Uptrend in inflation not due to TRAIN

Former finance officials and economists from the Foundation for Economic Freedom (FEF) have pointed to higher oil prices in the world market and the increase in food prices that were the result of weather-related developments as the main factors behind the inflation spike in January 2018.

The FEF said January’s inflation rate of 4 percent cannot be attributed to the implementation of the Tax Reform for Acceleration and Inclusion Act (TRAIN), which has built-in safeguards such as unconditional cash transfer (UCT) program to mitigate the price pressures induced by the adjusted excise tax rates under this law.

The January year-on-year inflation rate was within the overall target of 2 to 4 percent set by the Bangko Sentral ng Pilipinas (BSP) for 2018.

According to FEF, the significant economic reforms and fiscal consolidation implemented over the years have given monetary officials and the BSP effective tools to anticipate and ease the inflationary impact of the TRAIN.

“We, the Foundation for Economic Freedom (FEF) agree with the government that the recently enacted TRAIN has not caused inflation to rise in January 2018,” the FEF said in a statement read by its executive director Susan Bulan during a recent hearing conducted by the Senate economic affairs committee.

Bulan told senators at the hearing that “FEF believes the TRAIN has safeguards in place to mitigate any inflationary effects, which as estimated by the Department of Finance to result to a 0.7 percentage-point increase in inflation for 2018 with food prices rising by .03 percentage points and transportation by 0.1 percentage points.

”The correct view on TRAIN, the FEF said, is to look at it as a revenue-generating instrument that will enable the government to spend more on infrastructure, education, health and other social services, which would, in turn, “have a positive impact to the country’s medium- to long-term growth path—and this lifts the poor out of poverty.

”According to FEF, the higher food prices in January were the result of the increases in the cost of fish and vegetables that were affected by weather-related incidents and the lean season for the fishing industry.

Moreover, inflation rose in January because international oil prices increased 19.6 percent while the peso depreciated by 1.5 percent in the past year.

“It is not accurate to look at the TRAIN impact solely from the tax side without reference to expected increase in public expenditures for education and health, which are very progressive,” the FEF said.

The Foundation noted that the UCT program under the TRAIN should be effectively implemented to benefit the poor.

As for the informal sector, it pointed out that “many in the informal sector are not poor, but are exempt by self- election from any income taxation.

”According to FEF, “the TRAIN has provisions for reaching informal sectors, which currently do not pay income taxes,” to help “broaden the tax base which helps reduce the fiscal deficit and inflationary pressures.”

“It is fair that they pay their share of taxes,” the FEF added.