TRAIN, INFLATION, AND EMERGING DOE PRICE CONTROL

Price control measures are ugly policies to make the ugly tax hikes under TRAIN appear “less ugly” and “noninflationary.”

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 reinflation 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 reinvestments.

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.