Income inequality remains an issue in the Philippines, despite robust economic expansion



Over a decade of robust macroeconomic expansion has driven the Philippines to the forefront of regional economies, with personal consumption driving GDP growth and a swelling middle class expected to attract foreign investment in the coming years. However, despite a strong emphasis on poverty reduction and income equality in policies, poverty and income inequality remain persistent even as GDP growth approaches 7%.

Income inequality has become a particularly pressing issue, given the government’s moves to launch the Tax Reform for Acceleration and Inclusion (TRAIN), driving inflation to exceed central bank targets three months after its implementation. Public subsidies will mitigate the worst of the near-term shocks, improved food production could help the longer-term outlook.

Rising Consumption

Private consumption has underpinned rapid economic growth, though it remains somewhat volatile. According to the World Bank, household final consumption has soared since 2006, rising from $91.2bn to $143bn in 2010, $206bn in 2014 and a 10-year high of $224bn in 2016. The Philippine Statistics Authority (PSA) reported that total household expenditure increased by 8.34% in both 2016 and 2017, to P10.7trn ($211bn) and P11.6trn ($229bn), respectively.

However, household consumption as a percentage of GDP has fluctuated over the same period, accounting for 74.6% in 2006 before hitting a 10-year low of 71.6% in 2010. Consumption was then worth 74.2% in 2012, 72.5% in 2014, 73.8% in 2015 and 73.6% in 2016.

Inequality

In a March 2017 report, the Asian Development Bank found that income inequality is increasing: together with China, India, Indonesia and Russia, the Philippines is not seeing equality rise with GDP growth. Indeed, the PSA reported elevated poverty incidence across five of nine basic indicators, with the poverty rate estimated at 21.6% in 2015, the most recent year for which statistics are available. Farmers, fishermen and children of low-income families posted the highest poverty rates of 34.3%, 34% and 31.4%, respectively.

While improving, the country’s Gini index – a measure of income distribution resembling total equality (0) or total inequality (100) – is also elevated, standing at 42.2 in 2012 and 40.1 in 2015. Between 1985 and 2015 the Philippines never dropped below 40 on the index. Unemployment has also been on the rise, and underemployment persists, leaving low-income people vulnerable to economic shocks (see overview).

TRAIN 

Although the government’s socio-economic development strategies emphasise poverty reduction and inclusive growth, inequality could worsen after TRAIN’s first package came into effect on January 1, 2018. TRAIN reduced personal income tax, with the average worker set to gain P20,000 ($395) a year, but also expanded the value-added tax (VAT) base and introduced new charges on alcohol, tobacco and sugar-sweetened drinks. Inflation hit 4.3% in March 2018, exceeding the central bank’s 2-4% target (see analysis).

High inflation is especially challenging for low-income Filipinos, but the government is working to protect the most vulnerable: in February 2018 the Department of Finance announced plans to offer P200 ($3.95) of monthly cash subsidies to 7.4m low-income families to offset TRAIN’s inflationary impact. This is in addition to government investment in nationwide infrastructure projects, social programmes and free university tuition at public universities and colleges that should help reduce inequalities in the medium to long term. These measures should help mitigate the worst of the nearterm shocks, but rising unemployment, limited credit access for consumers and small businesses, and rising levels of automation remain significant challenges.

In January 2018 Ernesto Pernia, secretary of socio-economic planning and director-general of the National Economic and Development Authority, lobbied the government to replace quantitative rice import restrictions with tariffs to support investment in agricultural technology and post-production innovation, boosting food self-sufficiency and agricultural incomes.

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The Report: Philippines 2018

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