Former finance officials and economists from the Foundation for Economic Freedom (FEF) have pointed to higher oil prices in the world market and the increase in food prices that were the result of weather-related developments as the main factors behind the inflation spike in January 2018.
The FEF said January’s inflation rate of 4 percent cannot be attributed to the implementation of the Tax Reform for Acceleration and Inclusion Act (TRAIN), which has built-in safeguards such as unconditional cash transfer (UCT) program to mitigate the price pressures induced by the adjusted excise tax rates under this law.
The January year-on-year inflation rate was within the overall target of 2 to 4 percent set by the Bangko Sentral ng Pilipinas (BSP) for 2018.
According to FEF, the significant economic reforms and fiscal consolidation implemented over the years have given monetary officials and the BSP effective tools to anticipate and ease the inflationary impact of the TRAIN.
“We, the Foundation for Economic Freedom (FEF) agree with the government that the recently enacted TRAIN has not caused inflation to rise in January 2018,” the FEF said in a statement read by its executive director Susan Bulan during a recent hearing conducted by the Senate economic affairs committee.
Bulan told senators at the hearing that “FEF believes the TRAIN has safeguards in place to mitigate any inflationary effects, which as estimated by the Department of Finance to result to a 0.7 percentage-point increase in inflation for 2018 with food prices rising by .03 percentage points and transportation by 0.1 percentage points.”
The correct view on TRAIN, the FEF said, is to look at it as a revenue-generating instrument that will enable the government to spend more on infrastructure, education, health and other social services, which would, in turn, “have a positive impact to the country’s medium- to long-term growth path—and this lifts the poor out of poverty.”
According to FEF, the higher food prices in January were the result of the increases in the cost of fish and vegetables that were affected by weather-related incidents and the lean season for the fishing industry.
Moreover, inflation rose in January because international oil prices increased 19.6 percent while the peso depreciated by 1.5 percent in the past year.
“It is not accurate to look at the TRAIN impact solely from the tax side without reference to expected increase in public expenditures for education and health, which are very progressive,” the FEF said.
The Foundation noted that the UCT program under the TRAIN should be effectively implemented to benefit the poor.
As for the informal sector, it pointed out that “many in the informal sector are not poor, but are exempt by self- election from any income taxation.”
According to FEF, “the TRAIN has provisions for reaching informal sectors, which currently do not pay income taxes,” to help “broaden the tax base which helps reduce the fiscal deficit and inflationary pressures.”
“It is fair that they pay their share of taxes,” the FEF added.
The FEF statement submitted to the hearing said that fiscal consolidation, the restructuring of the central bank and the creation of an independent central monetary authority, foreign exchange liberalization, and flexible exchange rates that were achieved as a result of long years of economic reforms have armed monetary authorities with “effective tools to pursue inflation targeting to ensure that inflation and inflation expectations are properly anchored.”
“The BSP has the instruments to anticipate any possible build-up of inflationary pressures from TRAIN beyond what is warranted from current inter-industry structure of the economy,” they added.
Earlier, the DOF noted that the inflation rate in Metro Manila for January 2018 rose to 5.45 percent, while outside Metro Manila, where most of poor households reside, it was lower at 3.53 percent.
“This means that the poor, who are mostly outside NCR, are less affected,” Finance Undersecretary Karl Kendrick Chua said.
Rice inflation for the same period was only 1.4 percent, defeating claims that the TRAIN would lead to escalating food prices.
Chua said the January inflation rate was partly the result of better compliance with the payment of excise taxes on “sin” products, with tobacco inflation recorded at 17.4 percent during the same period even though the expected increase arising from the tax hike for cigarettes was only 8 percent.
According to Chua, the temporary inflation spike could also be attributed to the apparent “profiteering” by some traders, contrary to claims that this was caused by the implementation of TRAIN.
Chua said certain retailers selling old stocks they procured before the Jan. 1 effectivity of TRAIN seemingly took advantage of this new law and imposed excessive price adjustments, which led to last month’s higher-than-expected inflation rate.
He noted that the Philippine Statistics Authority (PSA) collects data on prices twice a month: first, during the 1st to 5th of the month; and second, during the 15th to 17th of the month.
“Given this, TRAIN is unlikely the reason for higher inflation as retailers were still selling old stock from 2017,” Chua said.
Prices are expected to normalize once the markets adjust and the government intensifies its monitoring campaign to check any unwarranted price movements of basic goods, Chua noted.
Chua recalled that last year, cigarette manufacturer Mighty Corporation sold its assets to Japan Tobacco Inc. (JTI) in order for it to settle its tax liabilities after the Bureau of Internal Revenue (BIR) filed several criminal complaints before the Department of Justice (DOJ) for its massive use of counterfeit tax stamps.
With JTI now in control of Mighty, the company is now paying the correct amount of taxes, which in turn, would mean it is charging higher prices for its cigarettes to make up for the higher tax rate, he said.
“In fact, if Mighty continued to evade tax and therefore cigarette prices remain low, overall inflation would have gone down to around 3.75 percent,” Chua said.
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