Topic 1: “The Way Forward Towards

Federalism and the Fiscal Implications of

Federalism”

Romulo E. M. Miral, Jr.

December 5, 2017
Outline of Presentation:
• Issues and Challenges
• Fiscal Federalism
• Assignment of Expenditure Functions
• Assignment of Revenue Powers
• Vertical Fiscal Balance
• Horizontal Fiscal Balance
 Diagnostic Framework for Poverty

High Poverty

Lack of Productive Employment Unequal Access to Inadequate

Opportunities Due to Low Opportunities Social Safety nets
Economic Growth

Low Levels of Private Investment
and Entrepreneurship
(allow the Growth Diagnostic
Framework)
Weak Human Capabilities Uneven Playing Field
Unequal Access to - Unequal Access to
- Education Infrastructure and Other
- Health Productive Assets (credit and
- Other Social Services land)
- Poor Governance, Weak
Institutions,
and Deficient Policy

Asian Development Bank (2007). Philippines: Critical Development Constraints

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COMMISSION ON AUDIT, AUDIT PERFORMANCE SUMMARY REPORT
For Calendar Year 2011

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Economic growth and poverty in the Philippines are highly uneven across regions.

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National government and local government shares in total government expenditures,
Philippines, 2009, 2011, 2013, and 2015

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National government and local government shares in total government revenues,
Philippines, 1990, 2000, 2010, and 2015

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 Common Pool Resource

A common resource pool is a resource that is

available for the joint use of numerous individuals
(property of non-excludability) but where the
consumption of the resource by an individual or group
reduces the amount available to others (property of
rivalry in use). Individuals or groups are thus inclined to
use more of these resources but to invest less in their
upkeep. The result is the overuse of common pool
resources or a condition called “tragedy of commons”
(Grossman, 2010).
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 Common Pool Resource Problem

The centralization of revenues created a common

pool resource with its attendant problems:

• Fiscal illusion and weakening of fiscal discipline

• Weakening of allocative and operational efficiency
(“Divide by N”)
• Increasing tolerance of corruption
• Patronage politics and political dynasties
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 Common Pool Resource Problem
On the financing side, it is also the interest of each
sector/locality/group to minimize its share of the tax burden. A
major reason for the Philippines’ weak tax effort relative to its
regional peers is the numerous tax exemptions given to
various sectors and groups, e.g., senior citizens, persons
with disabilities, boy scouts and girl scouts, cooperatives, the
power sector, and the shipping sector. The Philippines’ value
added tax system, for instance, has the highest number of
line exemptions at 143 compared to Indonesia’s 37,
Thailand’s 35, Vietnam’s 25, and Malaysia’s 14 (Department
of Finance, 2017).
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Highly fragmented local government system

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Fragmented local government units + patronage politics = Fragmented government services

National Government Number of LGUs

Provinces: 81
Provinces
Cities: 145
Municipalities: 1,489
Barangays: 42,036
Highly
Component Cities Municipalities
Urbanized Notes:
Cities Provinces are fiscally, the
weakest.
Cities are fiscally, the
Barangays Barangays Barangays strongest.
Cities have the combined
powers of provinces and
Population/voters municipalities.

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Fiscal Federalism
• Expenditure Assignment
• Revenue Assignment
• Inter-governmental Transfers
Taxation: Fiscal Social Contract
• Moore (2007) explained that if the state is dependent on
broad taxation, it is likely to be more responsive and
accountable to its citizens. Since governments’ incomes are
dependent on the taxes that they can collect from their
citizens, governments have a direct stake in the prosperity of
their citizens.
• At the other end, citizen-taxpayers who shoulder the burden
of taxation are likely to be more vigilant about the taxes that
they have to pay and how their government spends the
money.
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Fiscal Equivalence: Vertical Fiscal Balance
• Correspondence between those who receive the
benefits of a public good and those who pay for it
• Links cost to benefit
• Leads to congruence between deciding on expenditure
and financing
• Prevents free riding

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Respective Shares in Expenditures & Taxes
Switzerland, 2005

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Government Expenditures by Levels: National,
Regional and Local
Government Revenue Collections, 2015
Joint Taxation or Tax Sharing Scheme
Vertical Fiscal Balance
Fiscal Equalization: Horizontal Fiscal Balance
•Each unit within a particular level of government (or
each state in a federal system) has the capacity to
provide services at a comparable standard.
•Horizontal fiscal imbalance does not imply
uniformity of service provision or uniformity of
revenue-raising.

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 Factors that can cause
horizontal fiscal imbalance (HFI)
• On the revenue side, government units may have varying levels
of fiscal capacities due to differences in resources, which usually
include advantages of transportation, ports, climate, soil,
location, mineral deposits, as well as possession of a stock of
capital goods and the head offices of financial corporations.

• On the expenditure side, government units may face varying

expenditure needs due to different socioeconomic, geographic,
and demographic factors (e.g. ratios of school-age children and
the elderly)
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Suggested Federalism Design for the Philippines
Sicat Proposal:
• Four autonomous states: Luzon, Visayas, Mindanao, and
Bangsamoro
• Luzon and Mindanao are not as big as the Indonesian islands
of Java and Sumatra, but favorably compares with Taiwan
and South Korea
• Geographically, each grouping represents a compact group
of regions that could serve as bastions for new political
entities

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Suggested Federalism Design for the Philippines
Sicat Proposal:
• The administrative regions do not provide a sound basis for
creating the new states:
Not intended as founding nucleus for autonomous states
Meant to help strengthen the economic planning process among
similarly situated provinces and cities within a unitary state
Have been set up as specific groupings of provinces and cities to
strengthen their claim on national government economic
resources
Instability of regional groupings: 14 to 19 regions
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Suggested Federalism Design for the Philippines
Sicat Proposal:
• A four state federal union would be cheaper to run and would achieve as
much decentralization of political power compared to 12-state federation.
• With fewer states, there are likely to be fewer agencies and institutions to
set up and operate.
• A four state federation has greater potential to produce economic synergy
in terms of its economic operations (e.g. investment in infra like roads,
ports, telecom, and all form of land improvements.
• A big state would be more conducive to competition for leadership among
political groups. Political dynasties are more likely to thrive in small sized
self-governing states than in the big state.

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Thank you.