Press Release—Action for Economic Reforms— 27 March 2014

Higher sin taxes: not just a win for health and public finance, but for the economy in general.

On the one-year anniversary of Fitch’s awarding of ‘investment grade’ status to the Philippines in March 27, 2013, champions and advocates of the sin tax law affirmed the key role of the measure in prompting the country’s historic credit ratings upgrades last 2013.

“There is no doubt that the approval of the Sin Tax Law by Congress and President Aquino was a critical element in the Philippines’ being granted investment grade by all major credit rating agencies last year,” said Davao Rep. Isidro Ungab, the main sponsor of the sin tax law in the Lower House.

“Not only have substantial increases in sin tax collections ushered in unprecedented revenues for public health spending, they have also demonstrated the Aquino government’s political will for achieving reforms in health, fiscal management, and good governance to the global community. This, in turn, has given credit agencies a sound basis for their rating upgrades,” Ungab added.

According to the latest figures from the Department of Finance, incremental revenues from the sin taxes reached PHP51.4-B in 2013 — 50.7 percent above earlier DOF projections of PHP34.1-B.

However, just as significant as the law’s revenue performance has been its contribution to clinching credit rating upgrades throughout 2013 by Fitch’s (March 27), Standard and Poor’s (May 2), the Japan Credit Rating Agency (May 7) and Moody’s Investors (October 3). The passage of the sin tax law in December 20, 2012, was commonly cited by these agencies as a ‘key ratings driver’ in their first-ever raising of the Philippines’ credit rating to investment grade status.

Crucially, the legislation of higher sin taxes compensated for the country’s low tax collections levels compared to other ‘investment grade’ economies. The expected revenues from reformed sin taxes served to assure agencies that the Philippines would be able to meet its global financial obligations

Said Fitch’s in announcing its watershed upgrade: “The Philippines had a low fiscal revenue take of 18.3% of GDP in 2012, compared with [an investment grade] median of 32.3%… The recent introduction of a ‘sin tax’, against stiff political opposition, will likely lead to some increment in revenues and underlines the administration’s commitment to strengthening the revenue base.”

The significance of the sin tax law in improving the country’s credit outlook was also strongly supported by numerous public officials. “I think those taxes are the most important development, because they [the rating agencies] expect the sin taxes will yield to the government tens of billions of pesos. They now expect our public finance to improve further,” said Central Bank Deputy Governor Diwa Gunigundo in a December 20 interview with the media.

“The sin tax law has not only brought about clear health benefits, but it has also enabled landmark economic gains for our nation in 2013,” said Jo-ann Latuja, senior economist of Action for Economic Reforms. “Given what has been said by credit rating agencies, it is safe to say that our upgrades to investment status would have been much more difficult to attain, in the absence of the law’s passage.”

“As the sin tax law continues in its second year of implementation, its promised gains in 2012 are steadily becoming reality. Whether in increased health spending, decreased smoking, or rising international investment in the Philippines, the sin tax reform act is now proving itself to be a true public interest measure for the Filipino people,” she asserted.