Subsidies seen as short-term solution to soaring inflation

MANILA, Philippines — Targeted subsidies on the most affected sectors should be the short-term solution to manage soaring inflation and not the suspension of excise taxes on fuel products, the Asian Development Bank (ADB) said.

In its latest blog, the Manila-based multilateral lender said risks for inflation in Asia remain tilted to the upside as commodity prices continue to pick up as an effect of the Russia-Ukraine war.

This even as inflation in Asia remains relatively low compared to other regions in the world.

But as domestic demand recovers coupled with massive jumps in oil and food prices, so will inflationary pressures persist.

To address this, ADB economists Irfan Qureshi and Matteo Lanzafame emphasized that subsidies targeted at the poorest segments of the population are the most appropriate instrument to deal with inflation in the short-term.

“Subsidies create fewer distortions than alternatives such as suspensions of value added tax or excises on fuel—which are not only poorly targeted, but can be hard to re-install, set a bad precedent, and erode public finances,” they said.

In the Philippines, several lawmakers have already called for the suspension of the fuel tax as consumers continue to bear the brunt of more expensive food and non-food items.

Headline inflation jumped to a 3.5-year high of 5.4 percent in May.

But the incoming Marcos administration already expressed that it is not inclined to heed calls for excise tax suspension on fuel products.

In a recent television interview, Bangko Sentral ng Pilipinas Governor Benjamin Diokno, who will head the Department of Finance by July 1, maintained that such a move may be unwise.

Similar to what the ADB economists argued, Diokno said it would be “very difficult” to push for the return of such a tax measure when the need arises to do so.

“I think it’s a wrong move to cut taxes at this time,” Diokno said.

The Duterte administration already rejected calls for the suspension and instead provided subsidies to the most impacted sectors.

Diokno said the incoming administration will continue such an approach as it is more efficient than cutting taxes.

On the rising cost of fuel, the government has set aside P6.1 billion in fuel subsidies for public utility vehicle (PUV) drivers and farmers.

So far, over 180,000 PUV drivers and operators have received their P6,500 fuel subsidy while almost 160,000 farmers and fishers will get P3,000 fuel discounts.

On the other hand, Qureshi and Lanzafame noted that if there are signs that inflationary pressures are building and broadening, monetary policy should take center stage.

Further, they said the current nature of inflation, which is largely driven by energy prices, should prompt economies to ramp up investments on energy efficiency and renewables to reduce vulnerabilities in the medium-term.

“The crisis presents an opportunity for regional governments to speed up the transition to more sustainable and greener growth,” the economists said.