The country’s GDP may grow at a slower pace this year, as the implementation of the Tax Reform for Acceleration and Inclusion (TRAIN) law could cut consumer spending, economists said on Tuesday.
The National Economic and Development Authority (Neda) expects the TRAIN law to increase commodity prices by one percentage point at the most. Think tanks like the First Metro Investment Corp.-University of Asia and the Pacific (UA&P) Capital Markets estimated it could increase inflation by 0.6 percentage point.
Local economists told the BusinessMirror that inflation—the rate of increase in consumer prices—could average 3.7 percent to over 4 percent in 2018. The Bangko Sentral ng Pilipinas’s full-year target is 2 percent to 4 percent this year.
“The TRAIN law will exert downward pressure on growth this year, as it would curtail consumption spending. Although investments and capital formation can offset the downward push of the TRAIN law, this may not happen in the first two to three quarters this year,” UA&P School of Economics Dean Cid Terosa told the BusinessMirror.
The increase in inflation, according to former Socioeconomic Planning Secretary Romulo L. Neri, will largely be due to higher direct taxes caused by the increased excise on sugar-sweetened beverages.
There are also indirect taxes, such as the increased in excise taxes for petroleum products which could cause inflation to shoot up.
“I’m concerned about the inflationary impact of taxes. [It] may slow down consumption. There are direct taxes on consumption goods like soft drinks, not only fuel. Tax on coal will impact on electricity cost,” Neri told the BusinessMirror.
He added that due to the impact of the TRAIN on commodity prices, it is imperative for the government to “rush capital spending on infrastructure.”
Socioeconomic Planning Secretary Ernesto M. Pernia assured that this will happen since 2018 is being envisioned as a defining year for the Duterte administration’s “Build, Build, Build” program, as well as the 75 flagship projects since many of these will break ground in 2018.
“[These will] probably [have an impact of] one to two percentage points in the growth rate. That’s possible. In other words, our growth targets of 7 percent to 8 percent will be more feasible,” Pernia said. The only downside to the implementation of these projects is worsening traffic, especially in cities and municipalities where big-ticket projects will be rolled out.
However, Pernia said, the program will also increase capital formation, which also represents public and private construction, and boost GDP this year. The Neda chief added the projects that will be implemented this year will also increase employment opportunities for Filipinos. This, coupled with the reduction in personal-income tax, will increase the income of 99 percent of Filipino taxpayers.
“In the next quarter, we see the domestic demand picking up as household consumption will likely improve, following the recently approved tax-reform package, which will result in higher take-home pay for 99 percent of Filipino taxpayers. Household consumption is also seen to benefit from expanded employment opportunities from the Build, Build, Build program,” Pernia said.
He added the government will ensure that the ill effects of the TRAIN and the infrastructure program will be kept under control through the provision of safety nets and other reforms.
Pernia said that, in terms of keeping commodity prices in check, benefits from the salary-standardization law (SSL) will help boost incomes and the cash assistance to the bottom 50 percent of families will help combat the inflationary impact of the TRAIN.
Other measures to keep commodity prices low include the tarrification of the quantitative restrictions on rice imports, where the tariff revenues can be used to channel better extension services to farmers, thereby making them more resilient.
“This will improve the investment climate in the sector by eliminating policy uncertainty, thereby enabling farmers and farm operators to decide based on market and geophysical conditions,” Pernia said.
“The expected outcome is a substantial reduction in the retail price of rice, and the higher and more stable income of farmers,” he added. In terms of addressing the traffic situation, Pernia said agencies, such as the Metropolitan Manila Development Authority, are ready to provide rerouting schemes that will help motorists avoid choke points caused by infrastructure projects.
He added the government would also encourage flexible working arrangements in the country to reduce the number of workers traveling to and from cities like Metro Manila to ease congestion.
GDP growth
The Philippine Statistics Authority announced on Tuesday that the country posted a GDP growth of 6.7 percent in 2017. In the fourth quarter alone, the economy expanded by 6.6 percent. Among the major economic sectors, industry recorded the fastest growth of 7.3 percent in the October-to-December period. It also posted the highest annual increase of 7.2 percent in 2017.
The growth was buoyed by the manufacturing sector, which grew by 8.8 percent in the fourth quarter of last year and 8.6 percent in 2017.
However, the construction industry expanded by 2.8 percent in the fourth quarter of 2017, slower than the 10.7 percent recorded in 2016. This caused fixed capital to grow slower at 9.3 percent during the period, from the previous year’s 18.5 percent. For the whole of 2017, fixed capital growth of 9 percent was slower than the 23.7 percent recorded in 2016.
Services expanded by 6.8 percent in the fourth quarter and 6.7 percent in 2017. These were slower than the 7.2-percent and 7.4-percent increases posted by the sector in the fourth quarter and full-year 2016, respectively.
The main culprit for this, Pernia said, was miscellaneous services under which the business-process outsourcing industry is categorized. He noted that the BPO sector has already reached its “saturation point.”
“We can take this as an indication that the current market profile of the BPO sector is ripe to move into higher value-added services,” he said.
The laggard among the production sectors was agriculture which only recorded a 2.4-percent growth in the fourth quarter and 3.9 percent in 2017.
Image credits: Alysa Salen