On inflation: Let them eat cake
“Let them eat cake” was supposedly uttered by Queen Marie Antoinette when the peasants stormed the Bastille, asking for bread for their hunger, in the French Revolution. What brought King Louis XVI and his wife, the extravagant Marie Antoinette, to the guillotines and the end of the monarchy was the inequality between the rich and the poor in France in 1789. Economics does, as it always will, settle the politics in society.
“Let them eat cake” can be the unfeeling utterance of a national leadership in denial of the plight of the disadvantaged in society, as braggadocios of a better future are made to offset the stresses and anxieties of present unorthodox strategies that are yet not understood by the masses. Does the ordinary citizen know the meaning of inflation, or impending recession, of rapid peso depreciation?
“The country’s year-on-year inflation for the bottom 30% income households went up by 5.3% in the first quarter of 2018. This was higher than the 3.4% annual growth in the fourth quarter of 2017 and 2.8% in the first quarter of the previous year. The indices of all the commodity groups posted higher annual growths during the quarter, except for fuel, light and water (FLW) index which decelerated to 6.1%,” according to the Philippine Statistics Office (psa.gov.ph, April 30, 2018).
The annual increment of the food alone index at the national level picked up by 5.3% in the first quarter of 2018. Its annual rate was recorded at 3.4% in the previous quarter and 2.7% during the same period in 2017. The fish index showed a double-digit annual mark-up at 11.5%. All other food groups likewise exhibited higher annual gains during the quarter (Ibid.). The Philippines’ annual headline inflation continued to move at a faster rate at 4.5% in April 2018, the highest since 2011. Inflation in the previous month was pegged at 4.3% and in April 2017, 3.2% (psa.gov.ph, May 4, 2018). This is the highest inflation in Asia, including China (2.9%), Japan (1.5%) and Indonesia (3.2%) in February (tradingeconomics.com).
But rising inflation is not because of the recently implemented Tax Reform for Acceleration and Inclusion (TRAIN) law, Sen. Sherwin Gatchalian, who chairs the Senate economic affairs panel said in February, when he called for hearings to review the impacts of TRAIN (Philippine Daily Inquirer, Feb. 26, 2018).
He said the two main causes of higher inflation were “fluctuation on the global oil prices as well as the depreciation of the peso.” Finance Undersecretary Gil Beltran, the DoF’s chief economist, said moderate inflation is typical under a fast-growing economy like the Philippines, especially after the TRAIN law, which raised salaries and helped boost government spending to pump prime the economy, increased demand or consumption, which, in turn, drove up prices (www.dof.gov.ph/index.php/inflation, May 18, 2018).
In effect — yes, the TRAIN has something to do with rising inflation. Not to consider the depreciation of the peso, which was affected by the stronger dollar, and the ripple effect of more pesos from the overseas foreign workers (OFWs) and business process outsourcing (BPOs). The TRAIN itself by its tax cuts released more money for people to spend and pull inflationary prices up. Some six million Filipinos earning P250,000 and below who comprise 83% of the base for individual taxpayers no longer pay the personal income tax (PIT) under the TRAIN.
Of this number, some 28% or 2 million are minimum-wage earners, who are already exempted from the PIT, and 55% or 4 million more are those earning above the minimum pay but not over P250,000 per year (www.dof.gov.ph, June 8, 2017).
Imagine the false feeling of wealth that will whet the appetite to spend more — and drive the prices up! Add the bloating of OFW remittances by the depreciation of the peso, plus the extra “savings” from reduced estate and donors’ taxes, and capital gains. Consider the coming 100% increase in military salaries, teachers’ pay, free college education and health benefits — all good, but there’s the too-much-too-soon, easy-come-easy-go recipe for inflation.
But the TRAIN bill is “expected to help reduce poverty rate from 21.6% in 2015 to 14% in 2022, lifting some six million Filipinos out of poverty, and helping the country achieve upper middle-income country status where per capita gross national income increases from $3,500 in 2015 to at least $4,100 by 2022,” the DoF memorandum to President Rodrigo Duterte said (Ibid.). But for Dennis Mapa, dean of the University of the Philippines (UP) Diliman School of Statistics, with the high inflation rate, reducing poverty to 14% by 2022 would be “a tall order… This is not the first time we are seeing it. Poverty statistics since 2006 showed that whenever there are spikes in inflation, poverty reduction efforts are constrained.” Mapa said the DoF only computed the direct effects of the tax reform law, not the indirect.
BSP Vice-Governor Diwa Guinigundo reacted to some government people’s suggestion to reduce the BSP benchmark inflation rate of 4%, which has been breached, and still rising. “No matter how you measure inflation, no matter what base year you use, 2-4% inflation target makes sense, given our stage of development as well as the inflation dynamics.” If you lower it by one or two percent, you will tighten monetary policy and you will affect the trajectory of growth (Interaksyon, March 2, 2018).
The assumptions, projections, and resolutions of the TRAIN somehow loop and always must get back on track with the main destination of poverty alleviation and financial inclusion. Engineers must sit back and review what must be done about the runaway TRAIN. Meantime, our leaders must be humble enough to change what has to be changed, even if only altering the phasing and timing of fiscal and monetary interventions, to temper rising inflation.
“Let them eat cake” is not the temporary solution for our hungry poor.
Amelia H. C. Ylagan is a Doctor of Business Administration from the University of the Philippines.
ahcylagan@yahoo.com
