Monday, January 21, 2019

BWorld 283, Public debt, budget deficit and sin tax hikes

* This is my column in BusinessWorld last January 11, 2019.

 When the Philippines public debt reached P7.2 trillion last November, I was curious which among the previous and current administrations were the major debt generators. I checked the Bureau of the Treasury (BTr) website and summarized the numbers below and computed the per year rise in public debt stock.

So it was the short-lived Erap Estrada government (2 ½ years) then the Arroyo (9 ½ years) and Duterte governments (2 ½ years) are tied for second place. The often maligned Noynoy Aquino administration was responsible for some fiscal and borrowing restraints, while registering the fastest average GDP growth rates over six years.

One more thing, the DBM Secretary of Estrada and Duterte where over-borrowing was the norm was my former UPSE teacher, Dr. Ben Diokno.

Governments resort to over-borrowing after they over-spend, whether there is real or imaginary economic crisis. To follow will be to over-tax the citizens today and tomorrow to pay for the ever-rising public debt and welfarism. The big jump in expenditures and the resulting deficit is shown in Table 2.

More deficit, more borrowings, requiring more taxes. Among the usual punching bag by fiscal hawks in government, NGOs and academe is to raise the sin tax endlessly. Congressional bills certified urgent by MalacaƱang is to raise tobacco tax to P60 per pack, from the P30/pack under the Sin Tax law of 2012 to P40/pack under the TRAIN law of 2017, and raise alcohol tax to P40/liter.

I wrote a paper, “Assessment of the Sin Tax Reform Act of 2012” (52 pages) published by the Stratbase-Albert del Rosario Institute (ADRi) in November 2018. Among the things I discussed there is the concept of price elasticity of demand (PED), applied to tobacco and alcohol products. The PED is computed as % change in quantity over % change in prices. It is a measurement of responsiveness of demand when prices go up or down.

If the PED is between zero to one, it is considered as “inelastic” because the % change in demand is smaller than the % change in price. For instance, consumption of tobacco declines by 20% only even if prices have increased by 30% (after higher tobacco taxes).

If the PED is 1 it is considered as “unit elastic” and if it is greater than 1, then the demand is “elastic.” For instance, consumption of alcohol declines or even rises by 40% after prices have increased by 30% (after higher alcohol taxes).

I reviewed some of the literature about PED and I found three: (a) Quimbo et al (2012), cigarettes -0.87, no PED for alcohol; (b) DOF (2012), cigarettes -0.58, also no PED for alcohol; (c) Sornpaisarn et al (2017), alcohol -0.79 for low and medium-income countries, no PED F

I made my own computation based on available data on quantities for alcohol and tobacco and reconstructed prices and their changes, I arrived at the following PED numbers for the period 2013-2016: cigarettes -0.34, beer 0.21, wines 1.14, distilled spirits -0.14, or an average of 0.40 across all alcoholic products.

This means that cigarettes PED of -0.34 is inelastic, a 10% rise in tobacco prices (after tax hikes) resulted only in 3.4% decline in consumption. Government goal of getting more taxes from tobacco is achieved but its goal of significantly reducing smoking incidence is not achieved.

For alcohol products, a positive PED of 0.40 means that there was even an increase, not decline, in consumption. This is because the tax hike was not big unlike in tobacco, while people’s income (income elasticity of demand) has increased overall, and people shifted to lower-priced beer and wine so that overall consumption has increased.

Finally, a note on “over-tax tobacco and alcohol, over-increase funding for universal healthcare (UHC)” movement. First they aim that there should be less smoking and drinking, then they silently aim that there should be more smoking and drinking so that there will be more tobacco and alcohol taxes to fund UHC. These are two diametrically opposed goals.

A better option is that any additional revenues from higher alcohol and tobacco taxes should not go to UHC but to retire and reduce the public debt. Then any savings via reduction in interest payment should go to UHC.

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