A very significant development is happening in the local landscape, which is going to be greater originators of public spending with several serious implications.
The Supreme Court ruling in the Mandanas-Garcia case (2018, reiterated 2019) mandates that the 40 percent share of local government units (LGUs) from national taxes should be based on all national taxes not just internal revenue taxes. Custom duties, heretofore excluded, should be included in the computation. And this is a big chunk of government revenues. The estimate is that the LGUs’ 40 percent share of Php 847.4 billion under the present way of computation would balloon to Php 1.1 trillion in 2022 when this ruling will be first implemented. That’s Php 252 billion in difference, about a 30 percent increase. The LGUs’ share should no longer be called IRA (Internal Revenue Allocation), as it has been generally referred to, but NTA, for National Tax Allocation.
Some major implications of this development are:
1. The reduction of the government’s share of national taxes materially brings down its funding sources for services and projects heretofore undertaken by it. This forces the Executive branch to fully devolve to LGUs some of these services and projects, as their funding can no longer be provided by the national government as before. Consequently, the national government is driven to perhaps merge national agencies or even abolish them, and to downsize manpower.
2. LGUs are acquiring expanded fiscal autonomy, a core objective of the Local Government Code of 1991. It is a greater public spending power that affects not just their local concerns but the interest of the national economy.
3. This public spending power carries in turn serious responsibilities for their proper use aligned with national development goals.
4. Also, this public spending power requires a level of competence on the part of LGU officials and their administrative staff in the exercise of fiscal responsibility. Are they equipped and ready?
If it has taken this long for the full devolution of public services from the central to the local government as envisioned, there were usually two main reasons: The LGUs were not ready to take over the duties of devolved functions; and they did not have the funds. Now, they have more funds and the national government seems forced to devolve more functions, ready or not.
The LGUs can use some help in their capacity-building, to competently and confidently perform their expanded duties of devolved authorities and responsibilities. The private sector can offer this help, for everybody’s good purpose.
Our economic managers have been reported to say that the Mandanas-Garcia ruling “will create a fiscal problem” that would result in “unmanageable budget deficit.” So they propose to pass on to LGUs the cost of some public services now funded by the national budget.
Nevertheless, the Executive branch is already preparing for the transfer of some executive functions to LGUs as they take a greater share of the national taxes that are precisely meant to fund those devolved responsibilities and services.
What are some of these Executive branch functions or services that could be fully devolved to LGUs? Here’s an enumeration:
- Local physical infrastructure projects like roads, bridges, school buildings and related facilities
- Health services, like hospitals
- Agricultural services
- Drainage systems
- Waste management systems
- Social welfare services
- Sports facilities
- Housing projects
- Jails
- Environmental services, e.g. pollution control, community-based forestry, small-scale mining
- Tourism development
- Modernization of tax collection system
In other words, what this enumeration suggests is that we should move to truly make a full devolution effort to LGUs as the Local Government Code has conceived. The Mandanas-Garcia ruling is pressing us to do so.
There is a much-awaited Executive Order to prescribe the way to further devolve some specific functions of the Executive branch to LGUs as a consequence of the LGUs’ enhanced share of national taxes. But even now, the DBM and the DILG are conducting orientation sessions with LGUs for hopefully orderly implementation of the Supreme Court ruling in 2022. We need to monitor developments closely because there is a major shift in the power of public spending.
Santiago F. Dumlao Jr. past president of the Finex, is the current Secretary-General of the Association of Credit Rating Agencies in Asia.
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