Targeting: The way to go

Oil prices have always been volatile since the early 1970s when the Organization of the Petroleum Exporting Countries began flexing its global muscles. In the last two years alone, the crude oil price per barrel has spanned the range from $21 in April 2020, to over $120 in recent weeks. Unlike in most commodities, actual production costs have no direct bearing on world oil prices, but it is vagaries of supply and demand, especially the latter, that determine the price at which the market settles. Government taxation plays a prominent part as well, as taxes usually account for a sizable portion — in some places even more than half — of what consumers pay at the pump.

The effects of rising oil prices are far-reaching, most prevalent of which are elevated energy and transport costs. But there is also a wide range of by-products from petroleum that are part of our daily lives, including plastics, synthetic fibers, paints, fertilizers, pesticides, drugs, soaps and detergents, and various construction materials. One of the more disturbing implications lately is the significant rise in fertilizer prices, which have more than doubled. This threatens food production in two ways. First, higher fertilizer prices raise the cost of producing food at the farm, and this effect will be felt worldwide. Second, much higher fertilizer prices are likely to lead farmers to reduce, if not outright stop, its application, leading to lower farm productivity and reduced food supplies overall. Either way, the world can expect significantly higher food prices in the near term.

The Russia-Ukraine conflict has made things even worse. Apart from further elevating oil prices, being major sources of petroleum, these two countries also contribute nearly a third of the world’s wheat, and substantial supplies of fertilizers, iron and steel, nickel, and aluminum, among other commodities. Higher metal prices feed into prices of various manufactured products. As I wrote recently, the fallout from the Russia-Ukraine conflict threatens the whole world economy, and threatens ours in a profound way.

How should we respond to all this? Our economy and our people are barely recovering from the pandemic recession, while the government debt has returned to critical levels due to the urgent pandemic requirements of the past two years. Under these circumstances, the solutions we pursue must adhere to two basic principles. One, measures must be focused and well-targeted, and avoid collateral damage or unwarranted benefits to those better endowed to absorb higher costs. Two, they must not further burden the common Filipino taxpayer unduly.

Based on both principles, the clamor for the suspension of excise taxes on fuel is not the right answer. A one-year suspension would dent government finances by about P170 billion (based on 2019 consumption levels), while needlessly benefiting high-income consumers as well. It would cost far less to provide targeted subsidies for farmers and public transport operators, and avoid helping moneyed motorists needlessly. Note that a higher government bill raises its debt, which will ultimately have to be paid for with taxes. That is why removing excise taxes amounts to forcing all taxpayers, petroleum consumers and non-consumers alike, to eventually shoulder what rich motorists would save. This is income redistribution of the perverse kind, which no politician would want.

Clearly, rifle-focused assistance is the way to go, rather than a shotgun policy that lowers petroleum prices across the board. Fuel subsidies directed to public transport operators and trucking companies would help forestall a chain reaction of increased public transport and freight costs, leading to generally higher domestic prices of a wide range of products, and triggering higher wage demands. Farm input subsidies especially on fertilizers for small farmers would help avert a steep rise in food prices. This way, we could nip a deadly price spiral in the bud. Continued work-from-home, which has become part of the new normal, would also help workers save much on commuting costs.

To meet today’s challenge of fuel and food inflation, targeting is clearly the way to go.

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