By Elijah Joseph C. Tubayan, August 28 2018; Business World


Image Credit to Inquirer.net

THE GOVERNMENT has threatened to invoke a clause in the Local Government Code that allows it to reduce local government units’ (LGUs’) allocation from national taxes if it finds that higher allocations, as ordered by the Supreme Court, will lead to an “unmanageable public sector deficit.”

Budget Secretary Benjamin E. Diokno said that Republic Act No. 7160, or the Local Government Code, allows President Rodrigo R. Duterte to make LGUs share an internal revenue allotment (IRA) pie of as little as 30% of national taxes collected, from 40% under ordinary conditions.

“On the IRA, our response is that there is a provision in the Local Government Code that in the event of an unmanageable public sector deficit, the President has the option to reduce IRA from 40% to 30%. So we’ll use that,” Mr. Diokno said in a panel discussion during the Economic Journalists Association of the Philippines Economic Forum at the Ayuntamiento de Manila on Tuesday.

Asked whether the clause will be the government’s primary means of addressing fiscal risk as a result of the Supreme Court ruling instead of devolving functions to LGUs, Mr. Diokno said: “Yes. It’s provided for in the Local Government Code.”

The court last month ordered the automatic and prospective release of the IRA based on all national government taxes, including collections by the Bureau of Customs — expanding the IRA pie from the current practice of sharing out collections by the Bureau of Internal Revenue.

Economic managers have said that following the SC’s instructions in the upcoming budget will result in a fiscal deficit equivalent to 4% of gross domestic product (GDP) — a percentage point over the 3% cap deemed prudent by many economists, thereby risking a downgrade of the country’s investment-grade credit rating.

“I think the investors will welcome (invoking the clause). It means that we have full control of the fiscal deficit and we are committed of maintaining the fiscal deficit of around 3%. We won’t allow the deficit to increase to about 4%. I think that should be a welcome message to foreign investors,” Mr. Diokno said.

Mr. Diokno also proposed to pass on part of the national budget to LGUs, especially for those operations where LGUs are on the front line, such as conditional cash transfers, the construction of farm-to-market roads, and local health care programs, among others.

However, the economic managers will still wait for the court order to be final and executory before making any moves, after they have filed a motion for reconsideration seeking to clarify the other taxes involved in computing the IRA.

Sought for comment, some economists have said that the move should be credit-positive, and would be fair for LGUs.

“I think that the SC decision endangers our fiscal balance. The Philippines needs arterial infra(structure) that go across many LGU boundaries, not more basketball courts. ‘Build, Build, Build’ targets arterial infra. More money for basketball courts means less money for ‘Build, Build, Build. I support any move that keeps the fiscal deficit at or below 3%,” Raul V. Fabella, a retired professor of the University of the Philippines — School of Economics, said in a mobile phone message.

Bienvenido S. Oplas, Jr. the President of Minimal Government Thinkers, a member-institute of Economic Freedom Network (EFN) meanwhile said in an e-mail: “I think it is fair. If you look at the annual balances of LGUs, they have surplus yearly, P400-P500 (billion)/year [from] 2017-2018.”

Bernardo M. Villegas, an economist from the University of Asia and the Pacific however held that local governments should still get a larger share of national taxes.

“I think that they can just agree to spread out the payment to the LGUs over a longer period (which is consistent with the decision of the Supreme Court) rather than reduce the amounts due to LGUs. This is the way to decentralize effectively the government without the need for federalization.”

“The LGUs will take time before they can raise their own taxes and issue their own municipal bonds. In the meantime, they can already start implementing projects and programs, independently of the national government. This is what decentralization is all about,” Mr. Villegas added. — Elijah Joseph C. Tubayan