Why do I get the impression that this is deja vu… circa early to mid-’80s? The pro and con arguments of a proposal to suspend taxes on oil products have been argued before.
What amuses me is that after all these years, our leaders have not learned that no one will be happy with whatever course of action they take. Why not just do the right thing?
It all started because oil prices kept on rising for several weeks, with seemingly no end in sight. Premium gasoline was close to P70 a liter, and public grumbling during an election season was worrying our politicians.
In late September, Brent crude, the international benchmark, rose to as much as $80.69 a barrel, the highest since October 2018. Bank of America warned it could go up to $120/barrel by June 2022. The price of oil is at a seven-year high because of strong demand and limited supply.
Then last week, oil prices fell. Market analysts are saying that new COVID lockdowns, particularly in Europe, sparked demand concerns just as industry players signaled they are ready to produce more.
Then, US President Joe Biden and Chinese President Xi Jinping suggested during their virtual summit they would put millions of barrels of oil on the market from their strategic reserves. China moved in that direction quickly.
Reuters reported that the country’s state reserve bureau said it was working to release between 20 million and 30 million barrels in the next month.
The release of strategic reserves won’t change the overall picture for long. For oil prices to continue declining, more production must come into the market.
During the pandemic, several members of the OPEC, as well as other producers, including Russia, cut output. There are reports that they have since been having trouble ramping up to meet recovering demand.
So our politicians panicked. Even the normally level-headed congressman, Joey Salceda – who knows better, couldn’t resist the call to cut taxes on fuel products.
The House Committee on Ways and Means, headed by Salceda, quickly decided to temporarily suspend or reduce the excise tax on some fuel products for six months.
Specifically, Salceda’s committee scrapped the excise taxes on diesel, kerosene, and liquefied petroleum gas (LPG). Excise tax on low-octane gasoline will be reduced, while premium gasoline will remain taxed at current rates.
Salceda justified the policy reversal in terms of its supposed immediate relief for Filipino families affected by the recent run-up in fuel prices. The committee admitted that the cost to the national government (NG) is substantial at about P45 billion.
That could only mean more borrowings are in store because the pandemic is far from over.
Indeed, Fitch Ratings has already downgraded its outlook on the Philippines from stable to negative. It warned the Philippines may see its international credit rating downgraded due to its rising public debt vs GDP.
Then again, maybe it is just as well that taxes are cut because the more money the government has, the more our officials are tempted to do Pharmally-type scams.
What Salceda doesn’t realize or intentionally ignores is the reality that diesel is consumed not only by the poor. There are current models of Benzes and BMWs that use the same diesel used by jeepneys. The middle class use Toyotas powered by premium gasoline, but Salceda is not giving them any relief.
Urban rich and poor use LPG for cooking. But in the rural areas, many still use charcoal and firewood.
Salceda is trying to resurrect our socialized pricing policy of the ‘80s, which has many unintended and undesirable consequences.
One problem we had was having our low priced diesel smuggled out of the country to be sold in neighboring markets where the cost reflects market reality. Premium gasoline was being adulterated with diesel and low octane gasoline.
Clearly, Salceda’s proposal will not benefit the most needy of consumers. DOF has determined that scrapping excise taxes would benefit the rich more than the poor.
As the DOF pointed out, removing the excise taxes “would benefit buyers who never needed price cuts in the first place.”
According to the DOF, the tax relief will boost the disposable income of the richest 10 percent by some 0.63 percent to 0.82 percent in 2022. However, the disposable income of the poorest 50 percent of the population will only increase by 0.34 percent to 0.45 percent.
Salceda, the economist, must surely know it is best to keep the excise taxes on fuel products. The budget deficit had reached P1.1 trillion through September, an annual increase of nearly 30 percent. This is around 8.3 percent of our GDP.
Because of the pandemic’s impact on business, revenue collection had declined by some 16.3 percent as of end-September. Doing away with the excise tax means the NG would forego P38 billion, with minimal impact on inflation at 0.1 percent, according to an internal DOF estimate.
The government must still buy more vaccines and newly authorized anti-COVID drugs.
With the World Bank revealing that only one out of 10 Filipino children at the age of 10 can read and write, the education department will need a lot of budgetary support.
The agriculture department also needs to gear up to mitigate the impact of climate change on our food security.
It would be better to keep the tax policy and help the poor by granting time-bound and direct subsidy.
Last year, nearly 180,000 public utility drivers were helped through the distribution of cash. The current service contracting of buses by LTFRB will also insulate commuters from any fare increases.
Salceda and the congressmen did not think this out. Mercifully, the Salceda proposal will be stalled in the Senate, specially with the decline in international oil prices.
Most of the congressmen can perhaps be forgiven for not knowing any better. But how Salceda could have allowed it to pass his committee shows even a learned and normally responsible economist becomes a mindless populist in an election season.
Boo Chanco’s email address is bchanco@gmail.com. Follow him on Twitter @boochanco