The Department of Finance (DOF) yesterday said proposals in Congress to suspend the imposition of value-added tax (VAT) and excise tax on petroleum products will have a consequential impact on the country’s economic recovery, credit ratings and overall debt management strategy.
If the imposition of VAT and excise taxes on fuel are suspended, the DOF estimates that the government will lose P72.6 billion or 0.3 percent of gross domestic product (GDP) in total excise tax (P41.4 billion) and VAT (P31.2 billion) on fuel products for the last quarter of 2023.
The DOF said these projected revenues are already programmed under the 2023 budget to fund priority government projects and programs of the administration, such as social services and infrastructure.
In a statement, Finance Secretary Benjamin Diokno referred to the proposed suspension of fuel excise tax as “regressive” and “inequitable” as this will only benefit the top 10 percent of Filipino households who consume nearly half (48.7 percent) of the country’s fuel, compared to the bottom 50 percent households that only consume around 10.2 percent.
“Removal of taxes is a popular move for politicians. But legislation takes time. Once the elevated oil prices subside, it may not be easy to restore taxes on oil product. It is politically unpopular. That’s the political economy of tax legislation. This has serious implications on fiscal sustainability,” Diokno said.
The DOF pointed out that foregone revenues, as a result of the suspension of fuel tax, will lead to an increase in the country’s deficit levels, from 6.1 percent to 6.4 percent of GDP in 2023, thus undermining the government’s fiscal consolidation strategy.
According to Diokno, revenues lost will mean additional borrowings and interest for the country, resulting in higher debt-to-GDP ratio in 2023, from a projected 61.4 percent of GDP to 61.7 percent of GDP.
Likewise, foregone revenues amounting to P280.5 billion or 1.1 percent of GDP in total excise tax (P168.2 billion) and VAT (P112.3 billion) on fuel products for full-year 2024 will lead to higher fiscal deficit, from 5.1 percent to 6.2 percent of GDP, and higher debt-to-GDP ratio from a projected 60.2 percent to 61.3 percent.
Higher deficit and debt ratios will adversely impact the country’s credit rating status, increasing the risk premium for government borrowings and consequently result in another round of higher debt servicing, the DOF said.
This will also affect private sector borrowings, which will become costlier and negatively impact private investment and economic growth.
“Higher borrowings now will further increase our interest payments and deficit in the future, while reducing fiscal space for crucial social and economic programs,” Diokno said.
The DOF is proposing the timely distribution of targeted subsidies to vulnerable sectors who are most affected by the high fuel prices (i.e. jeepney operators, farmers and fisherfolk) as the appropriate policy response.
“We did this during the height of the oil price increase owing to Russia’s invasion of Ukraine. This gained the approval of the International Monetary Fund and other international organizations,” Diokno said.
“We recognize public sentiment to address the elevated fuel prices. However, as government, it is our responsibility to be cautious in implementing policies that could negatively impact the macro-fiscal stability and sustainability of the country,” he added.
Diokno stressed that the government must continue its spending, particularly on infrastructure projects, to support the Philippines’ sustained economic recovery.
“When you formulate policy, you always think of what’s the greatest good for the greatest number,” Diokno said.
Meanwhile, policy think-tank Infrawatch PH joined the clamor to suspend the collection of VAT on oil products.
“We urge President Ferdinand Marcos Jr. to issue an executive order to fast-track the suspension of VAT on oil products. Every moment counts. An executive order can provide immediate relief to millions of Filipinos affected by the unabated price hikes,” said Terry Ridon, Infrawatch PH convenor.
Ridon said the group supports call to review the 25-year old Oil Deregulation Law which “has long outlived its usefulness.”
