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Under TRAIN Law, Consumer Spending Was Supposed to Grow Faster. Here’s What Really Happened

The faster pace of price increases is upending the government’s neat plan
By Elyssa Christine Lopez |

 

 

 

When the Tax Reform for Acceleration and Inclusion (TRAIN) law took effect in January 2018, President Rodrigo Duterte’s economic managers expected consumer spending growth to pick up as employees were expected to receive higher take-home pay. Under the law, taxpayers earning a taxable income of Php250,000 a year or less will be exempted from paying personal income taxes. 

 

Six months into the year, the expected surge in household spending hasn’t happened yet. Quite the opposite, spending growth actually slowed slightly from a year ago.

 

In the first half of 2018, household final consumption expenditure grew from the same period a year ago by a mere 5.7 percent. That’s slightly lower than last year’s growth of 5.9 percent in the same period and the 5.8 percent rise posted in the previous semester.

 

A quarterly look at the figures makes the slowdown more pronounced. From 6.2 percent in the fourth quarter of 2017, growth in year-on-year household consumer spending slowed to only 5.7 percent in the first quarter of 2018 and 5.6 percent in the second quarter. The TRAIN law took effect on January 1, 2018. 

 

Socioeconomic Planning Secretary Ernesto Pernia blamed rising inflation for the slowdown in consumer spending growth. In July, consumer prices rose by a 47-month high of 5.7 percent, way above the Bangko Sentral ng Pilipinas’ target of two to four percent for the year. It is also the seventh consecutive month that the inflation rate has increased.

 

“Inflation would have dampened consumption to some extent,” Pernia said. In the first quarter press briefing on GDP growth, the economic manager even called inflation the “spoiler” to the economy’s performance.

 

Socioeconomic Planning Undersecretary Rosemarie Edillon said a closer look at the items in the consumer basket would reveal that the government’s expectations about beneficial effects of lower personal income taxes remained true. She pointed out that the only reason why consumer spending growth was muted was because of declines in spending for alcoholic beverages and cigarettes. However, spending growth for essential items such as food and household furnishings were still strong.

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“We’re seeing higher spending on food, furnishings, household equipment and routine household maintenance, miscellaneous goods and services. But alcohol beverages and tobacco have really been in the negative,” she said.

 

 “Sin” taxes on tobacco were raised in the wake of the TRAIN law, while the Bureau of Internal Revenue (BIR) has started to implement the long-delayed tax stamps on alcoholic drinks in the first quarter of 2018.

 

“Well, it’s a healthy reduction of consumption,” Pernia admitted.

 

Check out the infographic on this page to find out which consumer items posted the highest and lowest growth in recent quarters.

 

 

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Elyssa Christine Lopez is a staff writer of Entrepreneur PH. Follow her on Twitter @elyssalopz

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