The Political Economy of
Decentralization in the Philippines
A overview of the impact of fiscal
decentralization to the development of
Local Government in the Philippines
By Alfredo S Sureta Jr.
San Sebastian College-Recoletos
Constitutional and legal basis of
Fiscal decentralization in the
Philippines
• Political decentralization always goes hand in hand
with fiscal decentralization.
• There can be no meaningful decentralization if the
central government still retains direct supervision
and control over the disbursement of public funds.
• Hence a meaningful decentralization project should
not only deepen political accountability but foster
efficiency in the delivery of public service.
• Effective decentralization also allows for “the
diffusing of social and political tension and ensuring
local and political economy
• Under the Article X, sections 5, 6 and 7 of the 1987
constitution “Each local government unit shall have the
power to create its own sources of revenues and to levy
taxes, fees, and charges subject to such guidelines and
limitations as the Congress may provide, consistent with
the basic policy of local autonomy.
• Such taxes, fees, and charges shall accrue exclusively to
the local governments.
• In addition Section 6. Local government units shall have
a just share, as determined by law, in the national taxes
which shall be automatically released to them.
• Section 7, Local governments shall be entitled to an
equitable share in the proceeds of the utilization and
development of the national wealth within their
respective areas, in the manner provided by law,
including sharing the same with the inhabitants by way
of direct benefits”.
LGC provisions
Basis for the computation of the funds under the LGC
Distribution of the share of the fund among the LGUs
Section 284 ,285 and 286
(a) Provinces - Twenty-three percent (23%);
(b) Cities - Twenty-three percent (23%);
(c) Municipalities - Thirty-four percent (34%); and
(d) Barangays - Twenty percent (20%)
Transitory Provisions on the IRA
(a) On the first year of the effectivity
of this Code, thirty percent
(30%);
(b) On the second year, thirty-five percent (35%); and
(c) On the third year and thereafter, forty percent (40%).
Provided, That in the event that the national government incurs an
unmanageable public sector deficit, the President of the Philippines is hereby
authorized, upon the recommendation of Secretary of Finance, Secretary of Interior
and Local Government and Secretary of Budget and Management, and subject to
consultation with the presiding officers of both Houses of Congress and the
presidents of the "liga", to make the necessary adjustments in the internal revenue
allotment of local government units but in no case shall the allotment be less than
thirty percent (30%) of the collection of national internal revenue taxes of the third
fiscal year preceding the current fiscal year:
Provided, further, That in the first year of the effectivity of this Code, the local
government units shall, in addition to the thirty percent (30%) internal revenue
allotment which shall include the cost of devolved functions for essential public
services, be entitled to receive the amount equivalent to the cost of devolved
personal services
(a) Population - Fifty percent (50%);
(b) Land Area - Twenty-five percent (25%); and
131
(c) Equal sharing - Twenty-five percent (25%)
Provided, further, That the share of each barangay with a population of not less
than one hundred (100) inhabitants shall not be less than Eighty thousand
(P80,000.00) per annum chargeable against the twenty percent (20%) share of the
barangay from the internal revenue allotment, and the balance to be allocated on
the basis of the following formula:
(a) On the first year of the effectivity of this Code:
(1)
Population - Forty percent (40%); and
(2)
Equal sharing - Sixty percent (60%)
(b) On the second year:
(1)
Population - Fifty percent (50%); and
(2)
Equal sharing - Fifty percent (50%)
(c) On the third year and thereafter:
(1)
Population - Sixty percent (60%); and
(2)
Equal sharing - Forty percent (40%).
Provided, finally, That the financial requirements of barangays created by local
government units after the effectivity of this Code shall be the responsibility of the
local government unit concerned. The IRA (a) The share of each local government
unit shall be released, without need of any further action, directly to the provincial,
city, municipal or barangay treasurer, as the case may be, on a quarterly basis
within five (5) days after the end of each quarter, and which shall not be subject to
any lien or holdback that may be imposed by the national government for whatever
purpose.
70,000,000,000
60,000,000,000
50,000,000,000
40,000,000,000
30,000,000,000
Internal Revenue Allotment
Total Non-Tax Revenue
20,000,000,000
Total Tax Revenue
10,000,000,000
0
F.Y.2008
F.Y.2007
F.Y.2006
F.Y.2005
F.Y.2004
F.Y.2003
F.Y.2002
F.Y. 2001
• The table illustrates the accumulated income total of
LGUs in the Philippines from 2001 up to 2008. It
represents the overview on how the LGUs generated
their both from external and internal sources. And the
most remarkable overall view of LGUs fiscal situation is
the dependency of the LGUs from the internal revenue
allotment of the national government.
• This income pattern is consistently observed from 2001
to 2008. Despite relative increase in the pattern of local
tax collection which includes real property tax, business
tax and other non-tax revenue. The pattern remains
virtually unchanged with the IRA allotment taking most
of the share in terms of the resources LGUs need to
maintain its day to day operation.
100%
99%
98%
97%
96%
Loans & Borrowings
95%
94%
F.Y.2008
F.Y.2007
F.Y.2006
F.Y.2005
F.Y.2004
F.Y.2003
F.Y.2002
F.Y. 2001
Internal Revenue Allotment
• The number of IRA dependent LGUs outweighs
the aggregate total of fiscally strong LGUs. In
addition to external funding provided by the
IRA, the code also provides that LGU’s can avail
of funds from the capital market. According to
the DILG study “despite the availability of
financing facilities in government financial
institutions (GFIs) LGUs borrowings remain
low.
Local income vs. IRA(2001-2008)
16%
Total Local Sources
Internal Revenue Allotment
84%
• Based on the data collected by the BLGF, the locally
generated revenue for the LGU’s has remained low.
While there is an increase in the type of revenue an
LGU can collect according to the items enumerated
in LGC.
• The collection has remained very low compared to
the percentage share of IRA provided to the LGU’s.
Even though there have been cases of fiscally
productive LGU’s. The overall picture has remained
unchanged. Below is a summary of LGU revenue
sources as compared to the IRA allotment.
60,000,000,000
50,000,000,000
Real Property Tax
40,000,000,000
Business Tax
Other Taxes
Regulatory Fees
Service/User Charges
30,000,000,000
Receipts from Economic Enterprise
Toll Fees
Other Receipts
Internal Revenue Allotment
20,000,000,000
Linear (Regulatory Fees)
10,000,000,000
0
F.Y.2008
F.Y.2007
F.Y.2006
F.Y.2005
F.Y.2004
F.Y.2003
F.Y.2002
F.Y. 2001
Total Tax Revenue
Real Property Tax
Business Tax
Other Taxes
60,000,000,000
Total Non-Tax Revenue
Regulatory Fees
Service/User Charges
50,000,000,000
Receipts from Economic Enterprise
Toll Fees
Other Receipts
Internal Revenue Allotment
40,000,000,000
Other Shares
Extraordinary Receipts/Aids
Loans & Borrowings
30,000,000,000
Inter-Local Transfers
General Public Services
Education, Culture & Sports/ Manpower Development
Health, Nutrition & Population Control
20,000,000,000
Labor and Employment
Housing and Community Development
Social Security /Social Services & Welfare
10,000,000,000
Economic Services
Debt Service
Other Purposes
Excess (deficit) of Income over Expenditures
0
F.Y.2008
F.Y.2007
F.Y.2006
F.Y.2005
F.Y.2004
F.Y.2003
F.Y.2002
F.Y. 2001
Linear (Internal Revenue Allotment)
Linear (General Public Services)
General Public Services
Education, Culture & Sports/ Manpower Development
Health, Nutrition & Population Control
Labor and Employment
Housing and Community Development
Social Security /Social Services & Welfare
Economic Services
Debt Service
Other Purposes
Excess (deficit) of Income over Expenditures
30,000,000,000
25,000,000,000
In Millions of pesos
20,000,000,000
15,000,000,000
10,000,000,000
5,000,000,000
0
2000
2002
2004
2006
2008
2010
• Consequently there are attempts to correct this under
spending by the LGU’s. Among them are attempts to enhance
the capacity of the LGU’s to utilize the resources they have.
• Training programs initiated by the DILG, Local government
Academy and the Local Government Development
Foundation tries to capacitate LGU’s staff on development
planning and financial management.
• Another program started by the DILG together with World
Bank is the creation of a “Performance Enhancement Fund”
which provides additional funding to LGU’s on top of their
regular IRA allotment.
• The fund can be accessed when an LGU posses specific
criteria that will allow effective use of the fund. But even if the
LGU’s access this fund several challenges remain to be solved.
• First there is a lack of serious financial accountability on
the utilization of LGU’s resources. Until today national
government agencies such as the Department of Finance
and the DILG have not imposed strict accountability
rules on the utilization of the funds provided to the
LGU’s.
• Other government agencies such as the Department of
Health and the Department of Social Welfare utilize
different indicators to measure service delivery by the
LGU’s. But the lack of a comprehensive standard to
measure LGU performance hampers any effort to exact
fiscal accountability from the LGU.
• Secondly, despite the devolution of health, social
services, and agriculture the same national government
agencies continue to receive increased appropriation
from the national budget. Contradicting the goal of fiscal
decentralization embodied in the code.
• And finally the difference in the capacity of different
LGU’s in terms of implementing their devolved
function. Resulting in an uneven delivery of public
service where LGU’s that are financially
autonomous are able to function effectively making
them less dependent on the IRA. While less
developed LGU’s have to rely more on the IRA to
function.
• But since these IRA dependent LGU’s cannot
function without it, they cannot get out of the cycle
of IRA dependency. Hence making it difficult for
these LGU’s to become fiscally autonomous from the
national government. Even though there has been
numerous best practices by highly effective LGU’s
all over the country (see table 4). These LGU’s
remain simply as island of governance.