Bad timing

The first tax reform package that took effect at the start of the year is now being pilloried for supposedly causing undue hardship among ordinary consumers through higher prices of essential goods and services.

Called the Tax Reform for Acceleration and Inclusion (TRAIN) Law, it was initially hailed as a landmark piece of legislation designed to fix a flawed income tax structure and, at the same time, to raise additional revenues for the government through higher taxes on “sin” products and other commodities.

The initial impact would be manageable, President Duterte’s economic managers had assured a wary public, adding that there were mitigating measures to help the poor cope with any impact on prices. Among these is the conditional cash transfer for the poorest families across the country.

But two important factors with a big impact on consumer prices did not favor the government. We are, of course, referring to prices of crude oil in the international market and the peso-dollar exchange rate.

These two have exacerbated the inflationary impact of the TRAIN Law, adversely affecting the struggling middle class and the poor.

The benchmark Dubai crude price breached $75 a barrel last week, up by 50 percent from last year and the highest since 2014. This has been traced to geopolitical tensions in the Middle East.

There is, however, a provision in the TRAIN Law that will freeze any increase in fuel excise taxes if the price of crude oil hits $80 a barrel.

The sad part is that based on futures contract prices, Dubai crude will not breach that trigger price anytime soon. Dubai crude for deliveries this June until January 2020 carried prices ranging from $76.56 a barrel (June 2018 deliveries) to a low of $66.69 a barrel (for January 2020 deliveries).

The peso, on the other hand, weakened to 52.56 against the dollar last week from 49 a year ago. This has been traced to
the exit of so-called “hot money” from the local stock market. Portfolio funds are believed moving back to the United States, where interest rates are forecast to rise.

These two developments affect a big number of economic activities. Power generation and transportation are obvious examples.

These, in turn, cause production costs of almost everything to go up, thus the ever-increasing prices of basic goods and services since the start of the year.

Inflation rose to a five-year high of 4.5 percent year-on-year last April, mostly on the back of a jump in prices of “sin” products. The headline inflation rate based on 2012 prices averaged 4.1 percent in the first four months, breaching the government’s 2-4-percent target range.

Rising prices, in turn, have triggered calls for wage hikes and transport fare increases aside from the clamor for a suspension of the TRAIN Law.

It looks like a clear case of bad timing for the TRAIN Law. Its impact on prices should have been manageable, but the peso weakened against the dollar and crude oil prices surged to four-year highs.

Finance Undersecretary Karl Kendrick Chua had time and again explained that a spike in rice prices — because of an alleged lack of supply, a weak peso, rising oil prices abroad, better tax compliance of local cigarette firms and growing consumer demand — accounted for the bulk of the inflation in April.

He said the TRAIN Law accounted for only 0.4 percentage point of the 4.5-percent inflation.

In other words, if you could buy items for P100 last year, you need to spend P104.50 now for the same items, and of the P4.50 increase, only P0.40 was due to TRAIN.

There is nothing much that the government can do to influence external factors such as crude oil prices, or even the peso-dollar exchange rate.

It can only hope for oil prices and the peso to ease or stabilize soon.

Besides, the government’s economic managers expect the inflationary impact of TRAIN to diminish over the next few months. In the meantime, implementing its various infrastructure projects could generate the necessary jobs to help more families cope with rising prices.