Finance Secretary Benjamin Diokno on Tuesday described proposals to suspend the value-added tax and the excise tax on petroleum products as short sighted and ill-advised as they would 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,” Diokno said in a statement.
He said the revenue loss and its fiscal implications would be significant, estimated at P72.6 billion in VAT (0.3 percent of GDP) and P41.4 billion in excise taxes in the fourth quarter alone.
“Assuming no cut in spending… [practically the entire GAA has been released], the deficit-to-GDP will increase from 6.1 percent to 6.4 percent. This will also result into higher public debt-to-GDP ratio: from 61.4 percent to 61.7 percent,” Diokno said.
He said that on an annual basis, the full-year revenue loss would be a whopping P280.5 billion, or 1.1 percent of GDP. The forgone revenues will also lead to higher budget deficit from 5.1 percent to 6.2 percent of GDP, and higher debt-to-GDP ratio in 2024 from a projected 60.2 percent to 61.3 percent.
“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,” he said.
Diokno said the proposals are also regressive, as they would primarily benefit the top 10 percent of households who consume around 49 percent of total fuel consumption. The bottom half of households consume only around 10 percent.
“The best approach is targeted subsidy to the poor who will be affected by the high fuel prices, to jeepney operators, farmers and fisher folks. We did this during the height of the oil price increase owing to Russia’s invasion of Ukraine. This targeted [subsidy] gained the approval of the IMF and other international organizations,” he said.