Bad idea

I am relieved that our finance officials have struck down that stray proposal to suspend the RVAT on oil and gasoline products.

Until it was made clear that the RVAT on oil would not be suspended, the peso slackened and the equities market became anemic. There emerged renewed concern over our capacity to maintain a disciplined fiscal regime.

The proposal to suspend RVAT on oil products is a classic case of pursuing short-term (political) benefit at the cost of long-term (economic) damage.

Sen. Ralph Recto correctly opposed the proposal, pointing out that the public sector stood to lose up to P40 billion in revenues. That would have dire consequences that will eventually take its toll on the nation’s poor.

If the public sector loses P40 billion in realizable revenues, that will erase all the gains we painstakingly accomplished over the last two years. It will ruin the already impressive track record we have established in registering an actual deficit that is lower than targeted.

Because of that, we could court adverse speculation against the currency, causing an inflationary surge that is greater than what even the alarming increase in oil prices might cause. Instead of bringing our people relief from inflation, it could actually magnify the inflationary scourge.

Even as that danger is opened by the suspension of the RVAT, the lost revenues would diminish government’s capacity to pump prime the economy through a massive infrastructure program indicated by the proposed 2006 budget (which the Senate has yet to act on). That pump priming effort could create employment, push up domestic demand for manufacturing products and open new investment opportunities.

It took a lot of political will to put in the RVAT. The most challenging element in that new revenue measure was the inclusion of oil and power in the coverage of the tax. That was the most difficult component to sell, the one that required the greatest investment of political capital by the administration.

That component took the highest toll on the popularity of the President and encouraged opportunists of every stripe to try and dislodge her from office. But it was also the component that drew in the greatest amount of confidence from the investment community, helped improve our credit ratings and strengthened Philippine bonds.

If we suspended RVAT on oil, that would deal a tremendous blow on our fiscal credibility. It would reduce the attractiveness of the Republic’s bonds, make financing more expensive and disable our financial institutions from generating much needed funds to help pump-prime the economy.

In a word, suspending the RVAT would cause multifaceted and profound adverse consequences on the national economy.

And all these for what?

Suspension of the RVAT would probably cut a peso off the pump price for premium gasoline or cause a two-week postponement in the present schedule of price increases adopted in the face of record-high world prices for crude. That minor gain would soon be eradicated if the global oil price regime persists. Or, it could easily be forgotten if global prices for crude soften over the next few weeks.

In short, the advantages in bringing minor relief to consumers would be horrendously short-lived. The costs of undertaking this will be profound and long-lasting.

In pursuit of a few weeks of relief (that is probably hardly palpable to the ordinary consumer) we will absorb long-term pain. We might have to push back our schedule for achieving a budget surplus and again infirm our currency. It will take it doubly hard to win back the confidence of the investment community and return us to the caricature of a country with unpredictable economic policies.

In Britain, today, gasoline costs a pound sterling a liter. In the rest of Europe, pump prices are running at the equivalent of P100 per liter. Yet governments there are not budging on taxes.

In the US, which has one of the cheapest oil prices in the world, pump prices are running close to $1 a liter, which converts to about P50. Our pump prices are remarkably lower than elsewhere, except perhaps Venezuela where the populist government there is virtually giving away a precious national resource even as that country’s per capita income has already fallen dramatically because of short-sighted policies that raise Hugo Chavez’s popularity but flushes that nation’s future down the drain.

The reason our pump prices are lower is that the commodity remains, RVAT notwithstanding, under-taxed. This despite the great costs to the commons that consumption of the commodity brings in the form of added health care expenses, higher pollution and greater demand for public roads.

If oil prices are high today, then let us bite the bullet. Let the price regime bring forth prudence in the consumption of the non-renewable product and greater efficiency in the rest of the economy. Let that price regime push forward the search for alternative power sources and new fuel-efficient technologies.

Let us not try to sandbag a tide that cannot be stopped by doing so. The effort will be futile. It might bring in short-term popularity points for politicians, but it will cost the rest of the economy greatly.

Having abandoned that stray idea of suspending RVAT on oil products, government is still pursuing the equally stray idea of reducing tariffs on oil from 3 percent to 1 percent. All the arguments against suspending RVAT on oil apply to cutting tariffs on the product – only that the discrepancy between the marginal benefits to the consumer and the great costs to the fiscal regime are even more magnified in this latter option.

Cutting down tariffs on oil will cost government an estimated P800 million a month in lost revenue. Yet, it will bring such marginal price relief to the consumer that it might not even register in pump prices as they appear to be incessantly increasing through the summer months.

The driving force behind this bad idea of sacrificing fiscal adequacy on the altar of marginal consumer relief is populism rather than good economics. Government thinks it is its duty to put up sandbags against an unstoppable tide even if that is a futile thing to do.

The more correct option is to educate our people about the futility of such gestures and the wisdom of moving the whole economy away from its absolute dependence on an improbably priced and non-renewable source of energy.