Inflation impact of tax package seen neutral

Replacing the import quota on rice with a 35-percent tariff on the Filipino staple will offset the increase in inflation resulting from the first tax reform package, the Bangko Sentral ng Pilipinas said.

“Preliminary estimates of the House of Representatives version of the Train show that inflation could increase by 0.85-1.2 percentage points in 2018 and by 0.4-0.55 percentage point in 2019. Meanwhile, the proposed removal of quantitative restriction (QR) on rice could lead to lower domestic rice prices and could result in lower annual inflation by about 1.14 percentage points,” the BSP said in a report during the recent Development Budget Coordination Committee (DBCC) executive technical board meeting, referring to the Tax Reform for Acceleration and Inclusion Act under Republic Act No. 10963.

President Duterte last week signed into law package 1A of the Train, which starting January next year will slash and restructure personal income tax rates that had remained the same for two decades, while also jacking up or slapping new taxes on consumption of oil, cigarettes, sugary drinks and vehicles.

During the Cabinet-level DBCC meeting last Friday, economic managers kept the 2-4 percent inflation target for the medium term despite the short-term inflationary impact of the Train.

Felipe M. Medalla, a member of the BSP’s policy-making Monetary Board, told reporters that the Train’s long-term effect was actually anti-inflationary.

“To the extent that the infrastructure will reduce transportation costs and increase productivity, in the long run, the Train should reduce the inflation rate,” Medalla explained.

The Train, alongside domestic and foreign borrowings, will augment financing for the Duterte administration’s ambitious “Build, Build, Build” infrastructure program.

“However, of course, initially, you would have the cost-push effect of the higher indirect taxes,” Medalla added.

“The textbook on monetary policy says if an increase in inflation is transitory, there is no need for a monetary policy response because, after all, eventually inflation will settle down,” according to Medalla.

Also, Medalla said that since the government has been prioritizing the elimination of QR on rice and was planning to replace it with a tariff, the price of the commodity was expected to drop by P7 a kilo.

“Rice alone will more than offset the negative effects of the Train,” Medalla said.

According to Medalla, the Philippines would be one of the few countries in the world to increase taxes and lower the inflation slightly at the same time.