Economists differ on TRAIN’s impact on inflation rate

Economists are divided on the possible impact of the first tax reform package on Philippines’ inflation rate this 2018, with some saying the effect will be limited while some raised the possibility of breaching of the target. (Pixabay photo)

MANILA – – Economists are divided on the possible impact of the first tax reform package on Philippines’ inflation rate this 2018, with some saying the effect will be limited while some raised the possibility of breaching of the target.

BPI lead economist Jun Neri, in a Tweet Friday said: “higher excise taxes on oil may not bring us to 4.0 percent headline (inflation) anytime soon.”

On the other hand, ANZ Research, in a study, said  implementation of the Tax Reform for Acceleration and Inclusion’s (TRAIN) first package provides additional upside risks on inflation this year.

“In our view, the tax adjustments will likely push the inflation above the central bank’s target range,” it said, referring to the government’s two to four percent target range for 2018 and 2019.

The study explained that even before the tax reform’s first package was signed into law, upside risk on inflation was seen to come from increase in public transport fares.

Since TRAIN’s first package increases excise taxes on fuel, among others, it is seen to result to higher prices of utilities, tobacco and sweetened beverages, with the latter due also to higher taxes of sugary drinks.

Citing estimates by the Department of Finance (DOF), the study said the tax reform’s impact on inflation is only around 0.4-0.8 percent.

It, however, pointed out that “these estimates take into account the direct and not secondary impact of the tax reforms.”

“Once again, considering the strength of domestic demand, a meaningful secondary impact cannot be ruled out,” it said.

With inflation seen to rise beyond the government’s target range, ANZ Research projects the BangkoSentralngPilipinas (BSP) to  hike its key rates this year, at 25 basis points each in March and May, as it expects credit growth and trade deficit to increase further.

To date, rate of the BSP’s reverse repurchase (RRP) facility is three percent, the repurchase (RP) facility is 3.5 percent and the special deposit account (SDA) facility, 2.5 percent.

For his part, BDO chief strategist Jonathan Ravelas said impact of the tax reform should not be the only focus this year  vis-à-vis inflation  since there are other major factors to consider, particularly the global trend of rising commodity prices.

In an interview by PNA, Ravelas said DOF’s estimates on the TRAIN’s impact on domestic rate of price increases are based on constant prices and not the impact of changing prices not only here but overseas.

He said the cut in personal income tax in the country would provide people additional cash but with prices of commodities rising people would tend to cut back on their spending and play defensive.

Overseas, some central banks such as the US’ Federal Reserve,  the European Central Bank (ECB) and the Bank of Canada have started to increase their respective key rates after implementing bond-buying program a few years back.

Revelas said these two factors will eventually result to faster inflation rate, thus, the need for the BSP to intervene through hike in its key rates or for the government to allow the peso to strengthen.

He said a stronger peso will be beneficial to most Filipinos since, for one, it will allow domestic oil players to have more value for their peso, thus, providing them more capacity to buy oil from abroad at a cheaper cost.

He said strengthening of the local currency will be beneficial to most Filipinos because it will lessen the impact of hikes in commodity prices.

“A stronger peso could be there to support TRAIN because it will also encourage more foreign investors to investment in the country,” he added.