Inquirer Editorial

Editorial : Twin poisons

AROUND this time last year, 11 economics professors from the University of the Philippines prodded the government to adopt far-reaching fiscal reforms to narrow down the budget deficit and reduce its debts. Unless the needed reforms were taken, the group warned, the economy could collapse within two years, bringing chaos and violence such as those experienced by Argentina.

Picking up the warning, the administration of President Gloria Macapagal-Arroyo quickly put together an economic reform package that focused on raising new taxes and improving tax collection efficiency. The centerpiece of the program was the expansion of the value-added tax (VAT) to increase the rate to 12 percent from 10 percent and to lift the exemption given to some strategic sectors and products, like petroleum and electricity.

After several months of heated debates and administration arm-twisting, the measure was finally passed in May. The point man for the administration's economic reform package was the chair of the House committee on economic affairs, Rep. Joey Salceda of Albay province.

Now Salceda is again in the news, arguing not for collection of expanded VAT but deferment of its implementation. Collection of the tax has been put on hold temporarily by the Supreme Court, following a petition by the opposition questioning the constitutionality of some of its provisions. But Salceda says that even if the Court finds the law constitutional, the government should not collect E-VAT on oil products and power in the meantime, because to do so could trigger an economic meltdown.

Oil price increases in the first half of the year, Salceda pointed out, have pushed inflation to 8.4 percent, raised manufacturing costs and slowed down economic growth. With crude prices rising to $67 per barrel, imposing VAT and allowing the oil companies to recover the added cost would send gasoline prices above P40 a liter, he said. The higher cost of oil as well as electricity is "likely to stoke a second run of inflation and kill whatever growth impetus we have." Thus, he proposed that the government suspend the collection of the VAT on oil products and electricity until the international price of crude settles at $50 per barrel. "It would be fiscal folly, nay suicidal, to insist on its implementation at this point, even if there were no political crisis," he said.

That was not, of course, how the administration and Salceda sold the expanded VAT to his legislative colleagues and to the public. During the debates on the bill, what the administration deemed suicidal was the failure to pass the measure, since it would put in serious doubt the government's ability to pay its debts. Without the expanded VAT, it was then said, the country risked a credit rating downgrade, raising interest rates and limiting its ability to borrow from international financial institutions.

Little has changed since the time when the bill was being debated in Congress. The country's debts have not diminished. The budget deficit, which once seemed likely to narrow, is widening again, as both the Bureau of Customs and the Bureau of Internal Revenue failed to achieve their collection targets in July. And while crude prices have recently registered record highs, their upward trajectory was there for everyone to see. Sen. Joker Arroyo has said the possibility that crude would soar to $70 per barrel was already "factored" into the debates on the expanded VAT.

The more significant change apparently is not to be found in the economic field but in the political arena, where the President now finds herself fighting for survival amid accusations that she stole the election. Senate President Franklin Drilon said the Salceda proposal was a "trial balloon" to determine if the administration could get away with the non-implementation of a law that could be politically disastrous for the President. Senator Arroyo said the administration was engaging in "doublespeak" so that the President could "survive the political crisis," a view shared by some opposition senators.

Once again politics seems to be muddling an issue that should be weighed very carefully, given the serious implications of acting either way. But this is the sad reality President Arroyo has to face, now that she is being threatened with impeachment: that her every move will be suspected of being driven by the need to ensure her political survival. With suspicion polluting the air, it is difficult to see how the country can deal effectively with economic problems that demand the Filipinos' full attention and cooperation to overcome, like soaring crude prices and a crushing debt burden.