Ex-NEDA chief says slight, temporary inflation hike under tax reform won’t hurt low-income earners

Date Posted : July 2, 2017

Ex-NEDA chief says slight, temporary inflation hike under tax reform won’t hurt low-income earners

Date Posted : July 2, 2017

Former National Economic and Development Authority (NEDA) director-general Felipe Medalla said the slight, temporary inflation increase arising from the adjustments in oil excise taxes under the proposed Tax Reform for Acceleration and Inclusion Act (TRAIN) will not hurt low-income earners or members of the informal sector owing to the safety nets for the poor and other vulnerable sectors outlined in the measure.

Medalla, who has been retained as a member of the Monetary Board, said the Bangko Sentral ng Pilipinas (BSP) has found that with the proposed TRAIN, the fiscal targets and spending plans of the government remain “consistent with price stability and sustained the economic growth of 6.5 to 7.5 percent.”

He said that even if fuel prices increase as a result of the adjustment in oil excise taxes under TRAIN, the inflation rate will still be consistent with the BSP’s targets.

“Many people will not be actually hurt by the higher inflation if you take into account the increase in the incomes that result from the reduction in the income taxes for people who make less than P250,000 a year,” Medalla said at a recent Development Budget Coordination Committee (DBCC) press briefing.

Medalla was referring to the provision under TRAIN that exempts compensation earners with a net taxable income of P250,000 and below from paying personal income taxes (PIT). Compensation earners with a monthly salary of P21,000 and below are covered by the exemption.

The former NEDA chief also cited the social safety nets to be put in place under TRAIN for members of the informal sector, or those who do not pay income taxes.

Under TRAIN, these safety nets include unconditional cash transfers (UCT) to about 10 million households belonging to the bottom 50 percent of the population, and subsidies for public utility jeepney (PUJ) operators and drivers as well as for electricity consumers in island-provinces and other Small Power Utilities Group (SPUG) areas not connected to the main power transmission system.

“In short, our own analysis in the BSP is the fiscal reform and fiscal spending plans of the national government are consistent with price stability and sustained economic growth,” Medalla said.

Medalla said the government would be able to manage the economy well and maintain fiscal stability because the additional revenues generated under TRAIN will help finance the increased government spending on infrastructure, health, education, and social protection.

“The government will be spending more on infrastructure, education, health, and social programs without getting out of the framework of fiscal stability, precisely because it expects that new tax measures and improved tax collections will be able to finance a big part of the increased spending,” he said.

The House of Representatives approved the CTRP’s first package— House Bill No. 5636 or the TRAIN—by a 246-9 vote with one abstention before the Congress’ sine die adjournment.

The bill, which had consolidated the DOF’s original proposal—HB 4774 filed by Rep. Dakila Carlo Cua—with 54 other tax-related measures, seeks to make the country’s tax system simpler, fairer and more efficient by slashing PIT rates and, to fill up the consequent revenue loss, by adjusting excise taxes on certain products and broadening the Value Added Tax (VAT) base.

President Duterte has certified the bill as urgent and priority measure.

Finance Secretary Carlos Dominguez III, who had earlier asked the President to certify the tax reform bill as urgent, said in his memorandum to the Chief Executive that this TRAIN bill is “expected to help reduce poverty rate from 21.6 percent in 2015 to 14 percent in 2022, lifting some six million Filipinos out of poverty, and helping the country achieve upper middle-income country status where per capita gross national income increases from $3,500 in 2015 to at least $4,100 by 2022.”

Dominguez said the DOF will continue to hold dialogues with senators during the remaining weeks of the congressional break to explain to them the merits of tax reform package and convince them to retain the original DOF-endorsed version outlined in Cua’s HB 4774.

The finance chief said he hopes the Senate will retain the original features of TRAIN under HB 4774 to optimize the bill’s revenue gains, which were trimmed under the House-approved version.

An increasing number of international financial institutions have lauded HB 5636’s approval as a positive step to reforming the country’s tax system and boosting revenue, and a testament to the Duterte administration’s decisive leadership and firm resolve to pursue broad economic reforms and ensure the financial viability of its ambitious public investment program.

These institutions include Moody’s Investors Service, Fitch Ratings, Deutsche Bank and Nomura.

In a sign of positive business sentiment for this tax reform package, the Philippine Stock Exchange index (PSEi) went up by 90.37 points or 1.15 percent to close at 7,927.49 last June 1, or the day after the House had approved HB 5636 on third and final reading. It then closed at its highest level for this year at 8,001.38 points last June 5, and PSE president Ramon Monzon was quoted in media reports as saying that this breach of the 8,000 level was driven by “optimism over the developments in the DOF’s CTRP.”

DOF estimates show that under HB 5636 with complementary measures such as the motor vehicle user’s charge and the proposed estate tax amnesty, the government is expected to raise P133.8 billion in 2018, P233.6 billion in 2019, P272.9 billion in 2020, P253 billion in 2021 and P269.9 billion in 2022.

Under the original DOF-endorsed package in HB 4774, the government aims to raise P91.4 billion in 2018 from the tax reform package, P185.7 billion in 2019, P223.8 billion in 2020, P200.7 billion in 2021, and P219.2 billion in 2022.

With the complementary measures, which under the original package did not include the tax on sugar-sweetened beverages (this was included in the final version of HB 5636), the total revenue take was projected at P157.2 billion in 2018, P249.2 billion in 2019, P291.4 billion in 2020, P272.7 billion in 2021, and P295.7 billion in 2022.

HB 5636 will yield P1.163-trillion net revenues from 2018 to 2022 with complementary measures, compared to P1.266 trillion under the original proposal.


Date Posted July 2, 2017

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