Its effect may be a few years away, but the government has to act now on a serious concern raised by the head of the Duterte administration’s economic team that could bring the country into a fiscal crisis.
The issue stems from a Supreme Court ruling last year declaring that the share of local governments in state revenues should be 40 percent of all taxes collected by government agencies. This new computation is to take effect starting 2022; the high tribunal affirmed the ruling with finality in April this year.
What this means is that local government units (LGUs) should also get 40 percent of the tax collections of the Bureau of Customs, the second biggest revenue earner for the government. Before the Supreme Court ruling, the LGUs’ internal revenue
allotment or IRA came from 40 percent of national internal revenue taxes collected only by the Bureau of Internal Revenue.
Finance Secretary Carlos Dominguez III has warned that the Supreme Court’s ruling would swell the budget deficit from 3.2 percent to 4.1 percent of gross domestic product (GDP)—way beyond prudent levels, and a development that is simply “not acceptable” if the economy is to sustain its growth trajectory.
Simply put, the national government’s revenues allocated for infrastructure and public services will be diverted to LGUs. To be able to fulfill its programmed public expenditures, the government will then have to resort to borrowings.
Such deficit spending tends to raise interest rates as the government competes with the private sector for available loanable funds.
High interest rates, in turn, discourage private sector borrowings from expanding businesses because of the higher cost of borrowing. This will then affect overall economic expansion.
Dominguez offers three possible solutions to the looming fiscal disaster. The first is to pass on additional costs to local governments. The national government can delegate to LGUs the spending on education, health care, agricultural projects like irrigation and infrastructure such as roads, the programmed budget for which is equivalent to the additional 40 percent in Customs collections that will now go to LGUs starting 2022.
The big question is, can LGUs handle the extra money efficiently? Have LGUs, by and large, shown their capability to handle taxpayer money and undertake major infrastructure projects like bridges and highways at the unprecedented levels that the Supreme Court decision would now require?
The second option is for Congress to pass a law that will cut to 30 percent the share of LGUs’ IRA share from all national taxes. Congress, in the first place, enacted the Local Government Code that prescribed how much share LGUs should get from national government taxes.
The third option is for the President to declare the situation as risking an unmanageable fiscal deficit, and return to the original formula.
What is obvious in all these options is that none of them can happen overnight. Delegating, for example, the construction of bridges or airports to local governments will take a lot of planning and basic assessment whether the LGUs are capable of undertaking these projects.
If the national government agrees to devolve more power to the LGUs, this should be accompanied by an agreement requiring bigger responsibility, accountability and transparency from the LGUs in the way the additional IRA will be spent. This, of course, will take considerable time.
The second option will put the fate of the solution to the fiscal problem through the legislative mill, and everyone knows how slowly the process of enacting even a simple law in Congress takes.
One thing working for the government, though, is that the Duterte administration controls the majority in both houses of Congress. The President can certify a remedial measure as urgent, and crack the whip on his supermajority.
The third option, on the other hand, will surely be met by opposition and possible court cases, resulting in protracted litigation. Governors and mayors who want a bigger share of taxes are expected to spearhead the opposition to any unilateral executive action to disregard or ignore the court’s order.
Whatever option is chosen by the government, it should be made as soon as possible, and the stakes explained to the public clearly and persuasively, to prevent a fiscal crisis that could halt the economy’s growth, which is already experiencing a slowdown at this time. Since none of the proposed solutions can be done overnight, the best time to start moving is now.