2018News

DBCC weighs fiscal impact of LGUs’ bigger IRA share

By Rea Cu, July 24 2018; Business Mirror

https://businessmirror.com.ph/dbcc-weighs-fiscal-impact-of-lgus-bigger-ira-share/

Image Credit to Department of Budget and Management

THE Development Budget Coordination Committee (DBCC) would still have to deliberate​ on the implications of the recent Supreme Court ruling expanding coverage of the internal revenue allotment (IRA)​ due to local government units (LGUs) to include all national taxes, the Department of Finance has said.

Finance Secretary Carlos G. Dominguez III underscored the broad impact of the SC ruling which increases the coverage of the LGUs’ IRA share, a matter that even Fitch Ratings and Moody’s Investor Service have flagged as a possible challenge to the Philippines’s t public finance management program.

“We should communicate that this issue is not a simple matter. Both Fitch and Moody’s have put a red flag as warning regarding this SC ruling. They are fully aware of the [ruling’s] possible risks,” Dominguez said.

The DOF chief, along with Budget Secretary Benjamin E. Diokno, Socioeconomic Planning Secretary Ernesto M. Pernia, Bangko Sentral Governor Nestor A. Espenilla Jr. and Executive Secretary Salvador C. Medialdea are the members of the DBCC.

The intended beneficiaries of the SC ruling should be made aware. Dominguez said that the issue “is not a simple matter” and thus, should be implemented with due care to ensure that the government maintains its strong fiscal position.

Dominguez pointed out that while both credit rating agencies remain bullish on the country’s high growth prospects over the medium term, they mentioned the SC ruling as a possible challenge to effective public finance management.

On July 17 Fitch Ratings announced that it has affirmed the Philippines’s investment-grade rating at “BBB” with a stable outlook, citing the country’s strong macro-
economic performance, growth in investments and private consumption.

“We expect domestic demand to maintain strong growth of 6.8 percent in both 2019 and 2020, which would maintain the Philippines’ place among the fastest-growing economies in the Asia-Pacific region,” Fitch said in its press statement.

However, Fitch noted “the impact on the Philippines’ fiscal balances of a recent SC ruling requiring increased transfers from the central to local government units remains unclear given the uncertainty over the precise timing and content of the ruling.”

It added that “based on our preliminary assessment, the ruling could put upward pressure on the general government debt ratio, as well as creating challenges for effective public-finance management.”

Moody’s also affirmed its “Baa2” rating on the Philippines and maintained its stable outlook, citing the country’s “high economic strength derived from a large and fast-growing economy and improving fiscal strength based on moderate government debt levels and gains in debt affordability.”

“The government has made progress on several facets of the socioeconomic reform agenda that was unveiled at the outset of the term of President Rodrigo Duterte. In particular, tax reform has complemented faster implementation of infrastructure development. As a result, Moody’s expects a broadly stable government debt burden at moderate levels, below 40 percent of GDP, improving debt affordability, and sustained high GDP growth,” Moody’s said.

On Moody’s positive assessment, Dominguez said that this was “yet another recognition of the Duterte administration’s commitment to structural reforms in the economy that would lead to robust and inclusive growth into the medium term.”

Moody’s, however, also noted that “prospective changes to governance frameworks could have negative implications for public finances,” which it said include, among others, “the recent SC ruling that redefines the share of national government revenue to be transferred to local levels of government.”

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