Federal system’s consequential costs

The shift from the current unitary system to a federal form of government may be a turning point for the country: to propel peace and prosperity, or to break up the republic.

But there is scant public information about the federal system and its consequential costs. A shift to a federal system demands a closer scrutiny and deeper study of the issues of governance, allocation and distribution of limited resources among increasing funding for national security and peace, social services and food, and subsidy to new state governments.

The sudden overhaul of the political system will inevitably cause disruptions and drastic structural change. It will have deep implications on the current administrative setup, allocation of national income, realignment of power and responsibility between and among national agencies and local agencies, and between executive departments and agencies in the executive branch.

The advocates of federalism argue that the system will solve the gaping inequality of economic and political opportunity existing under an “Imperial Manila.”

As a consequence, Philippine society earns the dubious distinction of having one, if not the deepest gap in wealth and income in Southeast Asia. Under the present presidential-bicameral set-up of the government, decision-making is said to be heavily concentrated in Manila-based central offices.

Today’s Philippines is even more oligarchy-dominated than at any other time. The gulf between the few who are immensely rich, the labor class struggling to earn a living, and the nearly 10 million Filipinos with absolutely no work and no income is widening rather than closing.

Let’s take a look at the local government units’ capacity to finance their own development and support a self-governing state. Some LGUs have capable leaders and sit on rich natural resources and agricultural land. But the difference in capability and resources are quite stark.

Only a handful of LGUs earn enough from local taxes while the majority is highly dependent on and subsidized by the internal revenue allotment (IRA) they receive from the national government.

Based on 2015 data from the Bureau of Local Government Finance, 110 out of the country’s 144 cities are 50-percent dependent on the IRA and 25 out of 81 provinces are 90-percent dependent on the IRA.

In a federal system, devolution of the entire social services, welfare, and maintenance of local peace and order is ordinarily made to state governments.

Each state government will take care of education, health, social welfare and policing of the residents. State governments will become the first providers of instruction and training, clinics and hospitals, pension and other welfare benefits to their state residents.

Thus, a changeover to a federal system will inevitably have deep implications on the current administrative setup, allocation of national income, and realignment of power and responsibility between and among national and local agencies. This is why an immediate shift to a federal system may neither be affordable nor sustainable.

It may not be affordable because many of the existing regions cannot afford to shoulder the costs of maintaining a state government. A state government will have to pay the salaries of state employees, and pay maintenance costs of local roads, bridges, ports and other infrastructure. They will have to operate their own schools, hospitals, pensions, police forces, judicial courts and legislatures.

In 2016, Dr. Milwida Guevara, former finance undersecretary and CEO of Synergeia Foundation, calculated that the total cost of financing a federal setup in the Philippines is roughly P2.4 trillion. This expenditure will be shared by the state and federal government.

Assuming the current 13 administrative regions will be the 13 federal states, they will pay P1.18 trillion and the federal government, P1.22 trillion. Each state will shoulder P90.79 billion.

None of the 13 putative states — except three — have the capacity to raise that money. Per Guevara’s calculations, only three regions have the adequate taxable capacity — the ability of individuals and businesses to pay their taxes — to be financially viable. These are the National Capital Region with a taxable capacity of P468 billion; Central Luzon with P114.8 billion; and Calabarzon (Cavite, Laguna, Batangas, Rizal and Quezon) with P201.5 billion.

The shift to federalism would need long and deep discussions about taxation, especially about how current national taxes will be collected and shared. Clearly, there will be tightrope walking to strike a balance, where the national government and the 13 local governments get their fair share of taxes.

EDGARDO J. ANGARA, former Senate president