https://www.bworldonline.com/opinion/2023/09/26/547660/financing-growth-a-rice-tariff-cut-an-mup-pension-cut-and-reforms-in-excise-tax-in-mining-oil-and-coal/
(Part 4 of a series)
There were lots of business developments last week, but I will comment on just the four issues below. The reports in BusinessWorld on each subject will provide more context about the issues:
1. Rice price control and tariff reduction: “DoF defends plan to cut import tariffs on rice” (Sept. 19), “Rice import tariff cuts should not depress farmgate prices — NEDA” (Sept. 20), and, “Key Palace meeting to review rice price controls next week” (Sept. 21).
2. The military and uniformed personnel (MUP) pension reform bill: “Key MUP pension reform clause out” (Sept. 20), and, “House version of MUP reform may still pose fiscal risks” (Sept. 22).
3. Mining tax reform: “House OK’s mining fiscal regime bill” (Sept. 19), “Margin-based mining tax bill in line with industry guidance” (Sept. 19), and, “Miners see fiscal bill boosting investment, gov’t revenue” (Sept. 24).
4. Proposed suspension of the oil excise tax: “Lawmaker pushes 50% tax cut on coal, other oil products” (Aug. 20), “Gov’t to lose up to P73B from fuel tax suspension” (Sept. 20), and, “Lawmaker calls for relaxation of biofuel requirement to ease oil prices” (Sept. 21).
Before I discuss these, the economic managers — Finance Secretary Benjamin Diokno, Economics/NEDA Secretary Arsenio Balisacan, and Budget Secretary Amenah Pangandaman, issued a statement last Friday, Sept. 22, about a recent survey on the declining trust of the performance of the Marcos Jr. administration. They argued:
“As surveys are primarily based on perceptions, not facts, let it be clear that on GDP growth, the Philippines’ real GDP growth of 5.3% in the first semester of 2023 in fact proved to be highest among emerging markets in the ASEAN-6, beating Singapore, Malaysia, Indonesia, Vietnam, and Thailand. It was also the third fastest growing economy among Asian countries with available GDP data…”
The economic managers are correct.
In a table, I expanded the comparison of growth performance to more countries. Groups A and B are the big East Asian economies plus India, Group A countries are the fast-growing and Group B countries are the slow-growing Asians in 2023. Group C countries are the biggest economies of North and South America, and Group D countries are the biggest European economies except Russia.
The Philippines had the third fastest GDP growth in the first half (average for first and second quarters or Q1 and Q2) of 2023 among these countries.
When it comes to commodity prices, the Philippines indeed has the highest inflation rate in 2023 among major Asian neighbors (see Table 1).
So, with the bad global and regional economic environment, the Philippines’ growth of 5.3% (6.4% in Q1 and 4.3% in Q2) was already high, so the economic team and the administration deserve praise and commendation. But since this fact is grossly if not deliberately omitted, one can suspect that the attacks on growth deceleration have some element of a political hit job.
The same can be said about our inflation rate. There is the possible deliberate omission of two points. One, our high inflation this year is based on low inflation last year, whereas it is the reverse for Thailand, South Korea, and Singapore. Two, the Americas and Europe have high inflation in 2023 based on already high inflation in 2022, this would be horrible news if this happened in the Philippines.
Now on to No. 1, food inflation and rice trade liberalization. The proposed tariff reduction from 35% (ASEAN-origin like Thailand) and 50% (non-ASEAN origin like India) to zero and 10% is a brilliant move by the economic team. The purpose of import tariffs is to make cheaper goods from abroad become expensive at home in order to protect domestic producers, but this penalizes domestic consumers. The economic team is correct in this move. Their priority is mainly protecting the consumers, helping reduce inflation without necessarily abandoning the food producers. Certain farmer organization leaders are wrong in their continued “penalize rice consumers” lobby.
On No. 2, the MUP pension reform, the House version is practically no reform because full indexation of the pension is retained, and only new recruits will start contributing to the fund. Why call it pension reform when there is no reform? The Senate should consider the following: all incumbent MUPs should contribute to their own future pensions, indexation should be discontinued or disallowed, and pensioners should contribute to the fund via taxation of the monthly pension.
On No. 3, mining tax reform, I was one of the speakers and discussants in the panel on Day 2 of the Mining Philippines 2023 conference last week, Sept. 19-20, at Edsa Shangri-La Hotel. The main presenter was Department of Finance (DoF) Undersecretary Karlo Adriano. Mr. Adriano recognized that the country’s mining tax system is complicated and non-attractive to many potential players who could come in. Consider one of his slides: on top of taxes are two royalties for indigenous people (IP) and on mineral reserves (MR) (see Table 2).
So, the four DoF proposals are: 1.) simplify the mining fiscal regime, 2.) raise the royalty tax outside mineral reservation from zero to 3%, 3.) raise the windfall profit tax from zero to 1-15%, and, 4.) provide thin-capitalization, ring-fencing, transparency, and accountability.
I support the DoF’s proposed reforms. In particular, the shift in taxation from gross revenue to profitability like windfall profit, and the simplification of tax payment, both proposals are good.
Finally on No. 4, the proposed suspension of fuel excise tax, I support this — provided that any projected revenue reduction should be covered by a corresponding spending cut by the same amount, and/or that some existing VAT exemptions should be lifted and those businesses and services should pay VAT.
I argued for these when I was interviewed by Cito Beltran last Thursday, Sept. 21, in his daily program Agenda on Cignal TV, One News Channel.
The other proposal, to cut the coal excise tax, is also good. Before the TRAIN law of 2017 (RA 10963), the coal tax was only P10/ton, then this became P150/ton. Coal power provides about 63% of total electricity generation in the Philippines versus wind+solar’s contribution of only 2.8% of total power generation. So, if we want cheaper electricity, the cost of coal as fuel should decrease, not increase. In future bills amending the TRAIN law, this should be put on the table.
A cut in energy taxes does not necessarily lead to overall revenue losses. Cheaper energy means lower cost of doing business in the Philippines, which will attract more investments and businesses that will pay other taxes and expand overall revenue generation.
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See also:
BWorld 639, Energy realism: Why we need more coal, gas and nuclear power plants, September 28, 2023
BWorld 640, Financing growth: PEB in Qatar and UAE, mining tax, and liberalized wage setting, Sept. 29, 2023
BWorld 641, Power generation mix and fiscal irresponsibility, October 01, 2023.
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