Gov’t eyes cuts in ‘non-infra’ spending

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Calungbuyan Bridge

By Elijah Joseph C. Tubayan

THE GOVERNMENT will cut spending on non-infrastructure items to weather the impact of billions of pesos in revenues to be foregone from the suspension of an oil excise tax hike scheduled in January and to keep the fiscal gap in check, the Finance chief told reporters on Monday.

“We will have to cancel some non-infra expenditures,” Finance Secretary Carlos G. Dominguez III told reporters on Monday on the sidelines of a ship commissioning ceremony at the Philippine Coast Guard headquarters in Manila, while assuring that spending on social services will also be unaffected.

“We are going to take the necessary action not to increase our deficit.”

He said economic managers will identify items to sustain funding cuts during a Development Budget Coordination Committee (DBCC) meeting today.

The DBCC has programmed a deficit ceiling equivalent to three percent of gross domestic product this year. In 2019 it will inch up to 3.2% amid a foreseen spike in infrastructure spending, then back to three percent in the succeeding years until 2022. These programs compare to the actual 2.2% recorded in 2017.

Mr. Dominguez also noted that since oil prices will go up further and the peso will likely continue depreciation, the revenue loss may be partly recouped from higher value-added tax collections on fuel imports.

“So the total estimated foregone revenue is around P41 billion but we are still calculating how much the net revenue will be… We don’t expect the full P41 billion to be the (actual) amount,” he said.

He also noted that the DBCC will study whether the Pantawid Pasada program, a cash transfer for public utility jeepney service franchise holders affected by higher fuel taxes, will also be suspended along with the fuel excise hike. “That idea has been floating around but we will discuss that,” said Mr. Dominguez, noting that only 35% of the fuel vouchers were distributed, citing suspected irregularities in the list of beneficiaries.

Qualified parties received P5,000 this year and will get P20,515 in 2019.

Mr. Dominguez confirmed that economic managers and members of Congress had agreed on the need to suspend January’s oil tax hike under Republic Act no. 10963 or the Tax Reform for Acceleration and Inclusion Act.

The law increased fuel excise taxes by P2.5 per liter this year, and is scheduled to hike another P2 and P1.5 per liter in 2019 and 2020, respectively, totaling a P6 excise tax increment.

That law provides that the excise tax hike is automatically suspended should Dubai crude price average at least $80 per barrel this quarter.

The Department of Finance (DoF) had cited projections of such level till yearend as justification for Malacañang’s early announcement of the oil tax hike suspension.

Price of Dubai crude — used as a benchmark for Asia — rose 43% to $77.02/bbl in September from $53.86/bbl a year ago and by 6.78% from August’s $72.23/bbl. Prices averaged $82.278/bbl in the 10 trading days to Oct. 12, 50.69% more than the $54.602/bbl in last year’s comparable period.

“The first two weeks of October is already over $80 and the forward market, the futures market at the end of the year as of last week was over $80. So the market is telling us it’s going to be over $80 so we might as well announce the suspension so that people will not speculate anymore,” the Finance chief said.

“There is a chance — but it’s pretty slim — that it will not average $80.”

Mr. Dominguez also said that the DoF is still studying how the suspension can be lifted once the Dubai crude oil prices normalize. “The law is silent but I suppose that if for three months it’s lower than $80 per barrel then it can be reapplied. We will do that in the next few days,” he said.

Economists interviewed separately via e-mail said that the move to suspend the 2019 fuel excise hike should help temper price speculation.

Some also said that the 2019 mid-term elections was a key factor in the decision.

“The suspension might actually impact the market positively. If it were a non-elevated inflation environment, it might probably have a negative effect. Expect the market to have a bounce because of this particular information,” said Ruben Carlo O. Asuncion, chief economist at UnionBank of the Philippines, Inc.

Bienvenido S. Oplas, Jr., president of Minimal Government Thinkers, a member institute of Economic Freedom Network Asia, said: “The May 2019 elections is the primary consideration of Duterte and team.”

“If they proceed with part 2 [oil excise tax hike], they will have more tax money but less votes. If they suspend it, they will have less tax money but more votes… After the elections, they will very likely proceed with part 2 hikes. This is a tax-hungry administration so it will need more tax money.”

“The 2019 elections will have inflation among its core issues. Since inflation can be partly ascribed to higher fuel prices, the 2019 elections will definitely influence the lifting of the suspension of the fuel tax. I believe the lifting of the suspension will follow a few months after the 2019 elections but not before that,” University of Asia and the Pacific economist Cid L. Terosa said.

“The DoF has to break the momentum of seemingly unstoppable inflationary expectations by shifting its stance on the fuel tax. I believe that the shift in the policy stance of DoF will upset the current upward trend of fuel prices and inflation.”

Bank of the Philippine Islands Vice-President and Lead Economist Emilio S. Neri, Jr. said: “While it is clear that implementation of the oil tax this year was not the key culprit for this year’s inflation surprise, it will probably be more difficult for policy makers to resume the planned increases in the excise taxes for 2019 and 2020… after what happened to inflation this year,” referring to headline inflation that has lately been clocking in multiyear highs this year to average five percent in the nine months to September against the central bank’s 2-4% target range for full-year 2018.

Mr. Neri said forgone revenues may also be offset when the economy accelerates. “If the economy grows fast enough in 2019 owing to the anticipated improvement in next year’s inflation print, we could see collections from existing tax laws improving fast enough to offset some of these foregone opportunities,” he said.

A Palace spokesman said on Monday that President Rodrigo R. Duterte has made up his mind to suspend the fuel excise tax hike scheduled in January, adding that Malacañang will issue a formal order on this matter.

“The fact that they made an announcement… that is a validation,” Presidential Legal Counsel and Spokesman Salvador S. Panelo said in a press briefing at the Palace when asked if Mr. Duterte had decided on the matter.

Asked whether Malacañang will issue a formal order, Mr. Panelo replied: “Certainly, yes.”

Asked separately on the likely mechanism for the oil tax hike suspension even ahead of the January trigger period, Senator Juan Edgardo M. Angara, chairman of the Senate Ways and Means committee, replied in a mobile phone message: “To be sure, Congress can pass a joint resolution to that effect.”

House Ways and Means panel Chairman Rep. Estrellita B. Suansing of Nueva Ecija’s first district did not respond to a request for comment. — with Arjay L. Balinbin