Business World, 15 January 2013


The evidence that the Aquino administration is using the powers of the presidency to enhance the victory of the ruling party in the 2013 and 2016 elections is written all over the national budget. The most obvious politically motivated budget items embedded in the 2013 general appropriations act are the discretionary 1-billion fund for additional grant to local governments and the 250-million Empowerment Fund. Both funds are to be disbursed by the Secretary of the Department of Interior and Local Government (DILG).

An unwanted consequence of such measures is to make local governments weaker, not stronger, making them more dependent on budgetary aid coming from the central government.

The use the budget for political purposes is inconsistent with what the late President Corazon Aquino has envisioned when she empowered local governments through the Local Government Code (LGC) of 1991. Interestingly, it is more consistent with raw use of power by his predecessor, Gloria-Macapagal Arroyo, who selectively dispensed public funds in exchange for exacting loyalty from elected local officials.

After more than two decades of serious fiscal decentralization, our national leaders have failed, by and large, to make local authorities more fiscally responsible, by making them less dependent on the central government for their own finances.

If the desire to make local chief executives more fiscally responsible, then it is the responsibility of the President — through the DILG Secretary — to impose “hard” budget constraint. In brief, Malacañang should have a clear message to local authorities of the 80 provinces, 143 cities, 1,493 municipalities, and 42,028 barangays: live within your means.

Local government units (LGUs) are entitled to the Internal Revenue Allotment (IRA), an unconditional grant, that is automatically released to them. In fact, it is also automatically appropriated, meaning Congress does not have to appropriate it annually.

Since the IRA is formula-based, its distribution and release is non-political. Political allies and foes alike receive IRA without making a request from Malacañang.

The IRA is equivalent to 40% of internal taxes collected three years from the reference year. Thus the IRA in 2011 was based on tax collections in 2008, the IRA in 2012 on tax collections in 2009, and the IRA in 2013 on taxed collections in 2010. LGUs may also raise their own taxes based on tax responsibilities assigned to them. In addition, they may borrow money to finance capital projects.

The IRA is quite significant. It was 286.9 billion in 2011. It dipped to 273.3 billion, or by 4.7% in 2012, because internal revenues declined in 2009 as a result of a weaker economy as the world economy slowed. But with the rebound in internal taxes, the IRA has bounced back to 302.3 billion in 2013.


Responsible local government authorities should learn to live within their means. And the big brother, the national government, should refrain from offering temporary funding to local governments. Lower IRA resulted from lower national revenues which suggest that the national government’s finances have weakened too. Both should adjust.

A lower IRA in 2012 has given “populist” politicians justification for funding a program called “Local Governance Performance Management Program-Performance Based Challenge Fund for Local Government Units.” Clearly, a politically motivated program. In 2012, this program has an appropriation of 753.7 million, or close to one billion. The release of the fund is discretionary, not formula-based, and thus could be subject to political bargaining.

In 2013, the appropriation for this Fund was raised to 1 billion. That’s a huge sum of public funds, enough to exact loyalty from recipient LGUs. On economic grounds, it’s not justified since the IRA will be 29 billion higher in 2013, as IRA increases from 273.3 billion in 2012 to 302.3 billion.

A basic tenet in Economics posit: supply creates its own demand. The creation of additional funding source for local governments is like a magnet, and would naturally attract the attention of local authorities. The use of the additional grant may not pass the benefit-cost analysis, though it may be politically convenient. In which case, it is a wasteful use of public funds.

Worse, it is not justified since the central government has sharply taken over the devolved responsibilities of local governments. LGUs are supposed to be responsible for social welfare and basic health care. Local governments are supposed to use the IRA to fund these services.

But the national government has taken over enormous responsibilities for social welfare, working independently from LGUs. The budget for conditional cash transfer (CCT) program has more than doubled in three years — from 21.2 billion in 2011 to 44.3 billion in 2013.

The Department of Social Welfare and Development has implemented the CCT program, basically a devolved function, using a new, parallel organization, and not in coordination with local governments. That’s a formidable army of political campaigners for the 2013 and 2016 elections.

The national government has also taken over, de facto, another devolved function: basic health care. Many hospitals, which were assigned to local governments as part of the LGC of 1991, have already been re-centralized.

The budget of the Department of Health has sharply increased in the last three years. From 31.8 billion in 2011, its budget shoot up to 42.1 billion (32.4% increase) in 2012 and finally to 50.4 billion (19.7% increase) in 2013. In addition, some 13.6 billion has been appropriated in the Unprogrammed Part of the budget which could be funded once the promised additional revenues from the sin taxes are collected.

As a result, the expenditure needs for social welfare and health care have declined while the sources of financing has increased.

Hence, the policy question: with the responsibility for the devolved functions taken over by national government agencies (DSWD and DoH) and with a higher 302 billion-IRA, is there a need for new discretionary funds for local governments? Answer: none.

Why not let local authorities exercise “hard” budget constraint? Answer: enforcing the latter is not politically palatable, giving discretional grants is.


Here’s more  evidence that the national budget is being used for political purposes. A new line item in the budget — Support for the Bottom-up Budgeting Process (Empowerment Fund) has been given an appropriation of 250,000,000 or a quarter of a billion pesos. The amount is not trivial: it is more than one-fourth of the budget of the Department of Budget and Management.

The fund will be used to beef up the capacity of nongovernmental organizations (NGOs) who have been empowered to exercise veto power over the choice of some projects to be funded in the national budget. This is voodoo, not real, “reform.” It will undermine, not strengthen, the institution of representative democracy. We have elected representatives as our “agents” in policy decision-making — not some unelected NGO representatives.

But, of course, the Empowerment Fund will provide the ruling party a huge cadre of publicly funded political supporters for the 2013 and 2016 elections. Clearly, there are better alternative uses for the P250 million.