taxes, and the digital economy.

As a country that cannot continue running to debt to solve all its problems, the Philippines has its work cut out for it as it faces a tough road out to recovery from the impact of a poorly managed pandemic response. Our financial managers and legislators are hopefully working together to come up with solutions and reforms that can secure the future of Filipinos instead of burying the next couple of generations in even more crushing debts.*

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