Inflation is finally catching up with Philippine President Rodrigo Duterte’s high octane economic stimulus measures, a fast growth-geared policy push known locally as “Dutertenomics.”
Statistics released this week showed inflation rose 5.7% in July, the fastest rate in over five years, according to the National Economic Development Authority, a state agency. It marked the fifth consecutive month that inflation breached the central bank’s 2%-4% target band, leading to market speculation that it will soon hike interest rates.
The surge in prices has sparked a local debate over whether global or local factors are more to blame. Economic analysts note that inflation rates were modest as recently as late last year, clocking in at 3% and 2.9% in November and December respectively.
However, Duterte’s controversial Tax Reform for Acceleration and Inclusion (TRAIN) law came into force in January, a broad-based tax hike that many believe has driven the inflationary trend. Indeed, inflation has steadily risen in recent months: 3.4% in January, 3.8% in February, 4.3% in March, 4.5% in April, 4.6% in May, 5.2% in June, and 5.7% in July, or almost double the December 2017 level of 2.9%.
Duterte’s tax law was passed to help finance the government’s ultra-ambitious infrastructure spending plans, estimated at 8 trillion pesos (US$150 billion) over six years, as well as social welfare programs that aim to reduce poverty from 21% to 15% by the end of his term in 2022. While taxes have risen, widespread infrastructure-building has largely failed to materialize.
Still, the Philippines has recently been among Asia’s fastest growing economies, with gross domestic product (GDP) growth of 6.9% in 2016 and 6.7% last year. But that growth is now decelerating as inflationary pressures start to weigh against consumption and investment. Second quarter GDP growth fell to 6%, from 6.6% in the first quarter. That means first half GDP growth was only 6.3%, down significantly from the government’s full-year target of 7%.
Duterte’s economic managers, including officials at the Department of Finance (DOF), National Economic Development Authority (NEDA), Department of Budget and Management (DBM) and Department of Trade and Industry (DTI), have played down the TRAIN tax’s impact on galloping prices while at the same time scrambled to offer credible alternative explanations for the inflationary surge.
They have generally pointed to three main factors supposedly beyond their policy control, namely rising global oil prices, a recent fast depreciation of the peso which is currently among Asia’s worst performing currencies this year, and “profiteering” by big and small private businesses that have allegedly unscrupulously marked up their prices.
While the TRAIN law has cut personal income taxes, it has raised several other levies, especially for energy sources such as oil, liquefied petroleum gas and coal. Sin taxes for sugary drinks and tobacco have also been upped, while an expanded 12% value-added tax (VAT) now covers more economic sectors, including electricity transmission and foreign currency-denominated sales.
Official attempts to mostly blame higher global oil prices for the local surge in prices, however, doesn’t hold statistically when compared with other net-fuel importers in the region. Indeed, other oil-importing nations such as Thailand, South Korea and Sri Lanka have all seen a decline in inflation in the first half of this year compared to their full year 2017 rates.
The inflation differential for developed countries between January-June 2018 vis-a-vis 2017 is also statistically miniscule, measuring -0.1 for the United Kingdom, 0.1 for Germany, 0.4 for France and the United States, and 0.6 for Canada.
Instead, it is mostly domestic factors that are driving the Philippines’ inflation situation. First and foremost, inflation is hitting the poorest 30% of Filipino households harder than other demographic groups. In the first half of 2018, overall Philippine inflation was 4.3% but for poor households it was higher at 5%.
That’s because while “food and non-alcoholic beverages” comprise only 38% of the overall Consumer Price Index (CPI) basket, used for calculating the national inflation rate, the products constitute 61% of the poor’s consumption. The telling statistics were calculated by Dr Dennis Mapa, dean of the University of the Philippines School of Statistics (UPSS).
Nor is there any near-term relief in sight. Fare hikes for taxis, buses and point-to-point air-conditioned vans will soon come on-stream, as will phase two tax hikes on oil, LPG and coal in January 2019. A third phase tax hike on energy will be imposed in January 2020 as part of the Train tax reforms. Firms are also expected to start raising wages due to labor demands over TRAIN’s impact on prices, leading to a potential virtuous cycle of inflation.
The government is bidding to contain the inflationary trend, though so far with scant success. Those measures include a rice trade liberalization bill now before Congress that aims to convert quantitative restrictions to tariffs; expansion of unconditional and conditional cash transfer (CCT) programs that give monthly allowances to poor households; and interest rate hikes.
The central bank raised benchmark interest rates 25 basis points in both May and June, and were expected to do so again today (August 9).
Critics say Duterte’s government made multiple mistakes in their assumptions and projections when designing the TRAIN tax. Those include the notion, argued by Duterte-allied legislators while the bill was still in Congress, that the country’s richest 10% representing two million households account for 50% of national oil consumption and thus oil tax hikes will hit the rich more than the poor.
In retrospect, it seems doubtful that the government actually believed that of 25 million national households 23 million use a mere 50% of total national oil consumption.
Anecdotally, the poor and lower middle classes who work in the national capital, Manila, often live in neighboring provinces and drive or commute daily to the city center, making them big fuel consumers. The rich, meanwhile, live and work in Manila’s Makati business center and other central areas, and thus their oil consumption is low.
To bring the inflation situation under control, Duterte’s government should consider genuine pro-poor tax cuts and incorporate them into TRAIN 2, a bill now pending before Congress. One such measure would be to reduce the 12% VAT, currently the highest in East Asia, to around 8% and significantly reduce the number of exempted sectors.
Would it work? It did in Malaysia. During the election campaign period the party of newly elected premier Mahathir Mohamad promised it would abolish a Goods and Service Tax (GST) if voted into power. His party has since made good on its promise by reducing the GST from 6% to zero in June. The impact: inflation fell a full percentage point from 1.8% in May 2018 to 0.8% in June.
But it’s not clear yet to most observers that Duterte’s economic lieutenants are willing to acknowledge and correct their taxing, inflationary mistake.
Bienvenido S Oplas, Jr is president of Minimal Government Thinkers think tank and a columnist at BusinessWorld newspaper in Manila