* 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
Malacañang 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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See also:
BWorld 280, Provinces and New Year wishes for them, January 17, 2019
BWorld 281, Trump and Bolsonaro vs Xi and Duterte, January 18, 2019
BWorld 282, CHR on ‘carbon majors’ and fossil fuels, January 20, 2019
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