Tuesday, April 25, 2006

Malacañang flip-flops on EVAT

WE thought all along that Malacañang badly wanted the EVAT implemented to address the budget deficit and balance the budget by 2008. That is why, against widespread protests, the government raised the value added tax on many products including petroleum from 10 to 12 percent, and expanded its coverage to other products that were not previously covered.

When the Supreme Court finally the lifted temporary restraining order that delayed EVAT’s implementation, Malacañang rejoiced, telling the people that the country could now achieve fiscal consolidation, and that soon the sovereign rating agencies including Fitch and Moody’s are going to get nicer with us, thus enabling the country and its entrepreneurs access to cheaper money for economic expansion.

That is why we were surprised by the recent announcement by no less than presidential chief of staff Michael Defensor saying Malacañang might recommend to Congress the suspension of the coverage of the EVAT law on petroleum products, supposedly to help cushion the impact of rising crude prices on goods and services. Defensor even dared Congress to legislate the EVAT amendment on its own without any prodding from the Palace if it believes in the urgency of the measure.

“The Senate can see that the ones to be most affected by this issue are the people so they would surely cooperate,” said Defensor to Palace reporters. “This is not for the President but for the people.”

Why the sudden of heart? How come, all of a sudden it’s Palace officials who are so hell-bent on reversing hard fought reform measure? Why is Malacañang leading the way for policy backsliding?

Certainly, the proposal looks politically attractive but its definitely ridiculous when viewed from economic and governance perspectives. Suspending VAT coverage of petroleum products means we may have to kiss goodbye the objective of consolidating the country’s finances. The initial estimate says the country will forgo collection of at least P20 billion a year, translating in the continuing lack of investments in economic and social infrastructure that is needed for economic takeoff. Albay Rep. Joey Salceda said the government could compensate for the losses by selling more government assets, but we know that this process takes forever to yield money for the government.

The Philippines right now is not attractive to foreign investors for one major reason: policy instability. Leaders could not help but keep on changing policies midstream, thus scaring away investors. Now, Malacañang is going to hurt the country’s image in the international business community even more with another policy backsliding. The country’s credit rating would again suffer. No one will take us seriously anymore; we simply don’t have the guts to implement what it takes to be an economically progressive country. And for what?

The proposed suspension really doesn’t make sense because its impact will only be temporary. Movements of crude prices in the world market are determined by a host of factors beyond Malacañang’s control (e.g. rising demand from China and rest of the Asia-Pacific region; political troubles in the Middle East and Nigeria; the lack of refinery capacity) and its continuing volatility would make a mockery of Malacañang’s proposed tricks to deal with the problem. Supposing Malacañang got its way and suddenly crude prices radically moved again. Will Malacañang restore EVAT coverage or remove it depending on the movement of crude prices? Crazy.

Common sense dictates that the best measure to deal with volatile crude prices is to allow fuel prices to rise to market levels. This is painful but sensible, as real prices necessarily drive fuel consumption. When prices are high, the sensible thing to do is reduce consumption and this could be achieved through old-fashioned energy conservation measures, including the traffic demand management measures. In fact, allowing market forces alone to determine prices would force people to modify their behavior in order to conserve energy. Of course, this policy should be complemented by other means, including encouraging private investments in alternative energy sources (ethanol, biodiesel, natural gas, wind, among others).

It’s apparent that the proposal to suspend EVAT coverage of petroleum products is really all about making political scores—a fair assumption, seeing the recent spate of populist policy announcements. Palace officials were not bothered by one AFP area commander’s reported remarks about issuing shoot-to-kill orders for suspected military rebels. And yet, just a few days before, the President announced the commutation of death sentences of rapists, murderers, and terrorists. Sensing that it was a popular move, Malacañang announced it will work for repeal of the death penalty law.

Early last year, Malacañang told the world the debate on the mining law was over after the Supreme Court ruled with finality that the Mining Act is constitutional. After that, the government and the private sector sent delegates on a roadshow abroad to tell foreign business the Philippines is now open for mining investments. Malacañang also hosted delegations of investors from China and Australia, boasting that soon the economy will be boosted, courtesy of mining money to be poured in by foreign investors. Yet, a few weeks ago, sensing a continuing critical attitude from the bishops about her administration, the President ordered a “review” of the Mining Act. And now, Malacañang is about to commit another policy flipflop with the backsliding on the EVAT law. Does it even matter what the consequences on the Philippine economy will be?

Policy flip-flops are sometimes seen as signs of either a sincere change of mind, a lack of political will, or plain cluelessness. Yet they could also indicate cynical politics at work.

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