Consultative committee warned of costly federalism

MANILA, Philippines — The National Economic and Development Authority (NEDA) warned that the national government might incur as much as P243.5 billion in additional expenses every year to operate a federal government, which would increase pressure on the country’s fiscal deficit.

NEDA Undersecretary Rosemarie Edillon said the Philippines’ shift to federalism might result in additional costs ranging from P156.6 billion to P243.5 billion every year.

President Duterte’s economic managers belonging to the Economic Development Cluster met on Wednesday with the members of the consultative committee (Concom) reviewing the 1987 Constitution.

“We’re looking at fiscal pressures. One is with respect to the additional offices that will have to be put up, in the legislative, judiciary and of course in the executive as well. That’s why we were able to come up with that number,” Edillon said.

She said it also includes the required funding for the proposed Equalization Fund, which is three percent of the General Appropriations Act.

NEDA said it is difficult to ascertain whether or not a federal structure will work in the Philippine setting.

To improve the country’s readiness for a federal form of government, Edillon said there is a need to amend the Local Government Code and the Administrative Code, and ensure the competency of government employees.

“If they want an honest to goodness transition to federalism, then that’s the first thing you have to do, you capacitate,” Edillon said.

She said the incremental cost may even go up by another P10 billion in the first year of transition, as the government would need to shell out additional capital outlays for the construction or expansion of buildings and the acquisition of vehicles and various equipment for the federated regions.

She said the additional expenditures alone could widen the country’s fiscal deficit by 1.0 to 1.6 percent of the gross domestic product (GDP).

Edillon said the deficit ratio could go up even further to a range of 2.8 percent to 3.4 percent of GDP, considering that the collection of some national government revenues would be transferred to the federated regions under the federalism proposal.

The government currently has a fiscal deficit ceiling equivalent to three percent of GDP, which means deficit ratio could widen to as high as 6.4 percent based on NEDA estimates.

“Some of the revenues being collected by the national government will now be collected by the federated regions. And since it’s collected by the federated regions, it will be for their use as well. So that amounts to about 10 percent of revenues, you add another 1.8 percent of GDP. So total pressure is 2.8 percent to 3.4 percent of GDP,” the NEDA official said.

She said the 50-50 split in revenues between the federal government and the federated regions might also not be effective, as there is a mismatch in the revenue allocation and spending requirements of both sectors.

“It can actually go up to 80-20 if you consider the debt payments – 80 percent shouldered by the federal government. Under the federal government are the teachers, basic education, law and order, your police – that’s already two-thirds of the bureaucracy,” Edillon said.

NEDA has raised concerns on the “inevitable disruptions” to the country’s growth momentum by the proposed shift to a federal form of government, especially if regions are ill-equipped to weather changes.

Transition period

NEDA recommended a 15-year transition roadmap in the paper submitted to the Concom.

Socioeconomic Planning Secretary Ernesto Pernia said NEDA does not oppose federalism but noted the government cannot rush headlong into a new form of government.

“We do not oppose federalism per se because it can be the holy grail or the gold standard that we aspire for but to reach that, there are a lot of preparations to be carried out,” he said.

Pernia said, however, that the transition period could disrupt the economic growth momentum enjoyed by the country in recent years as well as the administration’s ambitious infrastructure agenda.

“The issue here in the meantime is this long transition period would be a period of uncertainty and a period of fickleness. People would not know what to expect so it’s going to disrupt the economic growth momentum. The streak of economic growth that we have been experiencing in the last three to five years and then also the momentum of Build, Build, Build would be disrupted,” he said yesterday.

Pernia said NEDA deems it necessary to continue the regional projects under the Philippine Development Plan 2017-2022 so lagging regions can catch up.

“The problem is there’s really huge inequality among regions in terms of economic growth, in terms of per capita income. I think that is not a good starting point for federalism because there are so many backward regions,” he said.

Economic managers, he said, also raised concerns on other economic provisions in the draft charter such as the retained restrictive and protectionist provisions.

“Our thinking with NEDA is that it’s better to follow the PDP 2017-2022 because most of the projects are in the regions, so when the projects are completed, the regions would be better connected among themselves as well as within mainstream economy and that will strengthen the regions,” said Pernia.

“The proposed charter tends to be protectionist. It limits foreign equity which is a throwback,” she added.

Aside from the additional costs and the revenue mismatch, NEDA warned that there may be “incalculable economic costs, repercussions and externalities” in the shift to federalism.

These include the impact on foreign direct investments and international trade and the reaction of credit rating agencies, which could affect the country’s debt and borrowing costs.

Former chief justice and Concom chairman Reynato Puno said they discussed with the economic managers led by

Pernia and Finance Secretary Carlos Dominguez III the measures to come out with a correct fiscal formula for federalism. 

“I am confident that we shall be able to find the correct fiscal formula,” Puno said during a business forum in Makati City on Tuesday where he presented the Concom’s proposed charter. 

Puno’s statement came after he noticed that some of the economic managers question the division of the powers of taxation under their draft constitution for a federal presidential form of government. 

Pernia and Dominguez had raised concerns over the potential risk of the shift to federalism.

Puno suggested that maybe a better fiscal formula will be determined by an inter-governmental council composed of the executive, legislative and members of the councils of governors and deputy governors. 

“Perhaps the way to go forward is to have a flexible fiscal formula. Flexible in the sense that the formula can be reviewed, let us say, every four years, tilt the formula in favor of the federal government,” he said. 

He said if the needs of the federal government is less than the needs of the federated regions, then the formula could be revised so that the need can swing in favor of the interest of the regions. 

Puno had urged Congress to prioritize the passage of the proposed federal charter instead of focusing on their indivisual campaign for the 2019 elections. 

Puno said Congress could call for a constitutional convention if they do not have the time to discuss the proposed charter, which will focus on amending or changing the Constitution. 

The Concom, which convened in February, submitted its draft constitution for a presidential federal government to Duterte last July. 

The Concom is now going around the country on an awareness campaign. -With Robertzon Ramirez