DEPARTMENT of Finance (DoF) Secretary Benjamin E. Diokno on Tuesday warned against the suspension of the collection of value-added tax (VAT) and excise tax on petroleum products, saying the government stands to lose up to P73 billion in revenues in the fourth quarter alone.
Mr. Diokno in a statement said that this proposal is “short-sighted, ill advised, and (may) have serious consequences” on the government’s finances and the economy.
“Any of the proposals will adversely affect our economic and fiscal recovery, our international credit ratings, and our overall debt management strategy, while benefiting primarily the rich and without providing lasting inflation relief,” he added.
Mr. Diokno said revenue losses are expected reach up to P72.6 billion, or around 0.3% of gross domestic product (GDP), in the October to December period. The government may lose P41.4 billion from excise tax revenues, and P31.2 billion from VAT revenues.
“Assuming no cut in spending (practically the entire General Appropriations Act 2023 has been released) the deficit-to-GDP will increase from 6.1% to 6.4%. This will also result in a higher public debt-to-GDP ratio from 61.4% to 61.7%,” he said.
As of end-June, the deficit-to-GDP ratio stood at 4.8%, while the debt-to-GDP ratio was at 61%.
If the collection of fuel taxes are suspended for an entire year, Mr. Diokno said revenue losses would reach a “whopping” P280.5 billion or 1.1% of GDP for 2024.
He noted this would lead to a higher deficit-to-GDP ratio of 6.2% in 2024, from the projected 5.1%; and debt-to-GDP ratio of 61.3%, from a projected 60.2%.
“With the deterioration in the fiscal picture, we run the risk of an international credit rating downgrade. This will increase the risk premium for government borrowings, consequently another round of higher debt servicing. Private sector borrowings will become costlier and have a negative impact on private investment and economic growth,” Mr. Diokno said.
Ranking members of the House of Representatives on Monday proposed the temporary suspension of fuel taxes to address rising pump prices. However, only the President can suspend the imposition of excise taxes on fuel.
“Removal of taxes is a popular move for politicians. But legislation takes time. Once the elevated oil prices subside, it may not be easy to restore taxes on oil products. It is politically unpopular. That’s the political economy of tax legislation. This has serious implications on fiscal sustainability,” Mr. Diokno said.
The proposal to remove fuel taxes is “regressive,” he noted, as it will mainly benefit the top 10% of households. Top households account for about 49% of total fuel consumption compared to the bottom half, which only consume around 10%, he added.
Instead of suspending taxes, the DoF chief said that the government should provide targeted subsidies to the most affected sectors from high fuel prices.
In February 2022, the government gave fuel subsidies to public utility vehicle drivers who were affected by the spike in fuel prices due to Russia’s invasion of Ukraine.
On Tuesday, oil companies raised pump prices by P2 per liter of gasoline, P2.50 per liter of diesel, and P2 per liter of kerosene. This marked the 11th straight week of increases for diesel and kerosene and 10th week for gasoline.
From the second week of July to the third week of September, pump prices have gone up by P11.85 per liter for gasoline, P17.30 per liter for diesel, and P15.94 per liter for kerosene.
National Economic and Development Authority (NEDA) Secretary Arsenio M. Balisacan told BusinessWorld that the proposal to suspend fuel taxes is “inequitable.”
“If you subsidize gasoline, (that’s) basically benefiting disproportionately the rich. That’s not a good way of subsidizing the population, the poor. It would be better off continuing to enhance, expanding targeted programs such that the poorest groups are provided with safety nets and enhance subsidies for jeepneys, tricycles. That’s better, more manageable, more sustainable, more equitable than overall general reduction,” Mr. Balisacan said on the sidelines of the House of Representatives budget plenary on Tuesday.
“Outright suspension of taxes on fuel would be costly and would deprive the funding for other government assistance programs for the poorest of the poor, similar to the dilemma last year,” Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said in a Viber message.
He noted the lawmakers’ proposal would impact the government’s tax revenues and potentially widen the budget deficit.
“Although such a measure would cause immediate relief to consumers, the forgone revenues would have implications on the fiscal balances. This could prompt fiscal authorities to offset the loss of these revenues from other means or by diverting funding away from other programs or possibly prompt more borrowings by the government, which in turn could push up interest rates even more,” ING Bank N.V. Manila Senior Economist Nicholas Antonio T. Mapa said in an e-mail.
Latest data from the Bureau of the Treasury showed the National Government’s budget gap narrowed by 44.89% to P47.8 billion in July from P86.8 billion in the same month a year ago.
Mr. Ricafort said that it would be better for the government to provide targeted fuel subsidies for the most vulnerable sectors.
Meanwhile, Senator Aquilino Martin “Koko” D. Pimentel III said that suspending fuel excise tax could help many Filipinos cope with rising pump prices.
“Our countrymen need a ‘lifeboat’ to face the challenge of ever-increasing fuel prices.” — Luisa Maria Jacinta C. Jocson
