INSIDER VIEW | Fiscal courage needed as oil shock hits economy

The United States of America and Israel bombed Iran with no prior notice to the rest of the world and now the specter of an old-fashioned oil crisis is at hand for the millennial generation. 

The baby boomers have lived through more than one oil crisis already and thankfully survived through a combination of grit, grace, prayer, and humor. 

Hopefully, saying “sa ikauunlad ng bayan, bisikleta ang kailangan” will not mean a visit from a humorless military, as what was rumored to have happened to a TV personality in 1972.

Ma. Teresa S. Habitan

"Fiscal policy is pragmatic, unpopular but it allows for a more balanced and nuanced metric to determine who gets what from a fast-dwindling pool of resources."

Limited options

Governments can only do so much, especially in a country which imports almost all its oil requirements. 

Any solution is costly and impacts the budget. Excise taxes on fuel products are likely to be suspended anytime soon, taking away at least P150 billion to more than P200 billion from the government’s revenue stream, depending on how long the suspension will last, whether half or an entire year. 

This will either expand the deficit or reduce the budget for government services. Such a situation cannot last for long; after all, in moments of crisis, the government still needs to act for the least of its citizens. And much like during the strictest COVID quarantine conditions in 2020, it is once again the poorest Filipinos who will bear the brunt of reduced budgets and will need the most help from the government to make ends meet.

Risky fixes

Even more insidious as a stopgap solution to minimize the increase in oil prices is to once more establish an oil price stabilization fund, or the OPSF. 

The OPSF was a 1984 phenomenon intended to cushion the effect of increases in the world prices of petroleum products. It lasted until 1998 when it was abolished. 

At the beginning, oil prices were still government-regulated, with oil companies requiring official approval to adjust prices. The OPSF shielded consumers from the immediate impact of fluctuations in global oil prices. Prices did not adjust in real time. Oil companies were compensated by the OPSF for delaying price increases. 

At the same time, when global oil prices declined, they could continue charging higher pump prices. During these periods, they deposited into the fund, creating a buffer from which they could later draw to delay increases in domestic pump prices.

Temporary relief

This was good for a while until it was not. Wars in the Middle East have a way of destroying well-made plans. After Iraq invaded Kuwait in August 1990, in seven months a US-led coalition was formed (unlike the one we have now against Iran) and launched what became the Gulf War of 1991, sending oil prices haywire. 

In the Philippines, this also meant a quicker depletion of the OPSF and the government decision to restore the buffer fund through budget allocation.

This significantly heightened the political cost of increasing domestic pump prices in a highly regulated environment, as well as further reducing fiscal space for priority projects. 

The OPSF added to the government's liabilities. The Oil Deregulation Law lifted the burden on price-setting from the government and rationalized the different impositions on petroleum products to just two: an excise tax and an import duty.

Structural shifts

Interestingly, many people now blame oil industry deregulation for the Philippines having only one remaining refinery, down from three before deregulation.

There could be many business factors behind this development, but certainly the fact that import duty has been standardized at 3 percent for both crude petroleum and refined petroleum imports is a major consideration. 

For one, this tariff set up has made it more attractive for new players to simply become importers of refined petroleum products. They then could set up retail outlets without the major capital investment of a refinery.

With the latest Middle East war still seeing no viable end anytime soon, the government has yielded to the clamor to temporarily suspend excise taxes. 

Policy pressure

And there’s that cohort of legislators also pushing for the abolition of the travel tax, one of the most progressive taxes, especially since overseas Filipino workers are exempt from it anyway. 

So, if one can afford that cruise package to the Bahamas or that pilgrimage to Lourdes, how can one argue one cannot pay the travel tax which has not even been increased in decades?

Life for ordinary Filipinos grows more difficult each day that Trump and the ayatollahs try to out-belligerent each other. 

Hard choices

Instead of suspending the excise tax on fuel products—which would have reduced prices by only P10/liter (gasoline prices have risen by an average of P40 in four weeks— the proceeds could have been earmarked for direct subsidy to the public utility drivers, delivery persons, and yes, even Grab drivers. That would have been more helpful instead of giving the owners of diesel-fed SUVs a break.

Fiscal policy is pragmatic, unpopular but it allows for a more balanced and nuanced metric to determine who gets what from a fast-dwindling pool of resources. 

The only thing is that the pragmatic fiscal policymaker might not have the stomach to bear the brunt of unpopular opinion. If so, then we better be prepared for a lot more pain for longer as the loss of tax revenues combine with higher welfare spending to drive up the deficit.

The medium term fiscal framework has left the room, crying.