By Elijah Joseph C. Tubayan, August 31 2018; Business World

Image Credit to Business World

THE MEETING last Wednesday of state economic managers and members of the Consultative Committee to review the 1987 Constitution failed to dispel worries about the fiscal impact of the draft federal charter, whose fate now lies with Congress.

Arthur N. Aguilar, who led the consultative body’s subcommittee on economic reforms, said in a telephone interview on Thursday that his group told state economic managers that there are “more than ample provisions in the constitutional design that ensure fiscal prudence.”

But Finance Secretary Carlos G. Dominguez III said more clarity is still needed on the fiscal impact of the proposed changes to the current Constitution.

Mr. Aguilar said much of their discussions last Wednesday revolved around the proposed revenue and expenditure sharing between the federal government and the federated regions.

“The 50-50 share is only in four taxes,” he said in a telephone interview yesterday, referring to income, excise, value-added tax and customs duty, meaning that the federal government will still get bulk of overall revenues.

Federated regions will have exclusive power to collect 12 taxes and fees while the federal government will collect all other levies.

“So the revenues, it’s about two-thirds federal and one-third federated regions,” said Mr. Aguilar.

“Expenditure finance follows functions. There are 21 exclusive powers of the federal government, 15 exclusive powers for the federated regions. Each exclusive power carries a budgetary implication.”

All other spending will be shared between the two governments.

“We’re just shifting marbles from one to another. We’re not creating a bigger pie,” Mr. Aguilar explained.

He also assured that “federated regions cannot incur indebtedness outside the guidelines of the federal government.”

Economic managers earlier warned that the proposed changes could cause the fiscal deficit to balloon beyond the prescribed three percent-to-gross domestic product (GDP) ratio.

Moody’s Investors Service last month flagged the planned shift to a federal form of government as a risk to the Philippines’ credit rating, which now stands a notch above minimum investment grade with a “stable” outlook.

The National Economic and Development Authority’s (NEDA) had cautioned that the proposed changes to the constitution could add 1.0-1.6 percentage points to the three percent-of-GDP fiscal deficit ceiling.

“In terms of the split, they said it’s a 50-50 split in terms of the revenues. But when we looked at the share in spending, it can actually go up to 80-20 if you consider debt payments,” NEDA Undersecretary for Policy and Planning Rosemarie G. Edillon told reporters late Wednesday after the meeting.

She noted that the draft federal charter was “not clear” on whether spending responsibilities will be shared in terms of subsidies, tax expenditures, financial expenses and capital outlays.

Ms. Edillon said that the government faces P156.6-243.50 billion in additional expenses — including personnel services and maintenance and operating expenses — in the first year of implementation of the new charter. She said that this does not include the cost of “around P10 billion to establish the new offices” in federated regions.

At least in the first few years of operation, therefore, the new government form “will impede the delivery of goods and services” and lead to “inevitable disruptions to the economy’s growth momentum and progress in infrastructure improvement efforts.”

The NEDA official said that there will also be “unquantifiable economic costs; repercussions and externalities [that] include impact on foreign direct investments and international trade, reaction of credit rating agencies to fiscal deficit and debt effects.”

After the meeting last Wednesday, Mr. Dominguez told reporters still that “We need more clarity, that’s all.”

“The document that was produced lacks clarity on these specific issues. We are not against federalism. It’s just that these things need to be clarified.”

The consultative committee submitted its draft to both chambers of Congress in July.

“Actually it’s already in Congress,” Mr. Dominguez said. “So it’s up to Congress already.”

Budget Secretary Benjamin E Diokno told reporters on Thursday that “the real decision makers here will be Congress,” adding that economic managers’ main concern was to “control the deficit.”

“That’s the major constraint: the size of the deficit.” — Elijah Joseph C. Tubayan