Next round of oil tax increase suspended

PHILIPPINES - In Brief 15 Oct 2018 by Romeo Bernardo

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The Department of Finance (DoF) announced over the weekend that the executive will suspend the second round of oil tax adjustments under the TRAIN law that were supposed to come into effect in January. The adjustments involve a P2/liter increase in excise taxes imposed on fuel prices, importantly diesel and gasoline (3-4% increase based on current prices), on top of the P2.50/liter implemented this year. The suspension is automatic under the law if the average 4Q18 Dubai crude oil price “reaches or exceeds $80/bbl”. With Dubai crude oil currently above $80/bbl and futures prices for the remainder of the year close to that level, the DoF decided to make an early judgment call to “proactively anchor inflation expectations.” The DoF estimates that the suspension will cost government P41.6 billion in foregone revenues in 2019 or about 0.2% of GDP. With the budget deficit for 2019, projected at 3.2% of GDP, already higher than the original 3% target and with the IMF calling for a more neutral fiscal stance, we expect that there will be more cutbacks in spending in response to the lower expected revenues. Given the upcoming election season, this would not necessarily be bad for economic growth assuming that the tighter budget space gives technocrats more leverage to weed out inferior projects in favor of more selective spending, particularly for infrastructure projects that would ease supply bottlenecks and raise potential growth, rather than simply repair works.As to domestic prices, the suspension of oil tax adjustments is the latest measure adopted by the executive to help rein in inflation and inflation expectations. Last month, it issued Administration Order 13 allowing...