Press Release
August 24, 2008

Gov't, biggest consumer, also hurt by double-digit inflation
Additional P15.6 billion needed to adjust gov't spending plan to higher prices

The national government, the country's single biggest consumer, is also being adversely affected in a big way by soaring commodity prices, just like most Filipinos, Sen. Loren Legarda, Senate economic affairs committee chairperson, said Sunday.

"On account of higher prices of goods and services, we reckon the government would need an additional P15.6 billion to adequately fund this year's spending program, as outlined in the national budget," Legarda said.

Legarda based her estimate on a Department of Finance projection that government expenditures increase by P2.6 billion every time the inflation rate goes up by a percentage point.

Congress passed this year's P1.24-trillion national budget on the assumption that the inflation rate would average only five percent at most, Legarda said.

However, due to rising oil and food prices, the senator noted that the Bangko Sentral ng Pilipinas (BSP) now expects the inflation rate to average up to 11 percent this year.

"The P15.6-billion is the result of the (six-percentage point) difference between the BSP's 11-percent projection and the five percent presumed in the budget, multiplied by P2.6 billion," Legarda said.

The National Statistics Office reported earlier this month that the nationwide inflation rate surged to 12.2 percent in July, the highest in 17 years.

Inflation is defined as a sustained increase in the general level of prices for goods and services. It is measured as an annual percentage increase. As inflation rises, every peso earned by a household buys a smaller percentage of a product or service.

The July inflation rate meant that consumers had to shell out 12.2 percent more in July for the same basket of goods that they bought in the same month in 2007.

July was the second month in a row that the inflation rate stood at double-digit levels. The inflation rate was 11.4 percent in June; 9.5 percent in May; 8.3 percent in April; 6.4 percent in March; 5.4 percent in February; and 4.9 percent in January.

Thus far, the inflation rate already averaged 8.3 percent in the seven months to July.

"This really underscores the need for the government to aggressively fight consumer price increases, which has been hurting ordinary Filipinos and the government," Legarda said.

Legarda, also chairperson of the Senate committee on social justice and rural development, renewed her call for the government to willfully build up infrastructure spending, particularly for agriculture.

Building up farm systems would not only provide more income for growers and new jobs for rural workers, but also ensure abundant food supply, which is crucially important to fighting inflation, according to Legarda.

"Robust farm production is the best way for us to guarantee affordable food. As long as we have ample supply of food that is within reach of ordinary families, we can fight inflation," the senator said.

She noted that the single biggest driver of unusually high inflation since March was not elevated oil prices, but the surge in the cost of rice, due to previous reports of massive shortages of the staple.

"Food price inflation has definitely been driving up the overall inflation rate. And the only way we can fight this is by producing more food more efficiently," Legarda stressed.

The extra P15.6 billion that Legarda said is needed to adjust the public spending program to higher prices could erode any extra value-added tax (VAT) revenues that the government hopes to collect this year.

The government collected a total of P53.31 billion in VAT revenues in the first six months to June -- P9.6 billion or 18 percent higher than the amount generated over the same period in 2007.

The 12-percent VAT is a buoyant tax. The tax income raked in by the government gets bigger as the prices of "VATable" goods, primarily petroleum products and electricity, increases.

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