DOF: Suspending fuel excise tax to benefit rich, not poor families

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The Department of Finance (DOF) has rejected proposals to suspend the excise tax on fuel as a way to reduce the impact on consumers of spiralling oil prices in the world market, asserting that this move would only set back the Philippines’ economic recovery from the pandemic and would instead end up subsidizing the expenses of affluent families more than those of low-income households.

Finance Secretary Carlos Dominguez III informed President Duterte during a meeting here with Cabinet officials on Tuesday night that the suspension of fuel excise taxes would lead to a massive revenue loss of P105.9 billion, or about a half-percent of the country’s Gross Domestic Product (GDP) this year.

This expected depletion in revenues would imperil the government’s currently strong fiscal position and further widen the budget deficit, especially at this time when global interest rates are rising, and would force the government to borrow more to fund its programs intended to provide improved social services, create more jobs and invigorate the economy.

Dominguez proposed instead for the government to continue providing targeted relief to vulnerable sectors, which would include extending a total of P33 billion in unconditional cash transfers (UCTs) to the bottom 50 percent of all households, or about 74.7 million Filipinos.

“We realize that this is not enough. But this is what we can afford as of this time, and to make sure that our finances going forward and especially for the next Administration are still going to be healthy. This, I believe, is what we can afford,” Dominguez told President Duterte during the meeting televised Wednesday morning.

The fund for these targeted interventions will be sourced from the excess value added tax (VAT) collections resulting from higher fuel prices, he said.

He said that as a matter of principle, the DOF strongly opposes any proposal that aims to suspend fuel excise taxes because it will translate into significant foregone revenues, will be detrimental to our recovery, and is inequitable.

From a cost-benefit standpoint, the proposal’s adverse impact on growth and economic recovery will also be permanent and more significant than its temporary and much smaller impact on overall inflation, he added.

Dominguez pointed out that the primary beneficiaries of the fuel excise tax suspension would actually be the top 10 percent of the country’s households, as they are estimated to use up around 48.8 percent of the Philippines’ total fuel consumption this year, while the bottom 50 percent will only consume around 13.9 percent.

“This means that with the suspension of fuel excise taxes, we are supporting higher income households more than lower income households,” he said.

Dominguez said the proposal to suspend fuel excise taxes will only provide temporary and minimal relief to consumers, as the prices of goods are expected to go down by only 0.03 percentage points (ppt) in 2022.

The trade off would be unrealized government spending from the foregone revenues, which will hamper the Philippines’ economic recovery and result to slower growth by 0.4 ppt in the short run and 0.03 ppt in the long haul, he said.

The excise tax on gasoline before the implementation of the Tax Reform for Acceleration and Inclusion (TRAIN) Law was P4.35 per liter, while there were no excise taxes collected from diesel, kerosene and liquified petroleum gas (LPG).

This tax remained unchanged from 2005 to 2017, even when the prices of petroleum products increased.

Under TRAIN, the excise tax rates were updated for the different types of fuel to adjust for increases in prices.

The current rates for the major petroleum products are as follows: P10 per liter for gasoline, P6 per liter for diesel, P5 per liter for kerosene, and P3 per liter for LPG.

These excise taxes are fixed on a per liter or per kilogram (kg) basis, and do not change depending on the cost of fuel

The TRAIN Law provides a safety net provision to address possible fuel price shocks that may be triggered by the increase in excise tax rates and other market factors.

However, this provision only refers to the excise tax increases mandated under the TRAIN Law, which have already taken place on Jan. 1 of 2018, 2019 and 2020.

Thus, the TRAIN Law cannot be invoked anymore to suspend fuel excise taxes, he said.

Dominguez said the estimated loss of P105.9 billion in excise tax and VAT collections this year alone already accounts for the possible impact of the Ukraine-Russia conflict on the volume of imported petroleum products.

From 2022 to 2032, the government stands to lose P1.76 trillion worth of excise revenues, which could be better spent on more productive sectors of the economy.

“Any reduction in our revenues will require us to borrow more to continue to fund government programs,” he said.

Dominguez said the projected P147 billion to be collected from the fuel excise tax and the VAT on oil imports this year is already allocated in the 2022 national budget, which means such revenues have been allotted for spending on government projects and programs.

These include the job-generating projects under the “Build, Build, Build” infrastructure modernization program, and the salaries of government employees, such as public school teachers, soldiers and members of the Philippine National Police (PNP), Dominguez said.

“Without these revenues, we will be required to borrow more to fund government programs,” he said.

“Hence, the proposal will be detrimental to our fiscal position. The foregone revenues will lead to an increase in our country’s deficit in 2022, from 7.7 percent to 8.2 percent of GDP, if the same level of government spending will be maintained to support economic recovery,” he added.

The budget deficit, which is the difference between revenues and expenditures, represents the amount the government needs to cover with additional borrowings.

Increased borrowings, in turn, will push up the debt-to-GDP ratio in 2022, from a projected 60.9 percent of GDP, to 61.4 percent of GDP.

“The effect of additional borrowings will be even greater in future years as we start to pay interest. The situation is compounded by the rise in global interest rates. Higher borrowings now will further increase our interest payments and deficit in the future,” Dominguez explained.

Dominguez said DOF computations show that higher VAT collections from rising fuel prices are sufficient to cover the targeted subsidies to be given to vulnerable sectors of the economy.

He said that if the per-barrel cost of crude oil in the world market hits a high of US$130, this would correspond to about P 37.5 billion in additional VAT collections.

Dominguez said that with global crude prices at US$ 110 per barrel (as of Tuesday night), the DOF estimates to collect P26 billion in additional VAT collections.

“These are much needed revenues that we recommend to be used as a funding source to support and provide subsidies to the sectors most affected,” he said.

The Duterte Cabinet’s Economic Development Cluster (EDC), which Dominguez heads, is recommending the distribution of cash grants to the bottom 50 percent of all Filipino households, which will benefit around 12.4 million families or 74.7 million Filipinos.

“The beneficiaries will be based on the updated list of the Department of Social Welfare and Development (DSWD) and will be similar to the unconditional cash transfers (UCTs) provided under the TRAIN Law,” he said.

Dominguez said the budget for the UCTs will amount to P33. 1 billion based on a proposed P200-per- month grant or P2,400 per year to be given to each qualified household.

The EDC has also recommended doubling the budget for fuel subsidies from the current P2.5 billion approved by the President to P5 billion to cushion the impact of the oil price hike on over 377,000 qualified public utility vehicle (PUV) drivers in the transport sector.

It has also proposed providing additional fuel vouchers for farmers and fisherfolk by increasing the budget from P500 million to P1.1 billion to help mitigate the impact of higher fuel prices on production and transport costs of farm and fishery products.

The first tranche of this amount will be released in March and the second tranche will be given in April.