Between a fiscal rock and a hard place

WITH reports in the past two days indicating that the war in the Middle East may again be taking a turn for the worse, it is worth reiterating that our government needs to apply longer-term thinking to economic relief measures to counteract the dire effects of elevated oil prices and a weakened peso. In a policy note shared this week by the Philippine Institute of Development Studies (PIDS), the warning was sounded, again, that the current crisis threatens to push millions of Filipinos back into poverty, and again makes the argument that targeted cash subsidies, rather than fuel excise tax relief, is the best response to prevent that.

While we do not question the accuracy of the PIDS researchers’ conclusions, as they are, after all, highly skilled and experienced economists, there are reasons for skepticism about the direct subsidy approach. It may, in fact, be little more than the best of several undesirable options, a stopgap measure that will have fiscal consequences that will last well beyond the current crisis.

According to the PIDS study, under what is for now considered the most likely scenario, that is, oil prices at about $105 per barrel for an extended period, with about 35 percent of additional fuel costs on goods production and transportation also passing through to consumers, the national poverty incidence is projected to rise from 13.2 percent in 2025 to 14.4 percent in 2026, pushing 1.34 million additional Filipinos into poverty, mainly households just above the poverty line. A more prolonged crisis extending into next year could raise poverty to 15.3 percent, and a severe disruption involving oil prices much higher than $105/barrel, lasting for a much longer time could raise poverty incidence to 16.3 percent nationally, and up to 22.5 percent in rural areas.

Price shocks related to elevated oil prices are regressive, as poor households lose 16.2 percent of their annual income in terms of purchasing power under the most likely scenario, compared with 3.4 percent for households in the highest income bracket. The issue that the PIDS experts have with universal fuel subsidies — i.e., fuel excise tax suspension and price controls — is that the benefits of those are about four times greater in absolute peso terms for rich households than for poor households, which worsens income inequality.

Emergency cash transfer approach

With all that in mind, PIDS is advocating for an expanded emergency cash transfer approach, suggesting a P6,000 per household per quarter, or P1,500 per individual level. This can be managed through existing programs such as the Pantawid Pamilyang Pilipino Program (4Ps), other programs for elderly and the disabled through the Department of Social Welfare and Development (DSWD), and government-run pension programs. If the emergency cash transfer program is further expanded to newly identified poor not already enrolled in something, the researchers estimate that poverty could be reduced by about 0.6 percent, protecting about 754,000 people. The estimated cost of this approach would be approximately P64.6 billion.

There are three obvious problems with this approach, which again, may still be the best option. First, the budgetary hit to the government would be substantial; P64.6 billion is slightly more than the DSWD’s entire budget for the social protections line item (excluding seniors and 4Ps) for 2026. Diverting these funds to an emergency cash transfer program will inevitably reduce funding for something else, or oblige the government to incur additional debt.

Second, there is reason to question whether the suggested amount would actually be enough to make a difference beyond a very short term. The pass-through costs from elevated oil prices lag increases and decreases in those prices by some period of time, so the effects on household budget would continue, perhaps beyond what an additional P2,000 a month would cover. This would certainly be the case if oil prices continue to rise, but would still happen if they fall, although for a shorter period of time.

Finally, even though cash transfers can smooth household expenditures, they do not really do anything to ameliorate income inequality as is implied by the study. From a certain perspective, cash transfers are not subsidies to households, but rather to businesses. Whereas without cash transfers, household consumption would be reduced, forcing companies to modulate their price increases in order to maintain their revenues, cash transfers simply put the entire burden of elevated prices on consumers.