Business World,  
18 January 2012


Philippine decentralization had a good start in the ’90s with the approval of the Local Government Code in 1991. But fiscal decentralization has suffered a policy reversal, based on the local government units’ fiscal behavior during the last decade. Local governments have become dependent on grants from the central government. Local budget priorities were misplaced. And there were distinct moves towards re centralization of both health and social welfare services.

The recent global crisis has added to the fiscal decentralization woes. As a result of the recent global economic crisis and its aftermath, many governments are now faced with ballooning deficits and deepening poverty. The Philippines is no exception. Its fiscal flexibility is now threatened. The perceived fiscal space enjoyed by the national government is illusory, a result of severe underspending for vital infrastructure, rather than stronger revenue structure and tax machinery.

As a result, the push for fiscal decentralization may have to take a back seat as the government addresses the more serious problems of fiscal sustainability and deepening poverty. The Aquino administration’s goal of inclusive, sustained and vigorous growth (in the neighborhood of 7 to 8% GDP growth) may not be achieved without running into large deficits in future years. Put differently, the Aquino government cannot afford to increase the internal revenue allotment (IRA) of local governments without losing its macroeconomic control of the budget.

The dip in revenues in 2009, an aftermath of the slower economy, has resulted in lower IRA in 2012. This has increased pressures on the national government to make up for the reduction through various means. But why can’t local authorities observe a “hard budget constraint?” Why can’t they tighten their belts or raise more local taxes? The fall in IRA was totally anticipated since the IRA system is formula-based and is computed based on fiscal data three years before.

The Philippines should choose between fixing its long-term fiscal problems or pushing forward decentralization reforms. At this time, I think the focus should be on fiscal sustainability and better delivery of public services first, before fiscal decentralization.

Who should address poverty and income redistribution problems?

Theory and practices dictate that income redistribution, poverty reduction, fiscal equalization is best addressed under a centralized, rather than a decentralized regime.

In the face of rising, or at best, stagnating poverty, what should be the government’s priority — reducing poverty or deeper fiscal decentralization?

While the current formulation of the IRA is mildly equalizing — with 25% distributed equally among LGUs, 25% based on land area, and 50% based on population — it needs further enhancement. But any attempt to change the present IRA formula is unlikely to succeed. Any equalization grant which should be in the form of a specific grant with matching component may be incorporated in the annual budget. This appears to be the best solution.

Weak link

Mechanisms for holding elected local authorities accountable for performance should be strengthened. Right now, they are virtually non-existent. The present electoral system has failed us: badly-performing local authorities are likely to get reelected as the good-performing ones.

What is lacking is a consistent, timely, regular, and unbiased set of indicators that would compare one province against other provinces, a city against other cities, and first class municipalities with other similarly situated municipalities. The set of performance indicators should be published, akin to the World Bank Governance Index. The set of indicators will be published online in what is called Hall of Fame and Hall of Shame. Local governments will be ranked on the basis on the overall performance indicators.

Hopefully, the report will be used by citizens in holding their local chief executives accountable for their performance. Citizens may also used the information in deciding whether to move or stay in their own local communities. In the economics literature, this mechanism is known as “voting with the feet.” Citizen-voters move to the community that is consistent with his demand for local public goods and local tax system.

This mechanism requires better information to be gathered systematically by designated government agencies (National Statistics Office, the Commission on Audit, and the Bureau of Local Government Finance of the Department of Finance). Local chief executives shall be required to submit a report on the key outputs and outcomes in the core areas of devolved services. All these information will be put together by a government think tank that is removed from partisan politics (for example, the Philippine Institute for Development Studies or the Philippine Center for Economic Development).

In the spirit of transparency and fiscal accountability, annual and quarterly fiscal data should be disaggregated by region, province, and cities, sector, and expense class (economic classification). The new data system should have the following characteristics: first, all national and local data should be consistent with the IMF-GFS (1986/UN’s Classification of Functions of Government (COFOG) categories; second, national government expenditures should be disaggregated by region, province, and cities; and third, the expenditure reports prepared by the Commission of Audit, the Department of Budget and Management, and the Bureau of Local Government Finance (BLGF) should be made consistent. Any serious student of local public finance knows that the numbers and the level of disaggregation and categories of data collected by the three government agencies are not consistent with each other.

Admittedly, a system of evaluating local government performance already exists. But it is self rating. And unless local authorities are saints and can objectively rate themselves, the system is flawed. But using and enhancing the existing system and assigning its generation to an unbiased government think tank or academic institution maybe a good move.

Publishing the performance evaluation results in the web, on a annual basis, may enhance its usefulness. And with the competition for citizen-voters and their approval, it might improve the responsiveness of local authorities to the preferences of their constituents, and thus the level and quality of local public services