With the administration resorting to populist measures in response to the crippling effects of the Middle East conflict, economists warned the government against giving in to the clamor for a wage increase, which they explained would only worsen the economic situation.

The growing clamor by labor groups for a wage hike amid the ongoing oil crisis, which has added upward pressure on inflation, is ill-timed, as small businesses will be forced to either lay off workers or shut down, economists warned on Friday.

Former Finance Secretary Margarito Teves believes that now is “not the right time” for a wage increase, noting that the “priority” should be boosting the food supply, increasing production, enhancing transportation, and expanding resources to mitigate inflation.

Any salary adjustment, he stressed, could be implemented “later on” after the economy and businesses recover from anticipated losses due to soaring oil prices linked to supply disruptions in the Middle East, from where the Philippines imports about 98 percent of its crude oil.

“Inflation is rising because of oil, and this is aggravated by the depreciation of the peso against the dollar,” Teves said.

“I thought that the problems we faced during the 2008–2009 global financial crisis were already severe. But this one is even worse,” the former fiscal manager said.

The measures to address the crisis risk triggering stagflation, a situation of rising prices, a slowing economy and stagnant incomes.

“Government funds are being redirected to social programs, reducing funds for economic growth. That is the dilemma — stagnant growth with rising prices. That’s why the government must meet regularly and speak with one voice,” Teves said.

Earlier this week, labor groups staged a protest to urge the government to dismantle the regional wage boards and called for a mandated increase in the minimum wage to help workers keep up with the rising living, food and transportation costs.

Professor Emmanuel Leyco, president and chief economist of Credit Rating and Investors Services Philippines Inc., echoed Teves’ concern.

He warned that a wage increase at this time, amid higher operational costs driven by the crisis, could disrupt businesses and force small enterprises to shut down.

“We cannot just say ‘raise salaries,’ and that’s it. What about our brothers and sisters who are small business owners? They really can’t afford it,” Leyco said in a radio interview.

Last year, shortly after the House of Representatives approved the proposed P200 wage hike, the government economic team warned that the salary increase could stoke inflation by about two percentage points and may lead to higher production costs.

The President had openly expressed reservations about the proposed wage hike, citing its economic and inflationary implications, as well as its adverse effects on businesses, particularly micro, small and medium enterprises (MSMEs).

MSMEs are considered the backbone of the economy, generating 63-65 percent of the country’s total employment.

According to Leyco, the government should extend assistance to MSMEs to avert an economic downturn through credit subsidies, financial aid, or a tax holiday.

Wage hike impacts jobs

In January, the country’s unemployment rate rose to 2.96 million, or 5.8 percent, from 4.4 percent in December last year, the Philippine Statistics Authority reported.

Leyco projected the figure would climb further due to higher operational costs stemming from the US-Israel war on Iran.

“The implication of that is that many small businesses will be forced to close because they cannot cope with the high production costs of the goods and services they need to sell,” he explained. “Many small businesses will lay off employees or shut down completely.”

The Marcos administration previously targeted 5.5-percent economic growth, though the outcome fell short at only 4.4 percent.

Leyco projected that the growth rate could plummet further because the economy is at risk of slowing down due to the ongoing war.

Teves, on the other hand, forecast that aside from higher inflation and lower gross domestic product, the worsening crisis may push interest rates higher.

He warned that a prolonged war could result in “stagflation,” which could adversely impact the economy and the government’s response.

Because large sums of government resources are being diverted to social aid instead of funding crucial programs, such as food supply and production, Teves stressed that this imbalance can lead to stagnant economic growth while inflation persists.

“That’s why some economic managers are concerned about the excessive support for social programs because there will be less money for the growth enhancement support for line agencies and the Department of Agriculture,” he pointed out.

Teves believes the administration needs to budget its resources wisely, so it could assist vulnerable sectors such as transport workers, farmers and fisherfolk while keeping the economy running to ensure uninterrupted supplies and services.

Excise tax suspension

Proposals granting the President the power to reduce or suspend the excise tax were approved by Congress and are awaiting Palace approval.

Teves proposed a dry run, with the excise tax suspension lasting no more than three months, as the state of the conflict may still change and ease in the months ahead.

This followed concerns by the Department of Finance that suspending the excise tax could cost the government P121.4 billion in revenue loss. However, the projected shortfall could reach P136 billion if the proposed suspension of the value-added tax is implemented. The estimated foregone revenue will cover only eight months, from May to December.

Crisis won’t end soon

According to Leyco, even if the conflict ends earlier than expected, many oil firms in the Middle East have been destroyed by airstrikes.

This means the oil crisis will not be automatically resolved at the end of the war, noting that six months is insufficient for oil production and operations to return to normal.