Recto warns against impact of proposed VAT cut

Metro Manila, Philippines - The proposal to lower the value added tax (VAT) from 12% to 10% may lead to higher government debt, Finance Secretary Ralph Recto warned on Tuesday, Oct. 14.

“I’m sure that those who have filed the bil have all well intentions,” Recto said during a Senate budget hearing.

“I leave it to Congress. If you pass a bill, my warning will be – that there will be a possible credit rating downgrade,” he said.

Senator Jinggoy Estrada asked Recto for his take on the proposal, which was filed by Batangas 1st district Rep. Leandro Legarda Leviste.

Recto said the government is expecting ₱1.5 trillion in VAT collections next year, an amount that falls short of the ₱1.7 trillion for government salaries alone.

He added that the projected deficit in 2026 is also ₱1.7 trillion, and that all capital outlays for infrastructure projects such as roads and bridges are already funded through loans.

“So kung magbabawas pa tayo ng revenue baka pati ang current operating expenses natin uutangin na rin natin [So if we reduce our revenue even further, we might end up borrowing just to cover our current operating expenses],” Recto said.

He said the proposed VAT cut would result in around ₱300 billion in lost revenue - an amount nearly equivalent to the Department of Health’s entire budget.

In the explanatory note to his bill, neophyte lawmaker Leviste said the revenue loss could be offset through reduced spending or imposing taxes on the wealthiest.

“Reducing the VAT could also have a lessened impact on the deficit as this should increase consumption and our country’s gross domestic product and improve tax compliance,” Leviste wrote.

He also noted that the bill includes a provision allowing the president to temporarily revert VAT to 12% in any given year if economic managers project that the deficit will exceed the government’s target.

The bill is pending at the House committee on ways and means.