If government continues to tighten its belt over spending for much-needed infrastructure, this might become a trend and would be detrimental for the country’s long-term growth.
As such, Karl Kendrick Tiu Chua, senior economist at the World Bank for the Philippines, said the public would start to feel this in longer hours stuck in traffic; frequent brownouts; and a manufacturing sector with little room to expand.
Chua said that increased government spending in infrastructure will lead to more private sector investment, resulting in exponential growth.
“When you have skyways to cut down traffic, and stable power generation, you will see members of the private sector deciding to set up more factories in the country,” Chua said.
Chua added that with current growth figures, the World Bank forecasts the Philippines to reach a growth ceiling by 2017, making continued growth of above 6% very difficult.
Raise excise tax on gasoline
The government had a difficult time last year in hitting overall revenue targets, worsened by the continuing oil price drop, as the Bureau of Customs cited.
The nearly 50% decline in oil prices already cost the government about P30 billion ($679.42 million) in Value Added-Tax (VAT) alone, Chua stated.
Oil transactions have an additional excise tax, and for gasoline it currently stands at P4.35 ($0.098) per liter – a figure that has not been adjusted since 1996, Chua cited.
Chua said P120 billion ($2.72 billion) or 1% of the gross domestic product (GDP) is the estimated amount that the government has lost as a result of not adjusting for price inflation in 18 years.
Come 2016, Chua sees the deficit in government spending to have a larger impact.
There is very little chance you can raise your infrastructure spending to 5% of GDP if you do not find an additional 2.5% of GDP in revenues, Chua explained.
He added Congress is currently proposing reforms to lower the income tax rate, such as adjusting the 13-month-pay tax bracket, creating a “pressing need to find offsetting measures to bolster government revenue.”
As such, World Bank said a simple and effective measure to boost government revenue is to raise the excise tax on gasoline.
The low fuel prices provides an ideal window of opportunity because consumers would, in effect, still be paying much less for fuel in total than they were 6 months ago, Chua said.
Oil price boon in 2015
For 2015, the World Bank said low oil prices is a net positive for the Philippines because the Philippines is a consumption-driven economy, accounting for 70% of its GDP.
The low price is giving households and businesses a lot of purchasing power. The effect on the GDP is an increase of about 0.3% to date, Chua said.
World Bank director for development prospects group Ayhan Koze said that the group expects global price of oil to hit $53 per barrel in 2015 – a dramatic drop from 2014’s $96 a barrel, based on the average of three 3 oil price markers: Brent, Dubai, and West Texas Intermediate.
Koze also said the global oil price to hit $57 in 2016 and foresees prices to be low for the next 24 months.
“Whether prices go up to levels we have seen last year [would] depend on decisions of major oil producers and geopolitical tensions,” Koze added.
The situation creates strong implications for inflation globally and for oil importing countries such as the Philippines, the decline in oil prices will give policy makers more room to keep rates low, Koze said. – Rappler.com
(US$1 = P44.16)