MANILA, Philippines -- An economic adviser to President Gloria Macapagal-Arroyo is proposing a P75-billion stimulus package -- a cocktail of income tax deductions, discounts on electricity bills and a boost in infrastructure and farm spending -- to shield the Philippines from the global fallout due to a slowdown in the US economy.

Albay Gov. Joey Salceda, the main architect of the Arroyo administration’s fiscal reform program four years ago, said the goal of the stimulus package would be to prevent the country from losing its growth momentum due to the imminent recession in the world’s biggest economy without sacrificing the government’s revenue base.

The move is being likened to the White House program to issue tax rebates of between $600 and $1,200 to taxpayers by May (hoping that the $150 billion in the pockets of consumers would be spent quickly and provide a jolt to the ailing US economy) and the P40-billion stimulus package of the Estrada administration in 1998 to tow the country out of the mire of the Asian financial crisis.

Salceda proposed the following:

• A P16-billion expansion in income tax deductions (to benefit middle-class working families).

• An P8-billion rebate to households consuming less than 200 kilowatt hours of electricity a month.

• A P51-billion increase in government spending this year (P15 billion for increasing agriculture production, P16 billion for infrastructure, P12 billion for education, P4 billion to increase PhilHealth memberships to 5 million, and P4 billion for mass housing).

“We must implement the economic equivalent of a preemptive evacuation. Domestic growth is our first line of defense against the incoming virus of global credit and corporate earnings recession. Not because it is fashionable, but because there are fundamental arguments for some kind of recession-proofing for the Philippine economy to preserve the gains of 27 uninterrupted quarters of GDP expansion,” Salceda said in an interview.

Economists said a full-blown US recession could drag down the Philippine economy. A recession is defined as the contraction of an economy for two consecutive quarters.

Cayetano Paderanga, a former socioeconomic planning secretary, said a US recession could lead to lower revenues for local businesses, which would prompt them to cut production or lay off workers.

A US recession could also lead to the weakening of the stock market, rising domestic interest rates, job losses in the business process outsourcing, drop in remittances by overseas Filipino workers, and slump in the real estate market.

It takes around six months for the full effects of a US recession to filter through the Philippine economy, according to Paderanga.

Salceda said the tax cuts and power rebate would immediately put more cash into the pockets of the middle class and the masses, while the increased government spending would perk up the countryside although at the expense of delaying the government’s target of achieving a balanced budget this year.

“The government’s fossilized fixation on a balanced budget this year as embodied by the 2008 budget must be shaken by emerging market realities. It will be a big mistake not to change gears, albeit short-term, with storm signals already raised. Targeting a surplus in a period of growth slowdown is ill-timed. We need to start thinking about the loser, too,” the governor said.

The government could have opted for a US-style tax rebate, but Salceda noted that there were only one million fixed-income taxpayers, mostly the rich and the middle class, in the country, which would make its impact very limited.

VAT suspension

Salceda said a rebate through the suspension of the value-added tax was also out of the question as it would only benefit the rich (who pay the bulk of consumption taxes) and further erode the government’s weak tax collection.

“Admittedly, as in the United States, cash is the best form of relief. The first policy option in this situation would have been income tax rebates being an unbiased and efficient instrument of stimulus,” he said.

Salceda said these moves would finally bring relief to ordinary employees, who have shouldered the burden of fiscal reforms since 2004 and whose income spending has declined due to higher taxes.

The P8-billion electricity discount is sustainable because the National Power Corp. (Napocor) can draw from its P140 billion in cumulative earnings from operations and foreign exchange gains since 2006, according to the governor.

“We must remember that the Arroyo administration’s fiscal reforms commenced with an ERC (Energy Regulatory Commission) application for a P1.87 [per kWh] increase in Napocor tariffs filed on June 24, 2004,” he said.

Energy tariffs

Unlike taxes, which need congressional action, energy tariffs have proved easier to restore.

A P1.5/kWh special discount on top of existing lifeline rates is proposed only for households consuming 200 kWh a month or 75 percent of total electric consumers. “That’s a savings of P300 on monthly electric bills for the poor and lower middle class families,” Salceda said.

The Estrada administration was successful in using fiscal spending to counter the effects of the Asian financial contagion in 1997 and the Arroyo administration has a more hospitable environment to carry out a similar spending program, according to the governor.

“This policy rebalancing is carefully designed and skillfully targeted as a proportional response to evolving global conditions. The key risk is, once again, all about sending wrong signals about undoing the success of the fiscal formula particularly after the recent upgrading by Moody’s,” he said.

Salceda said Ms Arroyo must, therefore, painstakingly resist the populist clamor for lifting the VAT on oil or reducing VAT rates.