World Bank urges RP gov’t not to lift VAT on oil

The World Bank has urged the Philippines to ensure that the increase in oil prices does not compromise its fiscal position, stressing that it should not remove the tax on oil. “As the country comes off several years of fiscal consolidation by lowering deficits and raising revenues, it will be important that the oil shock does not reverse hard won gains,” the World Bank said.

The multilateral lender said that in the short to medium term, revenue increases will also allow the Philippines to bolster its expenditure program to undertake much overdue investments in physical and human capital. It would be important that the Philippines continue to monitor the impact of the oil price shock on the poor and contemplate mitigating measures if necessary, the World Bank added.

The World Bank said fuel tax reductions can compromise revenue objectives as taxing fuel is one of the easiest ways to raise revenue – both because collecting fuel taxes is relatively straightforward and because the consumption of fuels as a group is relatively price and income inelastic.

“Third, from a fiscal standpoint, any measures taken by the administration that would weaken the fiscal stance will reflect negatively on markets and is likely to increase borrowing rates for the Philippines,” the World Bank said. “Any such impact would have additional severe consequences on the fiscal situation.”

The World Bank said losses in revenue ultimately mean less resources for the government to fund its priority programs to help Filipinos. In light of these considerations, the Philippines should resist the temptation to cut taxes in the short-term and take the time to develop a longer-term strategy to contend with higher oil prices, which are likely here to stay, the World Bank added.