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18.3.2.3 Fiscal Decentralization Issues

18.3.2.3.1 Macroeconomic Stability

Former DBM Secretary Benjamin Diokno questioned the rationale and viability of the 40% mandated share of IRA from the internal revenues. He noted the important role of the national government in managing macroeconomic stability given the fiscal problems confronting the country. The 40% share had no functional or computational basis; rather, it was a result of political grandstanding in Congress, where both the former senate president and the Speaker of the House during the LGC deliberations, had the intention of running for the presidency in 1992 (Diokno 2003). Thus, there would have been political incentives for them should they receive the support of local governments.

Some economists believe that the arguments to increase the share of local government in the national budget and broaden the taxable items (including sharing of centrally collected taxes) may face the risk of leading the country into serious macroeconomic stability problems; perhaps there is a lack of recognition that the country suffers from serious fiscal restraints, e.g., budget deficit and the increasing debt service payments.

The central issue is the equitable redistribution of resources from richer to poorer local governments, which can only be done by central government through a good fiscal transfers system. Obviously, poor local governments have low tax bases, which by increasing their revenue powers will not necessarily make significant gains to raise their revenue compared to geographically rich ones.

18.3.2.3.2 Policy Design Issues of the Internal Revenue Allotment

Manasan’s (2007) policy notes on the IRA design issues and challenges10 categorized the criticisms on IRA into four major issues: (1) vertical imbalances, (2) lack of equalizing feature in the IRA,

(3) disincentive effects on local revenue generation, and (4) poor predictability of IRA. As a result, the current IRA design leads to the inadequacy of funds for LGU expenditure functions, i.e., the cost of devolved functions,11 creation of mandatory positions, unfunded mandates, and 20% DF. It widens the geographic disparities in human development outcomes and level of economic development. It tends to provide a substitutive effect for tax revenues of provinces and cities. And finally, the non-appropriation in full, i.e., 40%, or the untimely release of IRA (between 1998 and 2004), has undermined the effective planning of LGUs.

Observers of the implementation of the LGC have articulated apprehensions about the insufficiency of IRA for the devolved functions and the payment of salaries for devolved personnel; uncertainty of receiving their estimated IRA shares; problem of equality of sharing among levels of LGUs; and the responsiveness of the criteria (i.e., population, land area, and equal sharing) to the funding needs of poorer LGUs (Ilago 1997). The “IRA formula has bias for cities,” which paradoxically have higher revenue earning capacities to finance the delivery of services (Gatmaytan 2001). Evidence has also shown that the IRA formula has a counter-equalizing effect; the per

10This paper perhaps summarizes Manasan’s analyses on the IRA issue since she wrote, “Intergovernmental Fiscal Relations, Fiscal Federalism, and Economic Development in the Philippines” in 1992. PIDS policy notes are observations and analyses by PIDS researchers on certain policy issues to provide useful inputs for decision making.

11In an earlier study, Manasan argues that computation for the cost of devolved functions covered only the personnel and facilities transferred to LGUs, and the maintenance and operating expenses (MOOE); not the “true cost” of devolved functions.

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