Weslene Uy, Senior Economic Research Analyst of the Stratbase ADR Institute

The chorus of lawmakers and various groups calling for the Tax Reform for Acceleration and Inclusion (TRAIN)’s suspension amidst inflation rates peaking to four-year highs has only grown louder. The chief architects of the law have been put on the defensive, vehemently explaining that the rise in prices was predominantly driven by external factors. Even the president himself, who usually refrains from talking about economic issues, has offered his two cents on the debate. While he acknowledged that TRAIN is one of the factors driving up inflation, he emphasized that he needed money to run the country.

The TRAIN has been a highly-polarizing issue since the proposal was first floated only a few months after President Rodrigo R. Duterte stepped into office. Taking advantage of the president’s popularity, officials from the Department of Finance lined up five tax packages with a two-fold objective: to remedy the deficiencies in the current tax structure and to raise revenues for much-needed public investments.

While the personal income tax cuts were widely supported, the revenue-generating measures of the bill, such as the excise taxes on petroleum, were met with widespread criticism. To justify these offsetting measures, the proponents of the TRAIN, backed by multilaterals, credit rating agencies, and leading economists, argue that merely lowering income taxes would strain our limited financial resources.

From the start, the economic managers knew that TRAIN would trigger a price shock. Nevertheless, they insisted that the benefits would eventually outweigh its costs. They also assured skeptics that several measures would be implemented to cushion consumers from higher commodity prices. During the deliberations, however, it became clear that some details still needed to be ironed out. Yet, Malacañang flexed its muscles and pressured lawmakers to speed up the passage of the bill. In its final form, the TRAIN has also morphed significantly from its original version to accommodate hastily inserted provisions — some of which were not carefully studied — in lieu of tempered excise taxes, while trying to preserve the revenue goal.

Of course, it would be unfair to solely lambast the TRAIN law for the steep price increases, or even from knocking off a few percentage points from our economic growth during the first quarter of 2018. For all its shortcomings, the TRAIN still addresses some of the current tax system’s deficiencies by including tax administration provisions and by streamlining and simplifying the processes. So far, revenue collections and spending performance have been on-track to meeting the full-year targets.

COLLECT, COLLECT, COLLECT

The government has rationalized that in order for the Philippines to reach upper middle-income status by the end of the Duterte administration, it has to catch up on much-needed investments, amounting to some P2.2 trillion. Half of the necessary revenues is allotted for infrastructure investments under the administration’s Build, Build, Build campaign. The TRAIN is expected to add P90 billion in revenues in its first year of implementation alone and contribute a total of P786 billion by 2022. Even at our best effort, the projected revenue collections from TRAIN will not be enough to cover half of our investment requirements, but it will prevent us from further stretching our finances.

Thankfully, revenue collections turned out higher-than-expected for the first quarter of the year, finally reversing an era of constantly missed targets. This, of course, is a welcome development. From January to March of 2018, the Bureau of Internal Revenue collections exceeded its target by 16.8%. The higher excise taxes from the TRAIN law have been instrumental in boosting revenue collections.

SPEND, SPEND, SPEND

Although the Philippines has recorded stellar economic growth rates in the last few years and even outperformed several of its peers in the region, infrastructure investments have failed to keep pace with growing demand. Infrastructure to GDP spending, for example, averaged at only 2.4% from 2010 to 2016. Consequently, the underinvestment in the sector has prevented us from reaching our full economic potential.

In an effort to overturn our dismal performance, the Duterte administration promised to allocate record-breaking funds into the sector to usher in the “golden age of infrastructure.” The government’s aggressive infrastructure campaign has so far yielded promising results.

When asked about the government’s spending performance last August 2017, Budget Secretary Benjamin Diokno remarked that underspending was “a thing of the past,” noting then that disbursements were almost “on the dot” for the programmed budget. Diokno’s bold declaration followed through for the rest of 2017, as infrastructure to GDP spending reached 3.6% and exceeded its programmed disbursements. This trend continued at the start of 2018, with the government’s commitment to roll out infrastructure projects in “full steam.” Indeed, the first four months of 2018 saw a 48% increase in infrastructure spending, on the back of construction and improvement of road and flood systems. Overall disbursements also jumped by 29.4% during the same period year on year.

Despite the faster infrastructure disbursements, several highly publicized “Build, Build, Build” projects, or 75 high-impact and critical projects that the government wants to showcase, have seen their completion dates pushed back due to issues such as the delays from right-of-way and the constrained capacity of construction companies.

Since the bulk of revenues from TRAIN are meant to fund infrastructure projects, it is crucial for the administration to deliver its Build, Build, Build program. Filipinos need to see concrete and tangible changes, instead of being wooed by lofty but empty promises.

MITIGATING MEASURES

Consumer prices rose to a four-year high of 4.1% for the first four months of 2018. Private sector economists expect inflation to reach 4.1% in 2018 and to inch even higher to 5% due to second-round effects from higher taxes. For the bottom 30% income households, the inflationary impacts are even greater, driven by higher food, beverages, and tobacco prices, which account for three-fourths of their consumption. Unsurprisingly, this segment of the population would be worse off under the TRAIN law since they will have to pay for the higher prices of commodities without benefitting from the relief of lower income taxes. While it is unfair to pin the rise of prices solely on TRAIN, the timing of its implementation, in conjunction with other external factors such as higher global oil prices and a weaker peso, all contribute towards the burden of inflation.

Secretary Diokno stressed that, “We are going to benefit from this. It is for the poor.” Indeed, a portion of TRAIN’s revenues are earmarked for various social safety nets. To cushion the poor against higher prices, the government is rolling out its unconditional cash transfer of Php 200 per month, covering 10 million Filipinos and expanding the current 4.4 million beneficiaries of the Pantawid Pamilyang Pilipino Program (4Ps). For this year, P25.67 billion has already been allocated for unconditional cash transfers. Yet, the simultaneous release of the unconditional cash transfers has only complicated an already faulty system. Unfortunately, close to 60% of beneficiaries have yet to receive their cash transfers, with the Department of Social Welfare and Development admitting that it was hard-pressed to roll out the program on time.

Other mitigating programs, such as the Pantawid Pasada, a revival of an ad interim measure implemented by the Department of Energy in May 2011 to cushion the impact of higher fuel prices on drivers and commuters through subsidies, is still expected to be implemented at the end of 2018. Just like the cash transfer program, the Pantawid Pasada was riddled with issues that usually plague targeted transfers including duplicate or fraudulent households, unliquidated funds due to distance or ineligible beneficiaries, and untimely release of funds.

To address this, the government is pushing for a National ID system or Philippine Identification System to make it easier to target qualified beneficiaries for the government’s social protection programs. The government has already allocated P2 billion to roll out the system in 2018, where senior citizens and PWDs will reportedly be prioritized, followed by the poorest 5.2 million households that do not have 4Ps cards. Both houses of Congress recently ratified the bill, and as of this writing, it is only awaiting the President’s approval.

Without these measures in place, the poor, who have not benefitted from the cut in income taxes, will continue to bear the brunt of higher excise taxes.

WHAT’S NEXT?

The country’s experience of TRAIN should serve as a lesson from which our lawmakers and economic managers could learn. Unfortunately, in its rush to approve tax packages, ostensibly to generate revenues to fund its investment requirements, the government may have overestimated its readiness to implement these reforms. As our legislators deliberate on succeeding tax proposals, they shouldn’t expedite the passage of the next tax package without carefully studying its wider impact. Otherwise, we end up repeating the same narrative as that of TRAIN, with the government punching above its weight.

 

 

This article was originally published in BusinessWorld’s Anniversary Report, “The Changing Game”.