This Supreme Court decision made back in 2019, affirmed the right of LGUs to include ALL FORMS OF REVENUE COLLECTED by the national government in the computation of their internal revenue allotments. This ruling will take effect next year. It’s expected to cost an extra P234 billion, about 1% of GDP.
To deal with this, economic managers are looking to shift the implementation of various projects worth P405 billion to LGUs. If the NG fails to devolve such powers, it could put pressure on its international credit rating. If LGUs are not prepared to handle the additional functions, it could spell disaster for the post-Covid response.
This could perpetuate the fiscal inequity between “Imperial Manila” and the rest of the country, as we are about to show.
It was on the eve of another election year in 1991 that the LGC was enacted. When it came to effect, the newly installed Ramos administration sought to lessen its impact by restricting its application to income taxes only. But, responsibility for operating hospitals was devolved straight away causing chaos and confusion.
In 1992, the nation was in the grips of an energy crisis, which crippled the economy. Today, we face a far greater health crisis, which has dragged our economy down. This puts in doubt the ability of agencies at both the national and local level to handle the devolution of powers “seamlessly”.
Based on the LGC, the IRA is allocated to LGUs in the following manner: 23% to provinces, 23% to cities, 34% to municipalities, and 20% to barangays. The split for each follows a weighting based on population (50%), land mass (25%) and equal sharing (25%). The formula doesn’t explicitly take into account fiscal capacity, or lack thereof.
With the SC decision, there is still likely to be a fiscal shortfall nationwide, due in part to lower LGU revenues. But because of the way the IRA is split, there will be regions with a larger fiscal shortfall, primarily in the Visayas and Mindanao, while other regions, like NCR and Southern Tagalog, will do particularly well.
We can clearly see that under a weaker economy, LGUs are expected to earn much less from their own sources of revenue next year. This is according to the Bureau of Local Government Finance. The added IRAs from the national government will make up for some of this, but the devolved functions will add an extra burden on LGUs.
We can see through this modelling that NCR and Calabarzon could actually have a surplus of over 64 billion pesos combined. But the regions outside Imperial Manila will suffer a huge fiscal black hole of over 310 billion pesos! In fact, the farther you go from Luzon, the worse it gets with BARMM accounting for nearly half of this deficit. BARMM’s fiscal problems will be fixed however by a separate allotment under the BOL. Other regions however won’t have such extra allotments anywhere near the fiscal gap remaining.
In NCR, LGUs rely on IRA for 20% of their revenues on average, while in Bicol (Region 5), they are dependent on IRA for 81% of revenues. Manilenos earn about 8x that of Bicolanos, on average, yet NCR and Bicolandia receive an equal share of IRA, at around 66-67 billion. Of course NCR has more than twice the population, but Bicol has 3x its land mass!
This will generate and perpetuate huge inequity across the countryside, as less developed regions will be saddled with a larger fiscal burden. To make things more equitable, our fiscal constitution would need to ensure that every Filipino, regardless of where he or she lives, can expect the same level of service as what the average or best performing regions receive, with the same tax burden.
In the spirit of bayanihan, the Philippines needs to adopt a cooperative model of fiscal governance, that observes fiscal equalisation. The OECD defines fiscal equalisation as
a transfer of fiscal resources across jurisdictions with the aim of offsetting differences in revenue raising capacity or public service cost. Its principal objective is to allow sub-central governments to provide their citizens with similar sets of public services at a similar tax burden even if incomes differ across areas.
Fiscal equalisation means there won’t be winners and losers. The gap between rich and poor won’t get bigger. Residents of poorer regions will have access to the same services as richer ones, at the same standard without having to raise their tax burden any higher.
Apart from preserving the economic inequities of our urban-rural divide, the Mandanas ruling may also have political consequences, not just in 2022, but beyond it as well.
Mandanas will supercharge the ability of NCR’s cities to invest in their people and infrastructure, leading to a different quality of life in the capital compared to the regions in the North and South. This will worsen the political, economic and cultural divide between city and region. Growing inequity will just lead to further polarization and populism.
To address this fiscal imbalance across jurisdictions, a re-weighting of the IRA needs to occur, where richer regions which have a greater ability to raise their own revenues should have their IRA discounted, accordingly. A corresponding positive differential should be made to adjust the IRA of poorer regions to take into account their lower revenue raising capacity or higher cost of service provision.
The NG should also decrease the amount of programs it plans to devolve to the regions, so that the fiscal burden doesn’t fall on their shoulders. Not in 2022 while the Philippines still reels from the consequences of Covid, and where LGUs are on the frontlines in dealing with the crisis.
Continuing down the current path would seem like madness. Rather than eliminating the need for federalisation, as Panganiban claims, the Mandanas ruling might actually accentuate it. This is because clarifying the roles of different levels of government and designing fiscal institutions to handle them is precisely what federalization would bring.
But even Pres. Duterte avoided the topic in his valedictory SONA last July. Mayor Sara Duterte for her part has said in the past that she is opposed to federalization, as it will create mini-fiefdoms which would be dominated by political dynasties. The failure of the Duterte administration to fix the fiscal imbalance across jurisdictions could become one of its unkept promises.
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