Press Statement
Retain VAT, But Help the Poor

25 July 2008 -- In 2005, the President, recognizing the risk of a financial crisis if swift actions were not taken, requested Congress to increase the VAT from 10% to 12%. That, with other measures, averted the crisis. Today, there is another crisis, one of the rapidly escalating cost of oil and other commodities. Reaction from some has been to call for a moratorium on the collection of the VAT on oil.

But this is not a short term crisis to weather. This is a long term reality we must learn to live with. Oil prices will remain high, even go higher.

Removing VAT on oil would benefit the rich far more than the poor as the rich consume far more oil than do the poor. The benefit to the poor would, in fact, be marginal. Of the total oil consumption, the rich and upper middle class account for 40.3%; the lower middle class, 54.3%; and the poor, a mere 5.4%, according to the latest available family income and expenditure data.

Also it cannot be assumed that there is indeed a windfall of "excess revenues". VAT on oil is projected to be P18.6 billion above target for this year (it was P9 billion in excess of target in the first half). But with industries slowing down as people consume less, streets clear as people use cars less, and profit margins are squeezed (some companies will even suffer losses), the tax base falls, so the "excess revenues" from VAT on oil simply offsets the likely below-target performance elsewhere.

The minimal 0.6% improvement in tax collection in the first quarter includes the higher-than-target VAT collections on oil. So without it, there would have been a shortfall. The downward adjustment in economic growth by the government itself indicates the difficulty to be expected in meeting targeted revenues of P1.109 trillion.

Without the "excess revenues" from the oil VAT, it is estimated that collection would be short by about P19 billion this year, even if we assume that the minimal improvement in tax collection efficiency in the first quarter is sustained. And if the oil VAT is entirely removed, the shortfall would be P73 billion (the originally projected yield of P54 billion plus the P19 billion shortfall in other taxes).

In short, the government would have already incurred a budget deficit even before the contemplated extra spending of P93.6 billion just to grow the economy by a modest 5.7%. If the deficit from this additional spending is included, the risk of a fiscal crisis increases.

The interaction throughout the economy is quite complex. Simplistic solutions, like doleouts or removing VAT on specific sectors, could do more harm than good. So before anything is decided, it should be carefully, fully researched. Then, and only then should a decision be made.

If it is decided it is necessary to directly help the poor, then Congress should be asked to pass a supplementary budget. That budget should be used to give projects to the poor like repairing roads, filling potholes, building classrooms, putting in small irrigation dams and bridges, and many more. Something like the Emergency Employment Agency of President Diosdado Macapagal in the 1960s should be considered. Money should only be given for work done, never given for nothing. This demeans a person, and quite simply doesn't work.

Requiring people to work for the money would have the additional benefit of not just a short-term stimulus to the economy as people spend that money, but also a long-term improvement in the infrastructure for the economy to grow. And for people to then get full-time jobs.

Ad hoc, quick fix solutions will not solve the problem, they may even worsen it. Jobs are what the poor need, that is where the focus must lie. Removing VAT and continuing the doleouts won't do it.

Action for Economic Reforms
Financial Executives Institute of the Philippines
Makati Business Club
Management Association of the Philippines