Midterm elections, inflation fatigue to delay tax reform passage

MANILA, Philippines — The midterm elections for members of Congress in May is seen to further delay the remaining tranches of the Duterte administration’s tax reform program.

Standard Chartered Bank economist for Asia Chidu Narayanan said in the bank’s economic outlook for 2019 that the May 13 elections, (which would also cover provincial, city, and municipal positions), could delay the passage of the rest of the comprehensive tax reform program.

“Tax reform is likely to be pushed to the back burner in the first half,” Narayanan said.

He noted that five Cabinet ministers are up for re-election, including former foreign affairs secretary Alan Cayetano.

The economist said a poor performance by PDP-Laban, President Duterte’s party, could make it more difficult to pass further legislation – including the rest of Republic Act 10963 or the Tax Reform for Acceleration and Inclusion Act (TRAIN) passed in December last year.

“We maintain our view that passage of the remaining tranches is unlikely in 2019. The government has confirmed that an additional excise tax on fuel will be imposed in 2019 on softening fuel prices,” Narayanan said.

Economic managers earlier considered suspending the hikes to reduce inflationary pressure, but shelved plans due to easing global oil prices.

Likewise, Nomura Securities Ltd said in a research note that midterm elections and signs of reform fatigue would further delay fiscal reforms.

Nomura said the tax amnesty bill under Package 1B of the comprehensive tax reforms program has been approved by both houses of Congress.

However, the Department of Finance is insisting on the entire package 1B to be passed together, including changes to the Bank Secrecy Law.

Nomura said the passage of Package 2, covering corporate income tax cuts accompanied by the rationalization of fiscal incentives, is also likely to be delayed from the original target of end-2018.

The Senate has not yet passed its version of the bill and some legislators have already conceded that they are unlikely to pass it before the end of 2018.

“This implies further delays beyond this year as we see it unlikely that this will be pushed before the mid-term elections. There are signs of reform fatigue as the implementation of Package 1 led to some public backlash and the perception that it contributed to this year’s surge in inflation,” it said.

Given the political cycle, Nomura doubts legislators will push to expedite the legislative process before May, pushing out further the passage of subsequent packages.

However, Nomura said it does not expect the delays to increase fiscal risks in the near term, or to affect spending priorities, particularly infrastructure spending which is gaining more traction.

According to Nomura, on-budget infrastructure and other capital outlays are likely to reach 4.3 percent of gross domestic product (GDP) this year, significantly higher than the 2.6 percent in 2015.

It said the government’s goal of raising infrastructure spending to seven percent of GDP by 2022 under the Build Build Build program remains on track.

For one, Nomura said Package 2 of the tax reform program is revenue-neutral and would not affect the funding of infrastructure allocations, while the planned suspension of the next round of excise tax hikes on fuel slated on Jan. 1, 2019 is no longer pushing through.