The tragic consequences of suspending the oil excise tax

Yellow Pad

 

Some quarters led by politicians (it doesn’t matter whether the politicians are pro-administration or anti-administration) have called for the suspension of the increase in the fuel excise tax brought about by the Tax Reform for Acceleration and Inclusion (TRAIN).

Senator Bam Aquino is the most outspoken of the lot.

He has introduced Senate Bill No. 1798. His bill states (in its original form):

“The imposition of excise tax on fuel under RA 10963 shall be automatically suspended when the average inflation rate for a three-month period exceeds the annual inflation target range that was set by the Development Budget Coordination Committee (DBCC) and the Bangko Sentral ng Pilipinas (BSP): Provided, however, that the excise tax on fuel prior to the effectivity of RA 10963 (TRAIN) shall remain in force during the period of suspension.”

A first reading of this section of Senator Aquino’s bill leads me to ask: Isn’t this jumping the gun? Senator Aquino himself says that the inflation range target is an average for one full year. We are in the month of June, halfway through the year. It is unknown whether world oil prices will stabilize and whether inflation will taper as a result. In short, we can only know by the end of 2018 whether the inflation target has been met.

This anyhow is not my main point. But it shows a semblance of shallow thinking behind the crafting of the bill.

May we remind Senators Bam Aquino, Grace Poe, Nancy Binay, and other politicians calling for the suspension of the fuel tax that Congress introduced a section in the TRAIN law that provides relief in the event that world oil prices would shoot up. Part of Section 43 of the law says:

“For the period covering 2018 to 2020, the scheduled increase in the excise tax as imposed in this Section shall be suspended when the average Dubai crude oil price based on Means of Platts Singapore (MOPS) for three (3) months prior to the scheduled increase of the month reaches Eighty dollars (USD 80) per barrel.”

That said, the main argument against suspending the fuel excise tax at this time is that its outcome will be worse than the problem it intends to address.

The reform of the fuel tax is TRAIN’s main generator of new revenues.

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Suspending the tax will likewise mean suspending the generous unconditional cash transfers being received by half of the total Filipino households. Suspending the fuel tax also means suspending the personal income tax relief being enjoyed by the middle and working classes.

Suspending the tax means less revenues in general, leading to greater deficit spending.

At present, the deficit spending has exceeded the original target as the revenue gain has fallen short. The revenue shortfall arises from the compromises in TRAIN. Also contributing to the bigger deficit are economically unsound populist programs introduced by the administration and the likes of Senator Bam Aquino. To name a couple: free college education and free irrigation.

The current high growth anchored on good fundamentals is put at great risk when higher deficit spending is done without new revenue. A high deficit spending when the economy is having high growth in fact can stoke higher inflation, which is what Senator Aquino wants to avoid.

The higher deficit increases money supply, but production cannot immediately keep up with the increase in money circulating in the economy. Factories are humming and are reaching peak capacity or are almost at full capacity. Furthermore, the current infrastructure bottlenecks hinder expanding capacity and meeting demand. In this setting, expect inflation to go up further. Hence Secretary Diokno’s “Build, Build, Build” program has to be accompanied by tax reform.

In addition, the higher deficit resulting from suspending the oil tax fuels expectations that inflation will rise, making higher inflation self-fulfilling.

Note, too, that the contribution of TRAIN to inflation is minimal.

The Department of Finance calculates that the TRAIN’s inflationary effect is equivalent to 0.4 percentage point of the current 4.5%. The main culprit behind the higher-than-expected inflation rate is the steeper increase in world crude prices, aggravated by the raising of profit margins by producers and retailers. In short, those calling for the suspension of the fuel tax are barking up the wrong tree.

One last point: Critics are against increasing government borrowing. Indeed, the lesson from our tragic Marcosian past is for the economy to reduce dependence on debt, especially foreign debt.

Deficit spending is acceptable when certain conditions are met. One condition is the credibility of tax reforms. Suspending the fuel tax in this sense contributes to a non-credible, even non-sustainable, deficit spending.

In summary, suspending the fuel tax is bad for growth, jobs, and investments. It will increase debt dependence. It will stoke inflation, which ironically is what the likes of Senator Aquino want to prevent. And it is anti-poor, denying the poor the transfers and essential services they need.

 

Filomeno S. Sta. Ana III coordinates the Action for Economic Reforms.

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