Although the recently enacted tax-reform law promises a higher take-home pay for Filipinos, there remains apprehension over the moderation in domestic consumption as prices rose higher than projected in January.
In reviewing the Tax Reform for Acceleration and Inclusion (TRAIN) Act, ANZ Bank economist Eugenia Victorino said the accelerated inflation traced to the tax-reform program was likely to curb consumption activities in the months going forward.
Private consumption has proven a resilient and consistent growth driver for the Philippines and has helped push the economy to growth above 6 percent in recent years.
“While take-home pay is higher for taxpayers, non-taxpayers are facing higher prices,” according to Victorino. “In the past, for every 1-percent increase in headline prices there was a corresponding decrease in private consumption by 0.3 percent,” the economist said.
He particularly cited the surge in both headline and core inflation following the tax-reform adoption in January. Data showing inflation of 4 percent in January shocked markets, as this sat at the upper limit of the 2-percent to 4-percent target for the year.
Interestingly enough, the BSP acknowledged inflation would likely push beyond the target range for the year at 4.3 percent.
“We expect inflation at 4.1 percent in 2018 and 3.4 percent in 2019. If realized, it would be the first inflation overshoot since 2008,” the ANZ economist said.
In 2017 inflation averaged 3.2 percent—well within the 2-percent to 4-percent target despite the higher inflation trend in the closing months.
Victorino also argued that surging inflation in January was influenced by factors “beyond tax adjustments.”
“While the tax reform had a direct effect on selected items, the rate of increase in core prices suggested that some of the second-round effects of the tax reform had already filtered through. Transport accounts for 7.8 percent of the CPI [consumer price index] basket, while electricity takes 4.5 percent. Nonalcoholic beverages account for 2.7 percent, while tobacco takes 1 percent,” the economist said.
At the moment, the Bangko Sentral ng Pilipinas keeps close to its chest whether future monetary-policy adjustments require a tightening to address rising inflation concerns, saying the second-round impact of the tax-reform law “appear to be well contained”.
Image credits: Alysa Salen