The Department of Finance (DOF) slammed the proposed removal of fuel taxes, labeling it as an ill-advised and populist measure that would disproportionately burden the poor.

Finance Secretary Benjamin E. Diokno cautioned against the politicians' popular yet detrimental plan to remove value-added tax (VAT) and excise taxes on oil, emphasizing the negative impact it would have on the economy.

“Proposals to suspend VAT and excise taxes on petroleum products are short-sighted, ill-advised, and have serious consequences on government finances and the economy,” Diokno told reporters on Tuesday, Sept. 19.

When fuel taxes are suspended, Diokno said it mainly benefits the richest 10 percent of households who use nearly half of the total fuel.

On the other hand, the bottom half of households only consume about 10 percent of the fuel, he said.

On Monday, the House of Representatives held a meeting with oil industry players to address the oil problem and explore potential solutions, such as a three-month suspension of excise tax, in order to mitigate its impact on the country.

However, Diokno objected, stating that it will fail to provide long-term relief from inflation.

The DOF estimated that the suspension could lead to a substantial revenue loss of around P72.6 billion in the fourth quarter alone, with approximately P31.2 billion in foregone VAT revenue and P41.4 billion in excise taxes at stake.

“Any of the proposals will adversely affect our economic and fiscal recovery, our international credit ratings, and our overall debt management strategy,” Diokno said.

If there are no spending cuts and the entire 2023 national budget is used, Diokno said the government's budget deficit compared to the size of the economy would increase from 6.1 percent to 6.4 percent.

“This will also result into higher public debt-to-GDP [gross domestic product] ratio: from 61.4 percent to 61.7 percent,” the finance chief said.

The estimated revenue loss for the whole year is a significant P280.5 billion, which is equivalent to 1.1 percent of the GDP, according to the DOF.

“The forgone revenues will lead to higher budget deficit: from 5.1 percent to 6.2 percent of GDP, and higher debt to GDP ratio in 2024 from a projected 60.2 percent to 61.3 percent,” Diokno said.

Due to the worsening fiscal situation, Diokno warned that the country faces the possibility of a downgrade in its international credit rating.

“This will increase the risk premium for government borrowings, consequently another round of higher debt servicing,” Diokno said.

“Private sector borrowings will [also] become costlier and have a negative impact on private investment and economic growth,” he added.

Diokno suggested that the most effective solution is to provide targeted subsidies to those who will be most impacted by high fuel prices, such as jeepney operators, farmers, and fisherfolk.

“We did this during the height of the oil price increase owing to Russia’s invasion of Ukraine. This targeted gained the approval of the IMF [International Monetary Fund] and other international organizations,” he noted.

Diokno also said the removal of fuel taxes requires legislative action, which can be a time-consuming process.

“Once the elevated oil prices subside, it may not be easy to restore taxes on oil product. It is politically unpopular.  That’s the political economy of tax legislation,” Diokno said.

“This has serious implications on fiscal sustainability,” he concluded.