The fate of “TRAIN 2”—the second phase of the Tax Reform for Acceleration and Inclusion package envisioned to fund an ambitious development blueprint anchored on massive infrastructure spending—hangs in the balance, as lawmakers want President Duterte’s economic managers to ease spreading concerns that TRAIN 1, which took effect on January 1, has sparked inflation beyond what was projected in deliberations last year.
This much was apparent after Senate Majority Leader Vicente C. Sotto III told the BusinessMirror last Sunday—the eve of a hearing on rising prices called by the Economic Affairs Committee—that senators “want a full report and not just projections before we even consider listening to TRAIN 2.”
Sotto was referring to government data issued recently that inflation for January 2018 stood at 4 percent, the fastest since the 4.3 percent posted in October 2014.
Sen. Sherwin T. Gatchalian, who called for Monday’s hearing as chairman of the Economic Affairs Committee, was particularly concerned over data showing that food and nonalcoholic beverages registered second among basic goods and commodities with the biggest inflationary increase for the month at 4.47 percent. Sotto added: “For all you know, what we might need is a bill amending TRAIN 1 if the effects are not doing good as projected.”
Gatchalian had served notice the panel will convene on February 26. The top economic managers of the government and members of academe will look into the effects of rising inflation. The objective: identify “immediate government actions that can be taken to mitigate the effects of rising prices on the wallets of Filipino consumers.”
The hearing was set into motion by Senate Resolution 642, also filed by Gatchalian, which called on the Senate to look into the macroeconomic fundamentals of the country, particularly focusing on means to contain the rising inflation.
“The biggest component of the inflation we are experiencing now involves food prices. This is a cause for concern because studies show that higher inflation, especially if driven by rising food prices, is related to higher hunger incidence among the poor and working-class sectors. We need to identify and implement a strong plan-of-action to get this inflation under control and make sure our countrymen have enough food to put on the table for their families,” Gatchalian stressed.
Gatchalian said recent inflation data had fanned alarm raised by worker groups and experts that TRAIN might end up doing more harm than good, if the rise in commodity prices cannot be reined in, while the vaunted revenue inflows from the tax-reform package might not be enough to offset the negative impact.
The public hearing, Gatchalian added, will also include a discussion on the potential causes of inflation, such as rising oil prices, heightened consumer demand and a weakening peso.
Updates sought
The Economic Affairs panel chief is asking the Duterte administration’s economic managers for updates on the effects of the TRAIN Act “on the purchasing power of consumers, as well as any changes in consumer behavior that have already been observed.”
The inquiry will, likewise, review the supposed cushions that the government pushed—and the lawmakers delivered in the law—to ease the impact of TRAIN’s inflationary effects on hard-hit sectors. Senators want to check the exact operational status of the expanded cash-transfer program that the Executive Branch promised to implement for the benefit of 10 million families.
“Essentially, the aim of this hearing is to get a clear snapshot of the state of the Philippine economy at this moment, with special focus on gauging the effects of this administration’s economic reforms on Filipino consumers. This snapshot will be critical to the crafting of responsive strategies to keep the rising prices of goods and services under control,” Gatchalian explained.
DOF’s projections
At the height of deliberations on TRAIN 1 in Congress in 2017, the Department of Finance insisted (DOF) experience—as shown by data— dispels fears of inflation.
Drawing from historical data and experience, the DOF projected the maximum impact of higher oil excise tax on inflation in year 2018—when Package 1 is envisioned to take effect—at only 0.9 percent. Transportation inflation was projected to be low also, at 2.8 percent.
The transportation share in the consumer price index (CPI) is set at only 6 percent (in contrast to food, which accounts for a third), and calculated from the daily average of jeepney and bus operations in Metro Manila, based on National Tax Research Center computation, the DOF said. The agency quashed the argument that higher oil excise tax will impact food inflation, noting that “rice price is not driven by oil price.”
The fears are simply overblown, DOF Undersecretary Karl Kendrick T. Chua said when he conducted a briefing for the BusinessMirror on the nitty-gritty of the TRAIN 1.
Inflation remained “low and stable despite significant increases in diesel prices in 2016,” the DOF briefing paper that pointed to inflation in January 2017 at a low 2.7 percent said, even though diesel prices posted a 75.9-percent increase year-on-year (January 2016 and January 2017), or from P18.25 a liter to P32.10 a liter.
Diesel is normally used as barometer because it is used by most public utility vehicles that workers patronize.
Critics repeat warning
LAST Sunday independent think tank IBON said the oil taxes should be scrapped for the benefit of millions of Filipinos who will otherwise continue to suffer the weight of TRAIN beyond 2018.
The DOF had explained that not imposing excise levies has cost the government some P140 billion in potential revenues per year. However, according to IBON, having to pay double taxes through excise taxes on top of value-added tax (VAT) will inevitably affect the country’s more than 60 million people living on very low incomes.
Oil products widely used in households, farms, fishing communities and transportation, such as liquefied petroleum gas (LPG), diesel and kerosene, are being slapped with excise taxes under TRAIN.
IBON pointed out that the final increase in prices of petroleum products is even higher because the higher excise taxes are themselves also subject to 12-percent VAT. “The government is obliging both the rice farmer, who struggles to earn P5,000 every month, and the CEO of San Miguel Corp,, who earns almost P6 million every month, to pay the same tax per liter of diesel that they consume,” IBON said.
However, proponents of the higher oil excise tax had described it as a “highly progressive tax, since those who consume more will pay more tax compared to those who consume less.”
The DOF explained this argument with these data from its micro-analysis: “the top 10 percent of Filipino households [around 2 million households] who earn around P113,000 and above per month consume almost 51 percent of fuel.” Meanwhile, the top 1 percent of Filipino households [or 180,000 households] who earn P288,000 and above per month consume 13 percent of fuel, which is roughly equivalent already to what the poorest 50 percent consume, or 13.67 percent.
The other tax reforms
As first laid down by the DOF, Package 2 of the tax reforms was to cover the lowering of corporate-income tax and the reforms in fiscal incentives, meant to remove the perks from those sectors that have been enjoying them through the years with nothing to show for it.
A comprehensive tax amnesty is also in the works, with the chairman of the Ways and Means Committee, Sen. Juan Edgardo M. Angara, earlier expressing hope to have it finished at committee level by end-January.
Tackling the second-wave reforms is of urgency to the Duterte administration, which needs to fund the ambitious “Build Build, Build” flagship infrastructure program.
When he signed the TRAIN law, or Republic Act 10963, into law last December 19, Duterte pointed out that this was just an initial part of the gains under the comprehensive tax-reform program. Congress has passed “two-thirds of the expected revenues from Package 1 of the TRAIN,” according to the DOF.
The remaining one-third involves provi-sions on the estate-tax amnesty, a general-tax amnesty, the proposed adjustments in the Motor Vehicle Users Charge and amendments to the bank-secrecy law and automatic
exchange of information, the DOF explained in a briefing statement.
As first laid out by the DOF, Package 3 embraces the slew of property-valuation reforms. Package 4 dwells on capital income taxation (interest income, premium payments, dividends and capital gains). Package 5, seen to be just as controversial, revisits coal and mining taxes.
Invited resource persons
Invited to Monday’s hearing by the Gatchalian panel are National Economic and Development Authority (Neda) Director General Ernesto M. Pernia, Chua, as well as officials from the Bangko Sentral ng Pilipinas and the Department of Budget and Management.
Members of academe were also invited: Ateneo de Manila University’s Economic Department Chairman Dr. Christina Bautista, Ateneo’s Center for Research and Development Chairman Dr. Alvin Ang, former Neda chief
and now Ateneo-affiliated Dr. Cielito Habito, University of the Philippines (UP) School of Economics Dean Dr. Orville Solon, National Scientist Dr. Raul Fabella, UP School of Statistics Dean Dr. Mapa, University of Asia and the Pacific’s senior economist Dr. Victor Abola and Ronilo Balbieran, consultant for UA&P and EID Foundation Director. Susan Bulan from the Foundation for Economic Freedom and Action for Economic Reforms’ Joy Chavez and Mr. Karl Yu were also invited.