The Bangko Sentral ng Pilipinas on Friday said the tax reform package of the Finance Department that includes higher fuel and automobile excise taxes is expected to increase inflation to nearly 4 percent in 2017 and 2018.
Bangko Sentral Deputy Governor Diwa Guinigundo told reporters in a media briefing the first package of the tax reform proposal, which includes the reduction of the personal income tax rate and some revenue-compensating measures, would increase inflation rate by 0.4 to 0.5 percentage points in 2017 and 0.8 to 1.0 percentage points in 2018.
Latest data from the Philippine Statistics Authority showed inflation in 2016 settled at 1.8 percent, or below the government’s target of 2.0 to 4.0 percent.
“All the numbers, our preliminary estimates indicate that should it be implemented, the first package on fuel and automobile, that is expected to contribute between 0.4 to 0.5 percentage points for 2017,” Guinigundo said.
“And then for 2018, 0.8 to one percentage points. So basically if that’s the case, then we will be close to the upper end of the target. And therefore we need to assess how monetary policy can respond to these changes,” he said.
Diwa said the higher inflation cause by higher oil prices would not necessarily alter the current monetary policies.
“Unless we see some signs, particularly on petroleum products, moving on into inflation expectations or second round effects, monetary policy will not be commissioned to deal with this inflation pressure coming from the tax reform package,” he said.
Diwa also noted that the effects of the tax reform package was a one-off development that would fund projects for development in the country, especially infrastructure.
“But I think we need to also understand that it is important that we also consider those tax reform packages because that will be the source of funding the proposed reduction, particularly, in personal income tax, which is also expected to result to higher domestic demand moving on,” he said.
The DoF earlier assured the public that while the tax reform program of the Duterte administration might incur a higher inflation rate when implemented, it would be manageable, with the services to be felt by the people eventually.