Keep the TRAIN on track

Yellow Pad

 

Policy reforms, and reform in general, are always difficult pills to swallow. Any doctor will tell you to complete the full course of antibiotics to address an infection. Likewise, a reform process that is halted mid-way is not much of a reform at all. So when some lawmakers recently called for the brakes on the Tax Reform for Acceleration and Inclusion or the TRAIN law over concerns that it was pushing inflation higher, it begs the question, why so soon when the law is just 5 months old?

The answer, these lawmakers say, is because the prices of basic commodities are rising, imposing an added burden on the public — primarily the poor who spend most of their money on basic needs such as canned sardines and rice. Politicians are, after all, only human and are affected by high food prices just like the rest of us — although maybe to a much lesser degree. They easily blame the TRAIN law for the spike in prices.

But is TRAIN the main culprit and its suspension the right solution to meeting the inflation target?

In a Senate hearing on inflation held on May 10, high-level representatives from the DoF, DTI, and NEDA, and the deputy governor of the BSP echoed the consensus that the TRAIN law accounted for only 0.4% of the 4.1% headline inflation rate for the first four months. In contrast, the rise in global oil prices, limited stocks of fish and corn, and higher rice prices had a bigger impact on inflation than TRAIN. To be certain, the excise tax on oil and petroleum products, sugar, and tobacco put some pressure on the prices of other goods, but the DTI says this is minimal.

In other words, while TRAIN had contributed to the rise in prices, other factors have played a more significant role. TRAIN’s impact on inflation is, in fact, as expected, but some external and internal events, which could not have been predicted last year, pulled up the figures.

However, there is definitely more that the government, and our lawmakers, can do to assuage the concerns of ordinary Filipinos about inflation.

First is to educate the public about the causes of inflation and not to be alarmist in doing so. Inflation is not always a bad thing. With growth and the government’s expansionary programs, higher inflation inevitably follows. The bigger take-home pay and stronger purchasing power of households due to the income tax cut under TRAIN could have also contributed to the uptick in prices.

Second is to take steps to address inflationary pressures where it matters most and mitigate the impact on the poor.

According to the survey of PSA, the year-on-year inflation rate of rice increased to 4.3% in April from 3.6% in March.

If Congress removes the quantitative restrictions (QR) on rice imports and replaces it with a tariff, this would increase the supply of rice in the market and lower prices. This could slice inflation by up to 1 percentage point, according to BSP estimates. Tariffication has also the added benefit of generating much needed revenue for the government.

At the Senate hearing, the rising global price of oil was also raised as a concern.

Fortunately, the TRAIN law already has a safeguard in place — the suspension of the excise tax on petroleum if Dubai crude oil hits a high $80 a barrel. The global market price (versus the inflation target, as proposed by some lawmakers) is the more appropriate trigger for the postponement of the excise tax since it is not within the government’s control.

Of course, the proposal to include additional safeguards is welcome, but our lawmakers must be keen in making sure that it will not affect TRAIN’s beneficial provisions like the higher take-home pay and cash transfers, which empower households, and higher taxes on sugar and sin products, which protect the health of Filipinos. This would be like throwing out the baby with the bathwater. The revenue from the excise taxes, by the way, also goes to funding social protection programs.

If our lawmakers want to make sure that the poor are protected from the adverse impact of inflation, then they must exercise greater oversight and push for the full and timely implementation of the unconditional cash transfer program (UCT) and not call for proposals that will cut funding for its implementation (Note: UCT funding is earmarked from the petroleum excise tax). The DSWD needs to step up its game to rapidly deliver the monthly P200-cash transfer to over 10 million households as mandated by the TRAIN law.

It is too early to tell what definitive impact this infant law will have on inflation and our economy.

With current inflation expected to taper off in the second semester, the yearend target of 2-4% is still achievable.

Insofar as the consensus among the executive agencies, the BSP, and other economists is that inflation is low and manageable, suspending the TRAIN now is an overreaction and may even cause more harm by increasing the fiscal deficit and delaying much needed infrastructure and public services.

Too often the easiest way out of a problem is to do nothing. We need to be vigilant but stay on track to finish this journey of reform that has only just begun.

 

Zak Yuson is the government and private sector liaison of the Action for Economic Reforms’ fiscal policy team. He is a graduate of the Lee Kuan Yew School of Public Policy.

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