Mitigating oil price hikes

The Tax Reform for Acceleration and Inclusion (TRAIN) Act, which kicked in at the start of 2018, is largely seen – rightly or wrongly – as one of the biggest reasons why consumers are seeing successive increases in the prices of goods.

The consumer price index (CPI), which measures the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care, was up 4.5 percent in April from 4.3 percent in March, an all-time high over a five-year period.

Government economists attributed this to higher oil prices and the initial impact of the implementation of the TRAIN Law. With almost everything priced higher, inflation has also reared its ugly head.

For now, the Bangko Sentral ng Pilipinas is on edge about the possibility of galloping inflation, and has appropriately acted by raising interest rates last week by 25 basis points to tighten money supply, and consequently temper rising prices of commodities and goods.

Still, the BSP sees inflation as continuing to flare up until the end of the year, and has revised its projections to 4.6 in 2018, six percentage points higher than the previous highest level of four originally forecast for the year.

Fiddling with oil taxes

During the deliberations for phase 1 of TRAIN, the economic team had justified the call for higher excise taxes on petroleum products to a dampened world price of crude oil, which had reached its low point of $27.10 a barrel in early 2016.

For most governments, taxation on oil is considered one of the most efficient ways of raising revenues, but also the most risky for the economy, especially if crude suddenly spikes out of control. And this is what happened in the first quarter of 2018, coinciding also with the first quarter performance of TRAIN.

Note that under TRAIN, liquefied petroleum gas (LPG), which was not taxed before, was slapped an excise tax of P1.00 tax per liter for 2018, P2.00 per liter in 2019, and P3.00 per liter in 2020.

Diesel, which was also not taxed before, was likewise assessed new taxes: P2.50 per liter in 2018, P4.50 per liter in 2019, and P6.00 per liter in 2020.

Gasoline, both regular and unleaded, had additional excise taxes from the current P4.35 per liter to P7.00 per liter in 2018, P9.00 per liter in 2019, and P10.00 per liter in 2020.

Other fuels and oil products such as aviation gas, asphalts, kerosene, naphtha, bunker fuel, lubricating oil, paraffin wax and petcoke were also assessed higher taxes.

Impact on almost everything

Today, the benchmark Brent price has surged by nearly 190 percent, hovering at the $70 level. While excise taxes are a fixed amount, this adds pressure on pump prices, which has seen increases almost every week during the recent months.

An increase in oil product prices, especially something as significant as what we had seen in recent months, is greatly felt in almost all aspects of the economy. Oil products are used for power generation, transportation, machineries, and in farming and fishing.

On the ground, housewives are complaining about the high cost of LPG, small businesses are seeing their profits eroded, farmers and fishermen are burdened by higher diesel and kerosene prices, and the transport sector is gearing up to ask for fare rate hikes.

A big increase comes also from power generators which had been subjected to a 12 percent value added tax in power transmission charges by the National Grid Corporation of the Philippines. Meralco had already passed on a rate increase of P0.75 per kilowatthour in February, P0.85 in March, and P0.23 in April.

Aside from oil, coal – used extensively for power generation – was also additionally levied P50 per metric ton from the current P10. This will be increased to P100 per metric ton next year, and P150 in 2020.

No one and nothing escapes an oil price increase.

A burden on the poor

Duterte’s smart guys are saying that safety nets for the poor are in place to cushion the impact of TRAIN, including the effect of tax hikes on tobacco, alcohol, and sugary drinks that poor consumer prefer and patronize.

However, unconditional cash transfers or dole-outs do not reach majority of those affected by TRAIN, and the waiver of personal income taxes on more salaried workers have already slowly been eaten by the recent rise in inflation rates.

Things will only get worse, even before it gets better. Crude oil prices will continue its upward climb and likely even breach $80 per barrel, a level that Saudi Arabia has been rumored to be targeting in preparation for the initial public offering of five percent of Aramco.

If we were to put weight on a recently published research of the Bank of America Merrill Lynch, crude oil prices could reach $100 per barrel next year, a first since 2014.

Amendments in order

A repeal of TRAIN would be too radical, in view of the government’s ambitious infrastructure program requiring P8 trillion over a six-year period. However, certain safety nets have to be adopted, especially in crisis times like now when crude prices are barreling upwards.

One safety net would be a suspension of the TRAIN taxes on oil products when benchmark crude oil prices rise to a certain level. After all, the corresponding increase in import duties alone should be able to compensate for the loss in TRAIN revenues.

Mitigating oil price hikes and its effects on the poor is posing a challenge to this administration. Add to this is the record-breaking profits being realized by the oil companies.

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