DOF: Subsidies to vulnerable sectors will address elevated fuel prices

The Department of Finance (DOF) recommends the timely and targeted distribution of subsidies to vulnerable sectors as the best course of action to address the impact of increasing fuel prices.

“We recognize public sentiment to address the elevated fuel prices. However, as government, it is our responsibility to be cautious in implementing policies that could negatively impact the macro-fiscal stability and sustainability of the country,” Finance Secretary Benjamin E. Diokno said in a statement on September 19, 2023.

The DOF maintains that Congress proposals to suspend the imposition of value-added tax (VAT) and excise tax on petroleum products under the Tax Reform for Acceleration and Inclusion (TRAIN) law will have a consequential impact on the country’s economic recovery, credit ratings, and overall debt management strategy.

Secretary Diokno referred to the suspension of fuel excise tax as “regressive” and “inequitable”, noting that the move will only benefit the top 10 percent of Filipino households who consume nearly half (48.7 percent) of the country’s fuel, compared to the bottom 50 percent households that only consume around 10.2 percent.

The DOF is proposing the timely distribution of targeted subsidies to vulnerable sectors who are most affected by the high fuel prices (i.e. jeepney operators, farmers, and fisherfolk) as the appropriate policy response.

“We did this during the height of the oil price increase owing to Russia’s invasion of Ukraine. This gained the approval of the [International Monetary Fund] and other international organizations,” Secretary Diokno said.

If the imposition of VAT and excise taxes on fuel are suspended, the DOF estimates that the government will lose PHP 72.6 billion or 0.3 percent of gross domestic product (GDP) in total excise tax (PHP 41.4 billion) and VAT (PHP 31.2 billion) on fuel products for the last quarter of 2023.

These projected revenues are already programmed under the 2023 budget to fund priority government projects and programs of the Marcos Administration, such as social services and infrastructure.

Secretary Diokno stressed that the government must continue its spending, particularly on infrastructure projects, in order to support the Philippines’ sustained economic recovery.

Forgone revenues, as a result of the suspension of fuel tax, will lead to an increase in the country’s deficit levels––from 6.1 percent to 6.4 percent of GDP in 2023, thus undermining the government’s fiscal consolidation strategy.

According to the Finance Secretary, revenues lost will mean additional borrowings and interest for the country, resulting in higher debt-to-GDP ratio in 2023, from a projected 61.4 percent of GDP, to 61.7 percent of GDP.

Likewise, forgone revenues amounting to PHP 280.5 billion or 1.1 percent of GDP in total excise tax (PHP 168.2billion) and VAT (PHP 112.3 billion) on fuel products for full-year 2024, will lead to higher fiscal deficit from 5.1 percent to 6.2 percent of GDP, and higher debt-to-GDP ratio from a projected 60.2 percent to 61.3 percent.

Higher deficit and debt ratios will adversely impact the country’s credit rating status, increasing the risk premium for government borrowings, and consequently result in another round of higher debt servicing.

This will also affect private sector borrowings, which will become costlier and negatively impact private investment and economic growth.

“Higher borrowings now will further increase our interest payments and deficit in the future, while reducing fiscal space for crucial social and economic programs,” Secretary Diokno said.

The Marcos administration is committed to sustaining the country’s strong fiscal standing through prudent fiscal management and well-calibrated solutions.

“When you formulate policy, you always think of what’s the greatest good for the greatest number,” Secretary Diokno said.