Intergovernmental Fiscal

Transfers in Philippine
Decentralization

Asst. Prof. Justine Diokno‐Sicat, Ph.D.
December 18, 2019       

Philippine Institute for Development Studies
Surian sa mga Pag‐aaral Pangkaunlaran ng Pilipinas
 Philippine Decentralization
• Decentralization was instituted in the Philippines
with the enactment of the Local Government
Code of 1991 (LGC).

• The aim is to “enable local government units to

attain their fullest development as self-reliant
communities and make them more effective
partners in the attainment of national goals”(Sec.
2).

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 Decentralized Local
Government Structure
National Government

Local Government Units

(17 Regions)

Provinces Cities Municipalities

(81) (145) (1,489)

Barangays
(42,045)

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 Devolved Basic Services and
Facilities
Service Specifics
Agricultural extension and On-site research
Community based forestry projects
Economic
Tourism facilities and tourism promotion and development
Services
Public works and infrastructure projects out of local funds
Telecommunication services for provinces and cities
School building program
Field health and hospital services and other tertiary health
Social services
Services Social welfare services
Housing projects for provinces and cities such as low-cost
housing and other mass dwellings
Others Investment support and Industrial research and development
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 Philippine Decentralization
• In reality, there is a mismatch between the
costs of expenditures that sub-national
governments are expected to undertake
and the resources available to them. [Kim
& Smoke, 2002]
• This mismatch to taxing-spending powers
provides a justification for
intergovernmental fiscal transfers.
 Sources of
Local Government Income
Source
of Major Categories
Income
• Real Property Tax
Tax • Business Tax
Local • Other Taxes
Nontax • Income from Economic Enterprises
• Service and User Fees
Internal Revenue Allotment (IRA)
External
Shares from Other National Taxes
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 Distribution of Local and External Sources
of LGU Income, 2009-2018
70.0%

60.0%

50.0%

40.0%

30.0%

20.0%

10.0%

0.0%

LOCAL SOURCE EXTERNAL SOURCE

Source of basic data: Bureau of Local Government Finance

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 Local Government Income and
Expenditures, (% of GDP), 2009-18
4.0%
3.5%
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
preliminary

Total LGU Income Local Sources Tax Revenues

Non‐Tax Revenues External Sources Total LGU Expenditures

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 LGU Income from Local Sources as
percent of GDP, 2009-18
1.40%

1.20%

1.00%

0.80%

0.60%

0.40%

0.20%

0.00%
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

  Real Property Tax   Tax on Business Local Sources

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 LGU Income from External Sources
as percent to GDP, 2009-2018
4.50%
4.00%
3.50%
3.00%
2.50%
2.00%
1.50%
1.00%
0.50%
0.00%
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

  Internal Revenue Allotment   Other Shares from National Tax Collections
External Sources Total Current Operating Income

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 The Design of Philippine
Intergovernmental Transfers
• This transfer is called the Internal Revenue
Allotment (IRA)

• This is 40% of internal revenue collections of the

3rd preceding fiscal year

• The total IRA is distributed to LGUs as follows:

- Provinces = 23 %
- Cities = 23 %
- Municipalities = 34 %
- Barangay = 20 %
 The Design of Philippine
Intergovernmental Transfers
• The allocation formula for
Province/Municipality/City is (Sec. 285):
- Population = 50 %
- Land Area = 25 %
- Equal sharing = 25 %

• If the national government an unmanageable

public sector deficit, the President may make
necessary adjustments to the total amount of
IRA
 Dependency on IRA and Weak
Revenue Mobilization
• Studies on Philippine decentralization have
highlighted the high and persistent dependency
of LGUs on the IRA (Diokno 2012, Manasan
2009, Llanto 2009, Diana 2007).

• Manasan (2004) found empirical evidence that

suggested “LGUs which received higher IRA
tended to be lax in their tax effort.”

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Recent Reforms and Continuing
Efforts in Revenue Mobilization
• Efforts both in Real Property and Business
Taxation to increase local revenue
mobilization;
• Proposed Real Property Valuation Reform
Bill
– Single valuation of real property
– Recentralize the approval of revised Schedule
of Market VAlues.

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 The Anticipated Increase in
Intergovernmental Fiscal Transfers
• In 2018, the Supreme Court issued what is
known as the Mandanas ruling which expands
the revenue base for computing
intergovernmental fiscal transfers.
• This will effectively increase the IRA received by
local governments and make a dent in overall
fiscal balance.
• This will also pose a challenge to encouraging
local governments to increase local revenue
effort.
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 Final Remarks
• The design of intergovernmental fiscal transfers
must balance the desire to support devolved
functions and the disincentive to raise local
revenues.
• There have been continuous efforts to improve
revenue mobilization with some being more
successful than others.
• Being able to find alternative solutions, such as
in the example of property valuation, is crucial to
pushing the agenda.
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 References
• Bureau of Local Government Finance. Statement of Receipts and Expenditures (Various Years).
• Department of Budget and Management. Budget of Expenditures and Sources of Financing
(Various Years).
• Diokno, Benjamin. 2012. "Fiscal decentralization after 20 years: What have we learned? Where
do we go from here?" Philippine Review of Economics 49(1) 9-26.
• Diokno-Sicat, Justine; Maddawin, Ricxie. (2018) A Survey of Literature on Philippine
Decentralization. Philippine Institute for Development Studies. Discussion Paper No. 2018-23.
• Llanto, Gilbert. 2009. "Fiscal Decentralization and Local Finance Reforms in the Philippines."
Philippine Institute for Development Studies Discussion Paper No. 2009-10.
• Manasan, Rosario. 2009. "Local Public Finance in the Philippines: Balancing Autonomy and
Accountablity ." In Decentralization Policies in Asian Development, by Schinichi Ichimura and Roy
L. Bahl. Singapore: World Scientifc Print.
• Manasan, Rosario. 2004. "Local Public Finance in the Philippines: In Search of Autonomy with
Accountability." Discussion Paper Series No. 2004-42. Makati: Philippine Institute for
Development Studies, December.

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Philippine Institute for Development
Studies
Surian sa mga Pag-aaral Pangkaunlaran ng
Pilipinas
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