"Congress needs to give it a long, hard second look."
When a train’s system malfunctions, it goes off the rails; it is said to be derailed. The economy of which it is a part is not supposed to be derailed; only the train is. In the case of the implementation of the Duterte administration’s signature economic program—(TRAIN), the (Tax Reform for Acceleration and Inclusion) law—it is the Philippine economy, not the train, that has gone off the tracks.
Regular readers of this column know that I have never been a supporter of TRAIN. My training as an economist taught me to never favor a fiscal program that is founded on excise taxes. I am, unapologetically a maximize-income-taxation, employ-excise-taxes-sparingly kind of economist.
Practically, TRAIN has driven off track an otherwise steadily progressing Philippine economy. The media are full of stories of how the TRAIN has damaged the economy, but please allow me, dear readers, to recite the charge sheet.
At the top of sheet, Charge No. 1 is that TRAIN has activated an inflationary psychology and stoked the prices of inflation. Whereas the BSP (Bangko Sentral ng Pilipinas) has been happily maintaining a 2-to-4 percent target range for inflation, the nation’s monetary authority was more having to track annualized inflation rates. The recently-released inflation rate for September was 6.7 percent—the highest since 2009—and the indications are that Mr. Inflation is not done yet.
Because food items account for around 52 percent of the CPI (consumer price index) the governmental snafu over the rise supply has played a large role in the upsurge in consumer prices, but the TRAIN hikes in fuel (broker fuel, diesel, gasoline and kerosene) prices are clearly largely chargeable with the steady upward movement of the inflation rate. Secretary of Finance D. Carlos Dominguez III and his guru Kendrick Chua insist that the mismanagement of the rice situation has been the culprit in all this, but anyone who knows the end-use pattern of fuel appreciates the pervasive impact of higher excise taxes on fuel. No man-on-the-street media intervention is necessary to establish this.
Recently I wrote about the evil of activating the inflationary psychology. Because one man’s income is another man’s cost, TRAIN has unleashed an I-get-left-behind mindset among producers and salary/wage earners. The upward spiral continues until all the players in the inflationary game are convinced that no more wage or price increases are forthcoming in the near future.
Charge No. 2 against TRAIN is its adverse impact on the desideratum of reduced income inequality. The 6.7-percent loss of purchasing power has not produced a dent in the standard of living of Mr. Henry Sy, but it has meant a great deal to a Filipino receiving the P532 daily minimum wage. That is TRAIN’s idea of inclusion?
Charge No. 3 against TRAIN is the adverse effect that the rise in the inflation rate—and the resulting deterioration in the price environment—has had on the international community’s assessment of this country’s near-term economic projects. Already the three leading international lending institutions—IMF (International Monetary Fund), World Bank and ADB (Asian Development Bank)—have reduced their 2018 growth forecasts for the Philippines. And the three foreign credit rating agencies have been making tactful noises about the negative economic developments that are taking place in this country’s any downgrade will make Philippine borrowing costlier.
Charge No. 4 against TRAIN is its adverse impact on the external value of the peso, particularly the peso-dollar dollar exchange rate. Every trained economist is taught that the inflation rate and the exchange rate influence one another, through the prices of imports and the cost of producing exports When the peso depreciates, prices of imported raw material and semi-processed good rise, making exports more costly to produce and, therefore, less competitive. The steady depreciation of the peso—thanks mainly to TRAIN-caused inflation—has been a magical contributor to the deterioration in Philippine merchandise trade, its whopping $26 billion deficit in 2018’s first eight months.
The charge sheet against TRAIN is powerful. It has caused great damage to the economy. It almost amounts to a case of gross economic mismanagement.
Congress need to give TRAIN a long, hard second look. The increases in fuel excise taxes are a good place to start.