Demagoguery

The best course is still to ride this out like a rollercoaster. Any other proposed solution will be more destructive in the longer run.

For eight straight weeks, pump prices for oil products rose. According to industry analysts, it is possible that the rise could continue (or at least hold at that high level) for a few more weeks.

The sharp rise in oil prices hurts consumers. It has reflected in higher prices for food. There is now a demand for increasing transport fares.

When the public is hurting, there is more room for demagoguery to play.

For years, it has been routine for the populist/leftist groups to demand that excise taxes on fuel products be removed whenever oil pricing is on an upward trend. On occasion, they also demand the re-nationalization of the oil industry. It is an idea that refuses to die despite the evidence.

This week, the two leading presidential candidates – Isko Moreno and Bongbong Marcos – repeated the worn out demand to either reduce or suspend excise taxes on oil products. The Department of Finance found it necessary to attach a number to the revenue government will have to forego if excise taxes are suspended: P131.4 billion.

This is money a deficit-ridden government fighting a pandemic could ill-afford.

When Isko Moreno proposed cutting taxes and duties in half, it was not clear if he was referring to the excise tax, the VAT or both. Fuel products are the most heavily taxed everywhere, not only as a means to raise revenue but also as an instrument for modulating consumption of a product that inflicts high social costs.

Bongbong Marcos proposed the suspension of all taxes on fuel products. In addition, he raised the possibility of returning the Oil Price Stabilization Fund (OPSF) that was scrapped in the nineties with the deregulation of the oil industry. This raises the specter of fiscal irresponsibility.

In the late seventies and early eighties, the country’s indebtedness was driven mainly by two losing propositions: the National Power Corporation (Napocor) and the Oil Price Stabilization Fund (OPSF). In an effort to win popularity, Marcos Sr. heavily subsidized both power and fuel costs. The state ended up with massive debt it eventually defaulted on, bringing forth the crisis of the mid-eighties.

It took us over two decades under a severe austerity regime to work down the debt. That meant cutting spending for infrastructure and other economic investments as well as keeping wages depressed. Our economy fell behind our neighbors during this period.

Over so many years, we worked hard to restore fiscal stability. The effort was rewarded two years ago when the credit rating agencies upgraded our ratings to the highest we ever achieved. Before the pandemic struck, we had brought down our debt-to-GDP ratio to a historic low 39.6 percent. Finally, we are able to modernize our infra to clear the congestion in our roads and ports to make our domestic economy more efficient.

With the current oil spike and all the populist options revived, we are in danger of compromising our fiscal stability and courting runaway borrowing that can only bring us to a new debt crisis.

A suspension of excise taxes on oil products will have an unhealthy domino effect. It will widen the budget deficit. It will force government to borrow more just as we had reached the ledge in sustainable indebtedness. It could force us into another austerity regime that will compromise future growth.

Even if we only suspend VAT on fuel products, that will have profound long-term effects. The VAT operates like a fishnet. If you cut a hole in it, the whole catch will escape through it. This most reliable of revenue mechanisms will fail.

There are proposals for cross-subsidies: mainly by making private vehicle owners pay for the fuel used by public transport. This is pretty much like the cross-subsidies implied by senior citizen discounts where younger consumers are forced to pay part of the costs of senior citizen consumption. It is inherently unjust, although it makes seniors like me happy.

A cross-subsidy will encourage consumers to cheat – much as it was profitable for oil industry players to cheat until the oil marking was imposed. At a certain level of cheating the system, it becomes unsustainable mainly due to high enforcement costs.

The most workable scheme is something we tried before: direct fuel subsidies to jeepney drivers and bus operators. This requires some sort of infrastructure: producing discount cards and extensive monitoring of their use. It has one beneficial political effect, however. It keeps the volatile jeepney drivers’ groups happy in the meantime, hopefully long enough to get to the point where oil prices begin to settle at a reasonable level.

There is peril in any direct or indirect subsidy scheme. It operates on the principle of getting the price wrong.

When OPSF subsidized fuel prices across the board, consumers felt the commodity was affordable and consumed it like it was going out of style. When gasoline prices were used to subsidize diesel, wealthier Filipinos shifted to gas-guzzling diesel-powered SUVs. These outsized vehicles became the fashion of the day, a statement on how easily the system may be gamed at the cost of dirtier air.

All things considered, the most sustainable path is to keep getting the price right. That means no foregone revenues, no subsidies and no cross-subsidies.

If oil prices are high at the moment, then that is the fact of our economic lives. We should not look for someone else to pay the costs for us.