POLITICAL REFORM AND FISCAL DECENTRALIZATION:

COMPARING THE PHILIPPINES WITH CHINA

Philip Camara, February 4, 2010

THE POLITICAL POWER OF MONEY

In the Philippines, with its march towards decline, it has become difficult to
separate money from power. Candidate Manuel Villar said it best when he
said that he has prepared his budget to run for the presidency and only
considered worthy challengers as those who likewise had pledges for the
vast sums, estimated at P4 to 8 billion, needed for a serious run for the
highest office.

Our big-bucks political electoral system locates itself at the center of the
disease that traps our country in a vicious cycle of maldevelopment where
public office is a franchise for private returns.

The ultimate catch is the Office of the Presidency and in this paper I hope to
shed light on the enormous financial resources at hand, just from the regular
budget, our taxes, that along with the ultimate control over our vast natural
resources and investment flows are easily worth the billions in campaign
funds. I would like to compare the Philippines with China to contrast and
highlight our governance fiscal structure dysfunctionalities.

HIGHLY CENTRALIZED FISCAL OPERATION IN RP, NOT SO IN CHINA

It is hard to find other countries with similar concentration of government

revenues and spending with the Central Government as opposed to the
spending by component Local Governments as that of the Philippines.

The Philippines
(2007 Figures; in
Million Pesos)
Central* Local**
Revenue 1,096,875 234,760.
.01 08
% to Total 82.37% 17.63%
Expenditu 1,029,377 194,736.
re .66 81
% to Total 84.09% 15.91%
*Net of IRA of P146,591.95 million
**Inclusive of IRA of P146,591.95 million
Source: Philippine Commission on Audit 2007 Financial Reports
Keep in mind that the figure for Local Governments includes all 1,600 plus
LGUs in the Philippines. And while 30% of the National Budget is used for
debt service, still a disproportionately large per cent of the Total Government
Budget is under the control of the Philippine President. This is not really that
surprising considering that our government was originally organized by our
colonial masters for the purpose of centralization and exploitation.
Apparently, our government today continues in that role. And it is from this
highly centralized control of the expenditures that a sitting President can
recoup investments in getting elected.

Ironically, it is the Chinese Communist Dictatorship that has a well developed

devolved fiscal system. Not only is there a good sharing of tax revenue
between the Central and Local Governments, we find that the Central
government even shares from its revenue take with the Local Governments
bumping up the share of Chinese Local Governments Expenditures to over
70% of total government expenditure.

China (2004
Figures; 100M
Yuan)
Central Local
Revenue 14,503. 11,893.
10 37
% to Total 54.90 45.10
% %
Expenditu 7,894.0 20,592.
re 8 81
% to Total 27.70 72.30
% %
Source: National Bureau of Statistics of China

Evidently, having the Local Governments conduct such a large share of the
People’s Tax & Collection Money is a big factor in China being the fastest
growing economy in the world. They have been successful in unleashing the
productive energies of their people by putting expenditures for government
services closer to the people.

LOCAL GOVERNMENTS SHORT-CHANGED

Indeed, given such a low share of Philippine Government expenditures while

having to absorb important front line expensive services such as in health &
agriculture since 1992, it is not surprising that we have become more food
and health insecure as a result of LGUs being short-changed. Not so in China
as we have seen above where the Central Government even gives more to
the Local Governments from its own collections to support front line service
delivery. For a comparison of Philippine Local Government and China Local
Government expenditure responsibility please turn to Annex 1.

DYSFUNCTIONAL LOCAL REVENUE SOURCES: ROOT OF PATRONAGE

The way our fiscal system works is really quite insane. You would think that
any designer of a fiscal system would build in an incentive match between
the economic performance of an area and its tax revenues. Not so in the
Philippines. For Provinces and Municipalities, for example, the dependency
on Internal Revenue Allotments or IRA are 83% and 78%, respectively. IRA
allocation, in turn, has 3 factors: equalization, population and size of
territory. None of these 3 factors have anything to do with the economic
performance of the Province or Municipality! In fact, the easiest way for a
Municipality to massively expand its IRA is simply to lobby to the political
benefactors above to allow its conversion into a City where, due to the
equalization factor, they automatically have a large increase in IRA. (No
Local Executive is rewarded for exceptional economic performance except
for the cities which serve as the Corporate domiciles such as Makati, Quezon
City, Cebu City, etc. due to the business tax based on their nation-wide
income generation.)

Local
Government % to
Units IRA Total Local Taxes % to Total
Local
IRA and Income Taxes &
Income
146,591,948 82,349,413
TOTAL .40 .05
43,011,998. 8,963,717.
Provinces 49 29.34% 84 83%
43,043,605. 55,972,204
Cities 14 29.36% .00 43%
60,536,344. 17,453,490
Municipalities 81 41.30% .92 78%
Source: Figures are from the Philippine Commission on Audit 2007 Financial Reports and BIR website

These are the sources of LGU Revenue:

 The Philippines

Local Taxes such as:

• Business Tax ( “neglible” for non-domicle areas of large
corporations).
• Real Property Tax
• Transfer Tax
• Franchise Tax
• Printing and Publication Tax
• Amusement Tax
• Community Tax

Share in National Taxes

• Internal revenue Allotment (IRA) representing 40% of internal revenue
collections based on the third preceding year (Regional distribution is as
follows: Provinces 23%; Cities 23%; Municipalities 34%; and Barangays
20%

Non-Tax Revenue
• Share in national wealth exploitation in their area
• Share in the earnings of government agencies or government-owned or
controlled corporations engaged in the utilization and development of
national wealth in their area based on the following: 1% of the gross
sales or receipts of the preceding calendar year or 40% of mining taxes,
royalties, forestry or fishery charges and such other taxes, fees or
charges including related surcharges, interests, or fines, whichever is
higher

While Provincial and Municipal LGUs are given the authority to raise new
sources of revenue under the Local Government Code, it is not surprising the
few turn to this option considering the already over-taxed and short-changed
status of the Filipino.

In contrast, China’s system for LGU revenue raising is eminently sensical:

there is more Local Government Revenue when the citizens and the
enterprises perform well. For here are the sources of Local Revenue for
Chinese Local Governments:

China
Local Taxes such as:
• Business Tax
• Income Tax of enterprises subordinate to the local government
• Personal income tax
• Tax on the use of urban land
• Tax on the adjustment of the investment in fixed assets
• Tax on town maintenance and construction
• Tax on real estates
• Tax on the use of vehicle and ships, stamp tax, slaughter tax
• Tax on agriculture and animal husbandry
• Tax on special agriculture products
• Tax on the occupancy of cultivated land, contract tax

Shared Taxes
• 25% of the value added tax
• 50% of the tax on stock dealing (stamp tax)
• Tax on resources other than the ocean petroleum resources

Non-Tax Revenue
• State-owned assets profit
• Planning subsidies to loss-suffering state-owned enterprises
• Income from administrative fees
• Penalty and confiscatory income
• Income from use of sea area, field and diggings
• Expert project income
• Other income

Just compare the 10 sources of Philippine LGU revenue sources with that of
the 20 juicy ones of their Chinese counterparts (and weep!). There, in a
snapshot, is the tap root and dynamic of Philippine patronage
politics. Patronage politics, in turn, is the mother of corruption. LGUs
(and their citizens) have been disempowered and the ticket for a Local
Government Chief Executive to more projects and funds is by joining the
bandwagon of the President.

CENTRALIZED REVENUE SYSTEM LEADS TO LOW COLLECTION RATES

The Philippines has one of the lowest percentages of revenue collections to

our Gross Domestic Product standing at around 15.50%. Take a look at the
same figure for other countries:

REVENUE EFFORT (% of GDP) 2008

United States 28.20%

United Kingdom 39.00%
Australia 30.50%
Japan 27.40%

15.40
Philippines %

It is not surprising that our Revenue Effort will be low due to the disconnect
between economic (GDP) performance and the tax collecting unit, unlike
China (and even in the United States, Australia and Japan) where Local
Governments sources of revenue are connected to the GDP (income of the
economy in one given year). This connection is critical as the Local share of
taxes become the basis for the Central governments collections as well.
What does it gain a Philippine LGU if tax collections in their area go up since
the increase does not necessarily mean a larger IRA for their particular area
especially if other LGUs are slouches when it comes to assisting tax
collections of the national government?

IMPROVING TAX COLLECTIONS

What can be done as a quick fix to input incentives for both the National and
Local Governments to improve tax collections? Immediately, an incentive
scheme must be implemented. A simple one would be to regionalize tax
collection and spending whereby Regional Development Councils are
empowered to supervise BIR regional Revenue District Offices and directly
retain for the component LGUs the IRA from these collections. A share of
improved collections (above BIR targets for that region) should stay in the
region for funding historical levels of National Regional expenditures.

In this way, in a simple stroke we make our dysfunctional system just a little
bit more rationale and lead to improved collections, as is clearly shown by
both China (and even the United States shown in the table above).

Regional Fiscal and Governance Decentralization has the power to unleash

the creative potentials and energies of Filipinos who have turned apathetic
from centuries of dysfunctional governance systems that simply strengthen
the few in the hope that benefits will trickle down to the surrounding areas
(principle of Superiority). This is “pinatulo”. True transformation beyond lip
service can only mean moving towards strengthening the “bottom-up” or
“Pinatubo” principle where the concept of government is that of a nurturer of
individual, community and enterprise initiatives towards productive and
dignified lives. That is the principle of Subsidiarity.

ANNEX 1

LOCAL GOVERNMENT EXPENDITURE ALLOCATION

The Philippines
The general expenditure which local
governments incur is consist of:
• Personal Services (45-55% of
the total budget)
• Infrastructure development and
maintenance
• The cost of delivering basic
services out of local government
existence
• Payments of debts and other
mandatory obligations
Sources: Country Report- the Philippines-United Nations Economic and Social Commission for Asia and
the Pacific; Local Government Code
China
Expenditure for armed police troops
Expenditure for capital construction
Expenditure for comprehensive
development of agriculture
Expenditure for circulating funds
Expenditure for city maintenance
Expenditure for developing land and sea
area
Expenditure for foreign affairs
Expenditure for geological prospecting
Expenditure for government
administration
Expenditure for innovation enterprises
Expenditure for national defense
Expenditure for operating expenses of
agriculture, forestry, water conservation
and meteorology
Expenditure for operating expenses of
department of industry & transportation
Expenditure for operating expenses of
department of commerce
Expenditure for operating expenses of
department of culture, sport &
broadcasting
Source: Country Report China-United Nations Economic and Social Commission for Asia and the Pacific
Expenditure for operating expenses of
education
Expenditure for operating expense s of
department of sciences
Expenditure for operating expenses of
department of tax, etc.
Expenditure for price subsidies
Expenditure for public security agency,
procuratorial agency and court of justice.
Expenditure for public health
Expenditure for pensions and relief funds for
social welfare
Expenditure for retired persons in
administrative departments
Expenditure for supporting agriculture
production
Expenditure for science and technology
promotion
Expenditure on subsidies to social security
programs
Expenditure for supporting underdeveloped
areas
Expenditure for special items and other
expenditure