* This is my column in BusinessWorld on March 5, 2018.
More countries are reporting their January 2018 inflation
rate and it is becoming clearer that majority of them have reigned in the
inflationary pressure of the big rise in world oil prices. West Texas
Instrument (WTI) prices, for instance, rose from $43.2/barrel in 2016 to
$50.9/barrel in 2017, and $63.7/barrel in January 2018.
Of the 13 major Asian economies in the table, 10 have
experienced a decline in their inflation rate compared to their December 2017
level and only three, including the Philippines, have experienced an increase.
But the rise in the Philippines was big 0.7 percentage points (see table).
The big question is: Why is the Philippines the outlier
in Asia in inflation rate movement?
The proximate reason is the recent tax law, RA 10963,
known as the Tax Reform for Acceleration and Inclusion (TRAIN). The cut in
personal income tax was good, but it was more than negated by the tax hike in
oil and other commodities — coal, sugar beverage, etc. The anticipated pass-on
effects of such tax hikes should be big.
How about Japan, which experienced a 0.3% point increase?
There are two possible explanations.
One, it is experiencing a re-inflation trend after
deflation in 2016 of -0.1%, then 0.5% in 2017. Two, it has a tax reform bill in
2018 that includes a 15% tax credit for corporations if their workers have
higher pay of at least 3%, and if domestic investment in depreciable assets is
equal to or more than 90% of depreciation. This means there will be expected
higher household consumption due to higher salaries for workers and managers,
and higher re-investments.
TRAIN’S IMPACT ON ELECTRICITY PRICES
The effect of TRAIN on electricity prices would be felt
in four avenues.
1. Oil tax hike (for peaking plants in WESM), about 1
centavo/kWh.
2. Coal tax hike (P10/ton to P50/ton in 2018), another 1
centavo/kWh.
3. VAT application on electricity transmission charge,
about 6-7 centavos/kWh.
4. Rise in universal charge (a big hike in electricity
cost for many islands and provinces running on gensets/oil, subsidy passed on
nationwide), perhaps another 1 centavo/kWh.
Sources for the first three points are Meralco as
reported in the papers.
EMERGING DOE PRICE CONTROL
Last January, the Department of Energy (DoE) directed all
distribution utilities (DUs) to require their power suppliers, the generation
companies (gencos) to explain any additional charges that will arise from
TRAIN.
Then last February, the DoE suggested that gencos should
absorb the initial cost of higher oil and coal taxes. Meaning there will be no
pass-on to the consumers. This was never done before.
In addition, the DoE also mandated the oil companies
extend subsidies to public utility vehicles (PUVs) as a “cost cushioning
mechanism.” This is another no pass-on policy.
These are price control measures. These are ugly policies
to make the ugly tax hikes under TRAIN appear “less ugly” and
“non-inflationary.”
TRAIN DOUBLE TALK
The architects and apologists of TRAIN are confused and
are engaged in double-talk.
First, they make cheaper oil and coal become expensive,
then deny the potential big inflationary pressure of such a measure.
Second, when inflationary pressure is higher than their
projected and concocted figures, they blame speculators and not the law that
created speculation.
Third, TRAIN exhibited favoritism and cronyism for
renewable energies (REs) like wind-solar because their feed-in-tariff (FiT)
revenues from WESM, then FiT-All, were again exempted from VAT. Natural gas is
also fossil fuel but TRAIN did not slap it with excise tax, only oil and coal.
Fourth, TRAIN’s architects deny that additional revenues
were largely meant to favor Chinese contractors and suppliers because many big
projects that were already under the integrated PPP were reversed and put under
“hybrid” PPP to be financed by ODA and foreign loans from China.
Fifth, they now propose price control measures in energy
and other sectors to make TRAIN look “less ugly” and “non-inflationary.”
The Communist Party of China and Xi Jinping’s “thoughts
on socialism” could be a rising influence in the economic and energy policies
of the Philippines. This is wrong.
The Philippines should stay the course of more market
reforms, not more state interventions and taxation. China’s communism and
dictatorship is a lousy “model” that should never be entertained by the
Philippines and other developing economies.
Bienvenido S. Oplas, Jr. is President of Minimal
Government Thinkers, a member-institute of Economic Freedom Network (EFN) Asia.
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See also:
BWorld 188, Estimating electricity price hikes resulting from TRAIN, March 10, 2018.
BWorld 190, TRAIN, inflation and the stock market, March 15, 2018
BWorld 191, Solar insecurity, energy stability and affordability, March 15, 2018
BWorld 192, Cobalt mining and TRAIN, March 16, 2018
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