BSP keeping tabs on how tax reforms translate to inflation

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The Philippine central bank will try to determine the impact of the proposed tax reforms on the country’s inflation path, especially since the US Federal Reserve is also wary of how the Trump administration’s fiscal policies would impact the US economy.

“The Fed chair has also flagged the need to discern the impact of the new fiscal policies of the Trump administration. The latter is not unlike our concern in the Philippines—we are watching out for the final form of the tax reform that will be approved by Congress,” Bangko Sentral ng Pilipinas (BSP) Governor Amando Tetangco Jr. told reporters in a text message on Wednesday.

The latest statement of Federal Reserve Chair Janet Yellen weighed into the debate over spending plans and tax cuts promised by President Donald Trump, as well as potential immigration limits, flagging measures that could bust the budget or slow economic growth. Yellen gave a testimony before the US Senate Banking Committee Tuesday.

Treading carefully but not commenting on specific policies—of which there are few in any case—Yellen responded to a question with a warning that US fiscal outlook has been “a long standing problem.”


With an aging population and rising health care costs, the budget is “already not sustainable,” she told the committee on the first day of her semi-annual testimony, her first since Trump took office last month.

“Some of the policies that are being discussed might well raise deficits and … may also have impacts on economic growth,” she said.

However, there simply is not enough “clarity” on the policies, and the impact on the economy will depend on their “timing and composition,” she added.

For the BSP, Tetangco said monetary authorities “will have to determine the impact of such changes in fiscal policy on the inflation path going forward, keeping in mind the need to distinguish the short term impact versus the longer term effects.”

In January, BSP Deputy Governor Diwa Guinigundo said the proposed tax reforms will add 0.5 percentage point to the inflation rate this year, before adding 0.7 percentage point to 2018’s inflation rate.

The central bank earlier revised upward its inflation forecast to 3.5 percent in 2017 from 3.3 percent, and to 3.1 percent in 2018 from 3 percent.

But the impact of tax reform on inflation will still be “quite modest,” Guinigundo said.

“There are countervailing measures such that when the economy’s potential capacity is increased because of infrastructure and spending on social protection, inflation also slows in the sense that more people will be able to produce and there is more potential capacity to produce. So in the presence of better supply conditions, price movement will moderate,” he explained.

At present, the Department of Finance-proposed Comprehensive Tax Reform Program (CTRP) has been incorporated into House Bill 4774 by the House of Representatives Committee on Ways and Means.

Package 1 of the CTRP aims to lower personal income tax rates as well as donor and estate taxes, while raising the excise rates for automobiles and petroleum products, and expanding the value-added tax base but retaining exemptions enjoyed by senior citizens and persons with disabilities.

Further reforms being considered by the Congress to complement HB 4774 include imposing a tax on sugar-sweetened beverages, indexing the motor vehicle user’s charge to inflation, and granting an amnesty to past estate tax cases.

HB 4774 includes legislated administrative reforms in the Bureaus of Internal Revenue (BIR) and of Customs (BOC), such as the adoption of a fuel marking and monitoring system to prevent oil smuggling–not only to collect the correct taxes but also to ensure that only high-quality petroleum products and not adulterated fuel are sold in the market–along with the use of e-receipts, and the mandatory link of the point-of-sale (POS) systems of establishments directly to the BIR.

Fed rate hike
Tetangco said the Fed has been consistent in stating that it is poised to raise rates and reduce accommodation, but “the timing and magnitude, however, are what remain undetermined at this point.”

Yellen made it clear on Tuesday that interest rate hikes are coming, and could happen at any time.

She presented an upbeat view of the economy, with labor market conditions continuing to improve and inflation slowly inching up to the Fed’s 2 percent target. She confirmed the next rate increase could come at any time.

If those factors continue to improve as expected, “it probably will be appropriate to raise interest rates further,” she said.

Yellen said she could not be specific on the timing, but “every meeting is live”–a signal analysts were looking for, as many have raised the chances for a rate increase at next month’s policy meeting.

The policy-setting Federal Open Market Committee (FOMC) raised rates in December for only the second time in a decade, a year after its first post-crisis increase, but kept rates steady in January.

Providing his view on the latest Fed statement, an analyst said that with the US economy showing strong growth momentum at the beginning of 2017, a number of FOMC voting members, including Fed Chair Yellen, are signaling that the Fed is likely to implement another rate hike during the first half of 2017.

“With consumer spending strong, the labor market close to full employment and sustained expansion in jobs growth, the Fed needs to gradually tighten monetary policy, with IHS Markit expecting a total of three Fed rate hikes this year,” IHS Markit senior economist Rajiv Biswas noted.

With the Trump administration needing time to develop and implement its new fiscal policy program, Biswas emphasized that Yellen has signaled that the Fed’s next rate hike will likely not wait for the final fiscal policy measures of the new US administration.

WITH AFP

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