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

In what was a surprising deviation from his usual off-the-cuff remarks, President Duterte stuck to his script as he delivered his third State of the Nation Address (SONA). Echoing his economic managers, he fended off criticisms of the Tax Reform for Acceleration and Inclusion (TRAIN) and asserted that it has made funds available to build infrastructure and develop human capital. The President extolled the seven-month-old law, claiming that it is already helping poor families and senior citizens cope with rising prices. He added that the government has set aside P149 billion worth of subsidies this year, a figure that will increase by P20 billion by next year. He also enumerated measures that the government has rolled out so far, including unconditional cash transfers, discounts in gas stations, and fuel vouchers for public utility vehicles, without mentioning the delayed implementation of these social mitigating measures. As he closed his segment on tax reform, the President urged Congress to pass the succeeding tax proposals.

INFLATION AND TRAIN

Yet lawmakers remain unconvinced, visibly aware of how consumers had felt the pinch of more expensive commodity prices despite a higher take home pay for those earning above minimum wage.

In June, inflation continued its monthly ascent and exceeded government target, clocking in a five-year high of 5.2% and averaging at 4.3% for the first half of the year. The Bangko Sentral ng Pilipinas already raised interest rates twice in a span of six weeks, in anticipation of higher inflation rates. Private sector economists are predicting at least one more rate hike before the year ends. While Moody’s retained the country’s investment-grade rating, it cautioned against the threats posed by elevated inflation and remarked that policy makers were facing challenges in managing the current inflationary pressures. Even former president and newly installed Speaker Gloria Arroyo, a major proponent of the expanded value added tax during her presidency, urged Duterte to “do something about the inflation.”

While many blamed TRAIN for the increased commodity prices, Duterte’s economic managers were quick to dispel this “incorrect” attribution, explaining that the higher-than-expected inflation was caused by a confluence of factors such as higher global oil prices, rice prices, and sin products. Nevertheless, the timing of TRAIN’s implementation, combined with the delay in the rollout of social mitigating measures, has undoubtedly burdened many Filipinos. In response, some senators have called for a suspension or, at the very least, a review of the law, an idea that the President dismissed in his SONA.

TAX PACKAGE 2

Up next on our lawmakers’ agenda is the second tax package, which focuses on lowering corporate income tax rates and rationalizing fiscal incentives. Businesses are burdened with the highest corporate income tax rate in the region at 30%, versus a low of 17% in Singapore. Even so, the efficiency in tax collections is still low. The country also has a complex tax incentives system, with fourteen different investment promotion agencies and over a hundred different investment laws.

In 2015, around P301 billion in revenues were foregone due to incentives. The DoF is pushing for the removal of incentives in certain industries, much to the chagrin of investment promotion agencies (IPA). While the government conceded that certain incentives are necessary to attract investments, several firms have enjoyed perpetual incentives without producing the desired benefits relative to its costs.

Following the same argument of providing for targeted subsidies instead of VAT exemptions under TRAIN, the DoF proposes the same logic as a more effective way of supporting firms. Yet, it remains unclear how the government intends to roll out these subsidies smoothly.

The upcoming 2019 midterm elections means that the legislative calendar will be shorter, as lawmakers head to their respective constituencies and begin preparing for their campaigns. This means legislators will be working within a tighter calendar compared to when the first tax package was deliberated upon in Congress. The House of Representatives has already started conducting hearings on the second package, but the Senate has yet to follow suit. Sen. Sonny Angara, chairman of the ways and means committee and a re-electionist in the midterm elections, said that the Senate is uncertain if it would pass a possibly “inflationary” tax package and is wary about the potentially adverse effects on jobs. The senators’ reluctance, however, may be overpowered if Malacañang decides to flex its muscles and push lawmakers to advance the bill.

As the President mentioned during his SONA, he hoped to sign the second package before the year draws to a close. This suggests the urgency with which the government is pushing for the passage of the next tax package, as lessons from the previous administrations have taught the current economic managers that reforms are most effective if implemented in the earlier part of a president’s term. Of course, this urgency is also prompted by the government’s need to raise revenues to finance its projects. However, does this mean that the government will introduce more new taxes? Will the rationalization of incentives be reasonable and fair? Unfortunately, the tight legislative timetable means that there wouldn’t be enough time to ensure that the bill is carefully studied. We can only hope that our officials have already learned from our TRAIN experience.

 

 

Image Source: Presidential Photo