While much talk has been said about the tax reform’s benefits to the overall growth and acceleration of the Philippines’s consumption-driven economy, the proposed shifts are seen to knock off the country from its position of low and tame inflation as seen in recent years.
Just last month the legislative process started on the administration’s tax-reform proposals, as Congress decided to adopt the revised bill on lowering personal income tax, along with accompanying offsetting measures.
Now under House Bill 4774, titled Tax Reform for Acceleration and Inclusion, the revised proposal seeks to exempt those earning P250,000 and below annually from paying personal-income tax—with graded adjustments accordingly to middle- and high-income earners.
To offset the potential losses in revenue from the tax cuts, the bill also includes proposals to impose excise taxes on petroleum. The removal of some incentives is also included.
Some sectors lauded the populist move of the Duterte administration to reform the tax schemes in the country, including senior officials from the Bangko Sentral ng Pilipinas (BSP), as they expressed support for the passage of the bill.
Bumps ahead
Just this month, Central Bank Deputy Governor for the Monetary Stability Sector Diwa C. Guinigundo said the comprehensive tax-reform program is seen to contribute an additional 0.6 percentage point to the country’s growth this year and 0.2 percent for next year.
The government’s target growth rate for this year is at a band of 6.5 percent to 7 percent, while it is at 7 percent to 8 percent starting 2018 up until 2022.
While positive for growth, the tax-reform package may spell out problems for the already rising inflation rate upon implementation, as proposed higher taxes on oil will coincide with the projected rise of petroleum prices in the global market.
For the past two years, inflation has been missing its target on the downside, with the low rate of expansion of consumer prices in the country being largely attributed to the sharp drop in oil prices worldwide.
However, starting the fourth quarter of 2016, inflation started to rise back to above 2 percent, with most recent data putting inflation at 2.7 percent in January 2017.
Upward push
“Given the current dynamics, the shifts in the tax scheme will probably push inflation up toward the upper end of the target with inflation probably knocking on the ceiling of 4 percent in a matter of months,” a local analyst told the BusinessMirror.
The Central Bank has its inflation target placed at 2 percent to 4 percent for this year and the next. The last time inflation hit above 4 percent was in October 2014. It was also around that period when the BSP last decided to hike its interest rates.
“The excise tax on fuel will definitely lead to an acceleration in inflation given the weight of transport in the CPI [consumer price index] basket. Add to that the second-round effects—as transports costs will push the cost of doing business across the board—and you have a recipe for some nasty inflation to bite you in the back,” the analyst warned.
“Mind you that oil prices have recovered and inflation was expected to trend higher even without the impending additional excise taxes on fuel,” the analyst, who refused to be named, further discussed.
Adding to that, the analyst said lowering the income taxes for lower income bracket earners may aggravate inflation on the demand pull side as it frees up more disposable income for consumption and investment, speeding up economic activity.
Further, inflation is on the way to breach the 4-percent market if the country has trouble with the rice-importation track and fails to keep a lid on food prices.
Tax shifts
Earlier, the International Monetary Fund (IMF) also said the growth of the country in the middle term is dependent on the government’s ability to pass the tax-reform package, as it will be crucial to the funding of the also-promised infrastructure-spending acceleration by the government.
The analyst explained to the BusinessMirror that the shifts in the tax system are designed to fund the “ambitious” infrastructure-spending program of the government and to enact an equally ambitious overhaul of the social landscape by championing the working class.
Accordingly, evident in all of the populist moves that the President is taking, including the entire tax-reform package, is aimed to level the playing field and skew benefits to the lower-income classes.
“Even the new taxes on fuel and automobiles are designed to have the lower-income earners bear the least burden, while the ultrarich and middle-income earners are seen to be left with the shortest sticks,” the analyst said.
‘Ambitious’
While the end goal of the reforms is better infrastructure and a more equitable distribution of wealth, the analyst warned that if not administered properly, we may end up with faster inflation, credit downgrades as the fiscal house falls apart and, ultimately, slower economic growth.
“It’s ambitious. You only enact something as game changing as this by stepping on some toes. The end results are either very good or very bad. There will be, sadly, no middle ground,” the analyst said.
In an interview with reporters, Guinigundo recently said one of the inflation upside risks include the tax-reform package being proposed by the government.
Latest BSP data put its forecast for 2017 inflation to rise to an average of 3.3 percent, from the earlier forecast of 3 percent. For 2018, inflation is seen to hit 3 percent, also up from the November forecast of 2.9 percent.
Also just recently, the Land Transportation Franchising and Regulatory Board approved a P1 hike to minimum jeepney fares—a direct result, according to Guinigundo, of the adjustment in oil prices.
This, Guinigundo added, has a minimal effect on inflation overall.
The Central Bank gave its latest inflation forecast, including adjustments for power-rate movements and the tax-reform proposal in consideration, in its monetary-policy meeting on February 9.
Image credits: Nelson Ching/Bloomberg News