The Philippine Institute for Development Studies (PIDS) has endorsed targeted financial assistance for Filipinos facing rising oil prices. This recommendation comes as an alternative to the removal or suspension of the value-added tax (VAT), which could negatively impact government finances.
A Countercyclical Approach
In a recent discussion paper, PIDS emphasized a consumption-focused and time-bound fiscal strategy. They argue this approach, which they describe as 'countercyclical,' would be more effective compared to a 'cyclical' fiscal policy.
A countercyclical fiscal policy involves increasing government spending or providing relief during economic downturns to boost demand, contrasting with a procyclical approach that tightens fiscal measures during slowdowns.
Our findings suggest that the effectiveness of countercyclical fiscal policy in supporting sustained macroeconomic growth depends on prudent and adaptive policy design.
Philippine Institute for Development Studies
PIDS highlighted the importance of maintaining fiscal space and credibility, enhancing automatic stabilizers, and ensuring that fiscal interventions are well-targeted.
Context of Rising Inflation
This recommendation aligns with the current energy crisis triggered by conflicts in the Middle East, which has driven inflation to 7.2% in April and slowed economic growth to 2.8% in the first quarter.
PIDS cautioned against the outright removal of VAT or excise taxes on fuel, stating such measures are fiscally burdensome, poorly targeted, and hard to reverse.
Current Government Response
The government's primary response to the energy crisis is the Unified Package for Livelihoods, Industry, Food, and Transport, which includes targeted fuel and transport subsidies.
PIDS warned that indiscriminate tax suspensions could worsen economic downturns by compromising fiscal sustainability and distorting long-term price signals.