Coupled with skyrocketing world oil prices, the E-VAT would hike prices of basic goods and services, forcing Filipinos to borrow heavily just to meet their basic needs.

By Joseph Yu
IBON Features
Posted by Bulatlat 

The country's poorest families will find themselves even more indebted once the expanded value-added tax (E-VAT) law is finally implemented.

The E-VAT is the centerpiece measure of the Arroyo Administration's revenue generation package to address the government's fiscal crisis. It is estimated to generate P28-30 billion from July to December 2005 and P97-P105 billion in 2006. 

Coupled with skyrocketing world oil prices, the E-VAT would hike prices of basic goods and services, forcing Filipinos to borrow heavily just to meet their basic needs.

Although the Supreme Court issued a temporary restraining order (TRO) in July halting the law's implementation, it is expected to lift the TRO soon.

Increasing expenditures, debt

The immediate effect of the E-VAT law's implementation will be to remove VAT exemptions on petroleum, electricity and professional fees of doctors and lawyers, among other vital sectors. This will automatically mean higher pump prices and electricity bills, not to mention charges for legal and medical services.

A study by the government National Statistical Coordination Board (NSCB) showed that removing VAT exemptions and zero-rate privileges on petroleum products, independent power producers (IPPs) and medical and legal fees will increase household consumption expenditures by 1.9 percent. Using data from the 2003 Family Income and Expenditure Survey (FIES), this would increase the average expenditures of the poorest 10 percent of Filipino families by some P40, the poorest 20 percent by P61 and the poorest 30 percent by P77.

Since these families are already in debt, any additional increase in expenses as a result of the E-VAT will force them to borrow even more.

The poorest 10% of families, for example, would see their monthly debt grow from P155.25 to P195. For a family who may be eking out an uncertain and irregular livelihood in the informal economy, this amount is substantial.

To further add to their woes, these families only have access to credit from informal sources, usually the neighborhood usurer who lends money under the 5-6 scheme (or 20% interest).

It should also be noted that the NSCB estimate is "above the 'normal' inflation rate," meaning that expenditures would be further bloated by the inflationary effect of hikes in these vital sectors apart from the effect of the E-VAT itself.

The E-VAT law, moreover, allows the president to increase the vat rate to 12 percent in January 2006 from the current 10 percent if the following conditions are met: the budget deficit accounted for more than 1.5 percent of gross domestic product (GDP) or if VAT collections surpassed 2.8 percent of GDP. Both of these conditions are certain to be met; in fact, the Department of Finance had already expressed its intention to hike the VAT rate next year.

The NSCB said the additional 2 percent VAT rate hike will increase the cost of household expenditures by 1.4 percent.  For the poorest 10 percent this means yet another increase in monthly expenses of P29. Thus, the E-VAT will hike the monthly expenses of the country's poorest families by at least a combined P70, raising their average monthly debt to P224.

High oil prices

Many Filipinos may also have to turn to charcoal stoves, since the prices of liquefied petroleum gas (LPG) are expected to rise the highest among petroleum products as a result of the removal of E-VAT exemptions.

According to Department of Energy (DoE) estimates, LPG prices will rise to P422.92 per 11-kg cylinder from the present P392.50, a 7 percent increase. Prices of unleaded gasoline were also seen to rise substantially, from P32.43 per liter to P35.23. Diesel, however, would have the lowest increase, from P30.45 to P31.15 per liter. Note that these hikes already take into account the "mitigating measures" government has put in place to soften the impact of the E-VAT, such as reducing import duties and excise taxes.

The DoE also admitted that the estimated prices are still below international prices for petroleum prices, which may be further adjusted depending on the prices of crude oil in the world market.

DoE figures showed that the regional benchmark Dubai crude surged to an average of $56 a barrel in the first 18 days of August, more than $3 higher than the July average of $52.83. Dubai crude had hit a record high price of $57.80 a barrel on August 12.

Since the start of the year, domestic gasoline and diesel prices have both increased 15 times by a total of P7.85 and P7.55 a liter respectively. Pump prices of gasoline may increase further by P2.50 to P3 a liter, and diesel by P0.50 a liter, if oil prices remain at present levels.

Consumers also have to contend with higher energy bills. The National Power Corporation (Napocor) has estimated that consumers will have to pay an initial P0.203 per kilowatt-hour generation charge once the TRO on the E-VAT is lifted, which is seen to be reflected in October billings. But after three months this would increase to P0.228/kWh because of the 70 percent creditable input VAT cap.

This increased charge is on top of iniquitous charges (such as the purchased power adjustment) in electric bills to service the onerous contracts of the IPPs, which have contributed to their near-doubling.

At the expense of the people

Despite widespread popular disapproval, the Arroyo administration still insists that it will implement the E-VAT, calling it a necessary sacrifice. This only highlights how government remains occupied with improving its fiscal condition along lines most acceptable to foreign ratings agencies and creditor institutions, even at the expense of the people's welfare. Because of Arroyo's pro-foreign and pro-elite policies, Filipinos find themselves poorer, hungrier, sicker and more ill-educated and badly-housed than ever.

In order to make E-VAT acceptable to the people, government claims that the additional revenues generated will be used for social services. But the finance department has already earmarked 100 percent of E-VAT proceeds for 2005 towards debt servicing, 70 percent in 2006, 60 percent in 2008, and 50 percent by 2010. And this may be subject to further adjustment due to the delay in E-VAT's implementation.

Government considers the passage of the E-VAT law as a major achievement towards fiscal stability.  But this only highlights how far the local economy is from the ideal of serving the people's needs. The E-VAT will bring more suffering to millions of Filipinos. This is not an achievement but a very real economic failure. IBON Features / Posted by Bulatlat

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