No interest rate impact seen from tax reform
THE BANGKO SENTRAL ng Pilipinas (BSP) will not have to adjust interest rates despite inflation pressures from tax reform that has just taken effect, a senior central bank official said, explaining that easing restrictions on rice imports could offset the impact of higher levies on basic goods.
The first of up to five planned tax reform packages — Republic Act No. 10963 — kicked in on Monday, which is expected to generate P82.3 billion in additional revenues in its first year of implementation.
The measure reduces personal income taxes for those earning below P2 million, alongside a simpler system for computing donor and estate taxes.
Foregone revenues will be offset by the removal of some valueadded tax exemptions; increased tax rates for fuel, automobiles, tobacco, coal, minerals, documentary stamps, foreign currency deposit units, capital gains for stocks not in the stock exchange, and stock transactions; and new taxes for sugar-sweetened drinks and cosmetic enhancements.
BSP Deputy Governor Diwa C. Guinigundo said higher taxes on consumer goods will likely drive up inflation, but not at an alarming rate as far as the central bank is concerned.
“We anticipate that the impact on inflation is less than one ppt (percentage point). But that hardly justifies a monetary response from the BSP because the impact is on the supply side,” Mr. Guinigundo said in a mobile phone message when asked about the impact of the tax reform law.
“We shall consider adjusting our monetary stance when second-round effects are triggered because the demand side would be upset, generating demand pressure for higher wages and higher transport fares,” he added.
Split into up to five tranches, the entire tax reform program is designed to shift the burden to those who can afford to pay more, while raising additional revenues that will help finance the government’s ambitious P8.44- trillion infrastructure development effort until 2022.
The government has kept its annual inflation target at 2-4% for 2018 despite the expected impact of the first tax reform package.
In particular, the BSP sees fullyear inflation averaging 3.4% this year, picking up from the 3.2% expected for the entire 2017.
Mr. Guinigundo said this showed that tax reform will not have much impact on overall price increases such that the central bank would have to step in.
The Monetary Board has kept its policy stance unchanged since September 2014, except for procedural cuts to key rates for the shift to an interest rate corridor scheme in June 2016. Manageable inflation and firm domestic demand has allowed the BSP to stand pat on policy settings, as these remain supportive of robust economic growth.
GAME CHANGER
On the flip side, Mr. Guinigundo said monetary authorities expect price pressures from higher taxes to be offset by a proposed law that seeks to allow a bigger supply of cheap rice to enter the Philippine market.
“[I]f Congress is able to pass the rice tariffication bill early enough this year, that could be a game changer because liberalizing rice imports would have the effect of cheapening the general price of rice which accounts for nearly nine percent of the consumer basket,” said the BSP official, who is an alternate member of the National Food Authority Council that sets rules and regulations for rice importation.
“Our initial estimate puts it at around 1 ppt reduction, which on balance could provide some counterweight to the inflationary pressure of the higher excise tax on fuel.”
Quantitative restrictions on rice imports — part of a preferential trade deal secured by the Philippines since 1995 — currently allows the country to limit the volume of rice imports every year in order to shield local farmers from cheap foreign rice.
Once lifted, individuals and businesses can import additional volumes of the crop, but will have to pay a higher tariff.
The BSP has been backing the lifting of rice quantitative restrictions as it would have “beneficial” effects to inflation.
Tariffs collected by the government are expected to support mass irrigation, warehousing, and rice research, Mr. Guinigundo added.
On balance, Mr. Guinigundo said the tax reform is expected to fund additional infrastructure projects that would “increase potential output” of the Philippine economy, and will eventually mitigate price pressures in the long run.
Aggressive public spending and equally upbeat household consumption are expected to spur annual economic growth to a faster 7-8% up to 2022, keeping the Philippines one of Asia’s fastest-growing economies.