Price hikes and TRAIN

Expectedly, there’s public anxiety over the recent increase in fuel prices — and the expected corresponding increase in costs of electricity, food, transportation, etc. — in the wake of the implementation of the Tax Reform for Acceleration and Inclusion (or TRAIN, the Duterte administration’s first tax reform package).

The Department of Trade and Industry is moving to ease public fears of immediate increases in prices, noting that the excise tax on petroleum products and the tax on sugar-sweetened beverages, as provided for under the TRAIN, should not yet impact on the prices of such products as the current supplies
are still from the period before Jan. 1, when the new tax law took effect.

In fact they shouldn’t. But there’s a clear danger of profiteering, and Malacañang is expected to deal with profiteers as sternly as it rants against corruption in government offices.

Economists expect inflation — or the rate of increase in the prices of basic goods and services — to rise this year following the higher taxes to be slapped on a number of products under the TRAIN.

Critics of the tax reform package have warned that consumers would be burdened by higher prices of essential commodities because of the higher taxes to be imposed on oil products,
sugary drinks, and vehicles.

But the TRAIN increases the excise taxes on petroleum products that have not been adjusted since 1997. The Department of Finance has time and again pointed out that the fuel excise tax was being wrongly perceived as antipoor.

The Family Income and Expenditure Survey 2015 showed that the top 10-percent richest households accounted for 51 percent of total fuel consumption and the top 1-percent richest households consumed 13 percent, or equivalent to the consumption of the bottom 50 percent of households.

A higher tax, technically, will affect the rich far more than the poor.

Government estimates indicate that the price impact of the new taxes will be manageable. Expanding the value-added tax base and adjusting excise taxes will raise the prices of some basic commodities, but this will be minimal or moderate and only temporary. The effect is estimated to be a 0.73 percentage point increase in inflation during the first year of the TRAIN’s implementation, with the impact tapering off over time.

Food prices can cause an increase of up to 0.73 percentage point; transportation, up to 2.8 percentage point; and electricity, up to 0.7 percentage point.

In 2016, the price of diesel surged by P14 to P32.10 a liter from P18.25, yet inflation remained low and stable as prices of food, transportation, electricity, gas, housing and water increased by only 2-3 percent. The TRAIN will increase diesel prices by only P2.50 a liter.

The Philippines also experienced two major economic shocks in the recent past — the VAT reform of 2005 and the global oil price shock in 2011.

While both events significantly raised fuel prices and triggered predictions that higher taxes or higher crude prices would sharply cut economic growth and cause runaway inflation, actual data showed that the economy remained resilient during those years.

The global oil price surge in 2011 to as much as $130 a barrel at its peak from $61 did not see inflation skyrocketing, but was in fact managed well by the central bank and kept below 5 percent.

With a smaller increase in fuel cost due to the TRAIN, monetary authorities are certain that the economy could continue to grow and inflation can be kept below 4 percent.

The expected minimal or moderate impact on prices could be the reason that the Bangko Sentral ng Pilipinas is confident about a manageable price outlook as it maintained its inflation forecasts of 3.4 percent for 2018 and 3.2 percent for 2019. Inflation averaged 3.2 percent in 2017.

But this bears pointing out: The criticism that the poor will bear the brunt of the price increases to be caused by the TRAIN is true.

Salaried workers, on the other hand, will have extra income to offset price increases in basic goods and services because the TRAIN also reduces the income tax rates across the different income brackets, with the first P250,000 annual income exempt from any tax. The poor, however, will have to bear the price increase, or hope that they will be covered by the government’s conditional cash transfer program and other possible mitigating plans.