An LGU Perspective
Macroeconomic Policy - Fiscal
“Easing of fiscal space and
achieving sustainable revenue
and spending path to support
physical and human capital
investments and provide basic
social services.”
Easing of Fiscal Space
 LGUs contribute to the easing of fiscal space by
reducing dependence on national government
fiscal transfers and other assistance thereby
allowing NG to use these resources to address the
deficit.
 As an additional benefit, by relying less on NG for
their funding requirements, LGUs become more
fiscally autonomous fulfilling the spirit and intent
of the Local Government Code of 1991.
Easing of Fiscal Space
 LGUs can be less dependent on NG by improving their
own-source revenue generation which include tax and
other fees and charges and non-tax sources.
 Tax sources include Real Property Taxation (RPT) and
Business Taxes, which are the largest sources of ownsource revenues, and non-tax sources such as income
from Economic Enterprises.
Easing of Fiscal Space
 LGUs can also explore other sources of financing such
as bank credits and non-credit sources such as the
issuance of debt (e.g., LGU bonds), BOT, Joint
Venture partnerships with the private sector and/or
other LGUs, and ODA grants.
Policy Gaps
 In 2008, estimated local-own source revenues of local
government as a share of total LGU regular revenue
was 33.4%, higher than Thailand (10.9%) and Vietnam
(5%).
 However, tax revenues accounted for only 23.5% which
fell marginally from the 2006 figure of 25%.
 A major reason for this is that the Local Government
Code seriously limits the power of the LGUs to set
local taxes.
Policy Gaps
 First, the Code fixes the tax rate of some of the taxes
assigned to LGUs.
 These include the Special Education Fund (SEF), the
Real Property Tax, and the Community Tax.
 Second, while LGUs have some discretion in setting
tax rates in the case of other local taxes, the Code sets
ceilings (or floors) on the tax rates that LGUs may
impose, which in some cases appears to be low (or
high) given current realities such as inflation.
Policy Gaps
 Third, the Code mandates that tax rates can only be
adjusted once every 5 years and by no more than 10%.
 This provision is particularly restrictive in the case of
taxes such as the professional tax whose rates are
specified in nominal peso terms.
 LGU tax administration is constrained because of low
staff professional qualifications and inadequate
automation of core tasks.
Policy Gaps
 On the matter of credit financing, LGUs complain that
that the concessionality of ODA-financed subloans are
not brought down to them.
 Many LGUs have poor capacities to prepare and
operate projects that would be suitable for ODA and
other commercial financing.
 The policy and legal environment restrict LGUs from
exploring other sources of financing. For example,
LGUs cannot open depository accounts in private
banks and LGUs cannot legally form corporations with
other LGUs or private entities.
Recent Developments
 A draft bill amending Book II of the Local Government
Code of 1991 (Taxation) has been endorsed by the LGU
Leagues and the DILG to the Congress.
 Studies have been completed on LGU Access to ODA
financing and credit financing.
 Executive Order 809 has been issued allowing first tier
LGUs to borrow from multilateral financing
institutions with a sovereign guarantee.
 A study on improving LGU exercise of their corporate
powers has been completed.
Some Policy Recommendations
 Conduct an advocacy campaign to the Congress for the
passage of the Book II amendments of the Local
Government Code of 1991.
 Review the pricing and terms under which ODA is
provided to GFIs.
 Develop a more transparent system for determining
who should benefit from the concessionality
embedded in ODA.
 Continue to build capacity among LGUs for tax
administration and the preparation and management
of credit and debt financed projects.
Some Policy Recommendations
 Draft and implement policy issuances that would
clarify and encourage joint venture arrangement
among LGUs and between LGUs and the private sector
entities.
 Study marked-based measures to reinvigorate LGU
bond floatation.
 Review the implementation of Executive Order 809 in
order to effect pilot testing in the near future.
 Review the policy for selectively allowing LGUs to open
depository accounts in private banks.
Achieving sustainable revenue and
spending path
 LGUs support the national effort for a sustainable
revenue and spending path by ensuring that the same
is emulated at the local level.
 This is achieved through well-rationalized, prudent,
efficient and harmonized planning, budget
preparation, revenue generation and expenditure
management.
Policy Gaps
 Although revenue management and budget reporting
have been improved, linking these to planning an to
each other is still weak for many LGUs. The integrity of
local budgeting is distorted by poor revenue estimates
during budget formulation.
 Budget formulation and execution, planning and
revenue generation at the local level is not linked to
performance outcomes.
 There is also a lack of performance measures that
adequately track Public Financial Management (PFM)
at the local level.
Policy Gaps
 These is a lack of incentive systems for good PFM
performance.
 There is a lack of sanctions for poor performance in
local administration.
 Some sources of revenues such as the Special
Education Fund are not effectively utilized due to a
restrictive interpretation of existing law on its use.
Recent Developments
 A study has been completed on improving the use of the
Special Education Fund and a draft issuance based on the
study’s recommendations is being circulated.
 Studies have been completed on issues related to personal
expenditures and the management of surpluses and
deficits in LGUs.
 The Performance Challenge Fund (PCF) has been pilot
tested in 2010 and will be fully implemented in 2011 with a
initial fund of P500 million.
 The ICC approved the Performance-Based Incentive Policy
in 2010 which will lead the way for the Performance-Based
Grant System.
Recent Developments
 The Executive has approved a national PFM roadmap.
 In support of JMC 2007-1, technical assistance has
been provided and continues to be provided to the
BLGF for the improvement of the Statement of
Receipts and Expenditures.
 In support of JMC 2007-1, technical assistance on local
planning has been provided to both the DILG and the
NEDA for planning at all LGU levels.
 In support of JMC 2007-1, technical assistance for key
areas of the DBM’s UBOM have and continues to be
provided.
Recent Developments
 Technical assistance is being provided for the
finalization of the implementation of the Competency
Certification for Local Treasurers.
 A law has been passed requiring assessors to pass a
professional licencing examination.
Policy Recommendations
 Implement the Competency Certification System for
Local Treasurer in order to professionalize the service.
 Implement plan-budget linkage by providing financial
incentives in the form of loan, loans and grants, and
grants for achievement of budget targets and
outcomes.
 Encourage good performance in PFM by providing a
performance-grant that scales up performance.
 Review the PFM Roadmap for gaps in assistance not
currently provided or in the pipeline.
Raymund C. Fabre
ADB TA 7451