Arroyo to Keep Philippine Oil Tax to Fund Spending

By Francisco Alcuaz Jr.

July 28 (Bloomberg) -- Philippine President Gloria Arroyo pledged to hold on to a tax on oil, defying pressure to eliminate or reduce it and help ease inflation, saying the revenue is needed to fund food programs.

The government's move in 2005 to extend the value-added tax to include oil helped the economy prepare for a crisis brought about by surging commodity prices this year, Arroyo, 61, said in her annual state-of-the-nation address in Manila today.

``We've come too far and made too many sacrifices to turn back on reforms,'' she said. The value-added tax on goods like oil products have helped the government ``build a shield around our country,'' and this has ``slowed down and somewhat softened the worst effects of a global crisis.''

Arroyo, who lifted the Southeast Asian nation's growth to a three-decade high of 7.2 percent last year from 1.8 percent at the start of her term in 2001, has seen her legacy threatened by record commodity prices and a weakening global economy this year. A June survey gave the economics scholar the lowest approval rating for a Philippine president in the past two decades.

A year ago, Arroyo looked forward to ending her term in 2010 having ``turned around'' the $118 billion economy with the 2005 oil tax and an increase in the value-added rate the following year that would enable the government to end a decade of budget deficits in 2008. Inflation fell to a seven-year low, the peso rose to a seven-year high and the key stock index climbed to a record last year.

Budget Deficit

Now, surging oil and rice prices have pushed inflation to a 14-year high of 11.4 percent in June, hurting consumer spending and further eroding growth that's already poised to ease as a U.S. slowdown crimps Asian exports. The Philippines imports almost all its oil and is the world's biggest buyer of rice.

The government in May cut its economic growth target for 2008 to as little as 5.7 percent, saying inflation is damping consumer spending in a country where a third of the population lives on less than $1 a day.

Arroyo in May had to abandon her plan to balance the government's budget in 2008 in favor of boosting spending on subsidies and programs to help Filipinos cope with accelerating inflation. The government has said it will use increased tax collection from fuel and oil, bolstered by higher prices, to help fund its additional spending this year.

The Philippines plans to provide at least 4 billion pesos ($91 million) in loans to farmers to help boost rice output, Agriculture Secretary Arthur Yap said today. The funds will come from the government's share in production from an underwater gas project.

`Urban Bias'

Critics including former Budget Secretary Ben Diokno say Arroyo should cut the tax on oil, which lead to higher food prices. The government's cash distribution programs to the low- income group, including one based on electricity usage, ``have a distinct urban bias'' because most of the poor live in the countryside and don't have access to electricity, he said.

The government now projects a deficit of as much as 75 billion pesos this year, from 12 billion pesos in 2007. Still, the government's cash spending was 40 percent less than planned in the first half of this year.

``There's a large gap between rhetoric and action,'' said Diokno. ``She may still want to balance the budget. That's the problem she has to reconcile.''

The state-owned National Food Authority, which subsidizes rice prices, and government-owned electricity producer National Power Corp. are projecting losses this year on higher costs, and Arroyo is distributing cash to low-income groups such as public transport drivers.

In her speech today, Arroyo asked Congress to allow state- run pension fund Social Security System to boost housing loans. Philippine mobile-phone companies have agreed to reduce charges for text messages, she said.

``It's inevitable when a government is facing shocks they will have to give those priority,'' said Agost Benard, associate director at Standard & Poor's. ``What's required is consistent effort to reform the collection agencies and expand the revenue base. Given the reforms of the past several years, the country is in a much better position to deal with these shocks.''

To contact the reporter on this story: Francisco Alcuaz Jr. in Manila at falcuaz@bloomberg.net