The cost of a federal setup

One key consideration in establishing a multilayer government structure is the division of cost. Obviously, allocating responsibilities between different government levels necessarily entails dividing the concomitant expenditures among them.

At this point in our own federalization project, it is still difficult to arrive at specific figures as to its financial impact on the eventual central and regional governments. Nonetheless, I think we can have a preliminary understanding of the cost of federalization if we refer to the current national budget (P3.8 trillion) as a pie to be shared.

Divide the pie then this way: All the government functions to be exclusively assigned to the central government on one side and all the ones exclusively assigned to the local (regional) government on the other side.

The corresponding monetary value of each side of the pie is the amount of money each level of government must respectively raise to be able to deliver its assigned functions under a federal setup.

However, the amount of money on the local (regional) government side represents only one aspect of the cost of federalism. This figure merely covers the amount of money the regions need to raise to properly fulfill the functions assigned to them.

Potentially, another set of expenses they need to pay for are the following:

• Salaries of governors and vice governors of regional governments and their staff, as well as operating expense of their offices.
• Salaries of senators (second chamber) and their staff, as well as operating expense of their offices — three senators per regional government under the PDP-Laban Model 1.0.
• Salaries of members of the judiciary at the state government level and their staff, as well as operating expense of their offices.
• Salaries of state legislators and their staff, as well as operating expense of their offices.
• Salaries of officials and employees of local government units.

The cost to maintain a regional level of government will be hard to estimate with pinpoint accuracy as each region will have different conditions and limitations. But a fair example to use at this stage can be the Autonomous Region in Muslim Mindanao (ARMM).

The ARMM government last year asked Congress for a P34-billion budget. Potentially, each region in the new federal setup would need to raise this level of revenue to support its own bureaucracy. In fact, more regions will probably need to meet a bigger budgetary requirement.

Clearly, the framework laid out here bears on how the fiscal feature of the federal setup is designed — meaning, how the revenue-raising powers of the region are defined in the federal constitution itself.

Should the regions still have a share in the national taxes, or should they simply get block grants? Should regional governments be vested a high degree of taxing powers and, at the same time, be given a huge share in the national revenue collection?

Furthermore, a fiscal equalization mechanism is absolutely necessary to help currently underperforming regions in the transition to a federal system. But where will the money to support this initiative come from? How will it be sustained? And more importantly, which government institution should be responsible in managing this program?

Needless to say, assigning fiscal responsibility over functions shared by the central and regional governments will be a big challenge in itself. But this will definitely be influenced by how the issues previously raised are addressed in the federal constitution.

These are utterly crucial matters to consider in the proposed shift to a federal setup. We certainly do not want a repeat of what happened in the implementation of the Local Government Code of 1991, where the devolution of functions was not followed by the devolution of funds.

Critically, however, federalization has become even more challenging given that there are now three competing groups (the Senate, the House of Representatives and the administration’s consultative committee) vying to come up with a draft constitution.

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Lawyer Michael Henry Ll. Yusingco is a nonresident research fellow at the Ateneo School of Government and a lecturer at the School of Law and Governance of the University of Asia and the Pacific.