BICOL UNIVERSITY

GRADUATE SCHOOL
LEGAZPI CITY

Name: GRACE R. CAMPOS Year & Course: 2ND YR EDD ELM

Course Code and Description: PhDPA 311 Financial Management in Government
Professor: DR. RAMESIS LORINO

REFLECTION 2
Even now, some countries remain resistant to implementing fiscal decentralization.
This can be a result of a lack of resources and capacity on the part of local administrations.
Decentralization is a challenging process that takes time to develop. But as developed
countries have shown, perseverance pays off in the end. A turning point in Philippine
political history occurred in 1991 with the adoption of the first Local Government Code.
By giving local government units (LGUs) increased power and total autonomy over the
delivery of key services including local public works, health care, education, and
agriculture, this law recognized that the purpose of decentralization is to assist LGUs in
becoming more self-sufficient. The new revenue and spending allocation structure
provided by this code allowed for decentralization to take place.
Local taxes may be charged since each local government unit is granted the power
to create its own revenue sources and to gather taxes, fees, and levies that will benefit
the local governments. While a municipality is permitted to launch, categorize, and tax
companies based on a classification not included in the Local Government Code of 1991,
it is not permitted to do so for companies based in its area of authority. The power granted
to municipal governments has a limit. The notion that taxpayers shall not be subjected to
taxes with disproportionate or arbitrary impositions is established in Section 25, Article II
of the Constitution about Section 2, Article X. Because the local government does not
naturally possess the authority to tax, it must also abide by the restrictions set by
Congress. The key takeaway from this is that the local government does not naturally
possess the power to levy taxes, and as a result, that power cannot go beyond the limits
set by Congress under the LGC.
LGUs, however, couldn't survive only on local taxes and other sources of money.
Since the national government obtained all internal revenue from national taxes prior to
1991, LGUs mostly relied on local taxation. Some of this money were used by local
departments of the federal government. The delivery of essential services was managed
by the regional branches and offices of the line ministries. LGUs that offered local project
ideas received a meager fraction of the projected transfer funds. In accordance with
Section 284 of the Local Government Code of 1991 (Republic Act RA No. 7160), LGUs
are entitled to a forty percent (40%) share of the national internal revenue taxes, based
on the amount collected in the third fiscal year before to the current fiscal year (NIRT).
The Local Government Code emphasized that local government entities' financial
affairs, transactions, and operations must be subject to the national government's
budgeting, accounting, and auditing laws and regulations. While the municipal budget is
established by a local ordinance, provincial governments submit their budgets to the
national Department of Budget and Management for approval. In order to avoid
overspending on salaries and administrative costs, the Code also requires LGUs to set
aside at least twenty percent (20%) of the annual IRA for development initiatives in their
annual budgets.
Because of the increased desire to provide more resources to social programs
including those that fight poverty and promote health, education, and literacy, the nation's
Millennium Development Goals (MDG) indicators have improved. Even though the rate
of progress is only considered modest, at least six of the 48 MDG indicators showed
improvements, and 14 of the 48 MDG indicators showed a strong possibility that the goals
will be met by 2015.
Thanks to the IRA, the LGUs were able to boost their investments in fixed assets.
As of the end of 2009, property, plant, and equipment accounted up 67% of their total
assets. Even though social services were given precedence, trade, industry, public works,
transportation, and communication received less support than other economic sectors. In
order to provide facilities for the whole nation or region, national government agencies
and the private sector have stepped in. These are some of the suggestions offered in the
World Bank's most recent Philippines Economic Update report. The Mandanas Ruling
asks for correcting the disparity in financial resources among local government units
(LGUs), boosting LGU capability, and improving openness and accountability. This ruling
will raise the percentage of national tax money that is distributed to local governments.
Due to the Mandanas ruling by the Supreme Court in 2018, the IRA are projected
to increase by 55 percent in the 2022 budget, reaching Php1.08 trillion or 4.8 percent of
the nation's gross domestic product compared to 3.5 percent of GDP in 2021. (and
confirmed in 2019). To lessen the economic impact of having to transfer additional
financial resources to LGUs, the national government has started to define the spending
responsibilities for a few devolved mandates that would be given back to the local
government.
The ability of some local governments to handle additional resources from the
Mandanas Ruling while maintaining total autonomy in planning and managing re-
devolved responsibilities has, however, come under scrutiny. Underspending by local
governments could get worse given that many of them are unable to handle a significant
increase in revenues. Because of this, the government faces a serious risk that the
process of transition could leave a sizable gap in the provision of services. This is because
a lack of coordination between the national and local governments and a lack of
implementation capacity could delay the transition toward greater decentralization.
As a member of the public sector, I support the Mandana ruling's new mandate as
well as the LGU's ability to levy taxes (though it is constrained by Congress). One
advantageous result of the decision is that LGUs now have the administrative freedom to
choose their own priority programs for economic growth. Instead of relying on assistance
from the federal government, it is preferable for the area to oversee determining and
meeting the immediate needs of its residents. This decision would enhance the services
provided to the public in the fields of health, education, agriculture, and other vital aspects
of life.
The funds of the LGUs significantly rose after the inclusion of national taxes, which
include the collections of the Bureau of Customs, for example, the customs duties, in the
IRA, which previously covered the Bureau of Internal Revenue's domestic collection. The
full devolution does not imply that all NGA programs will be given to the LGUs, rather, the
mandate of the agencies will continue, and they will take on the directing role or support
and assist the LGUs with their technical needs.
It is projected that the main disadvantage of this choice will be the fact that local
governments typically lack the manpower and technical know-how required to efficiently
plan, coordinate, implement, and monitor projects and services. This capability limitation,
which is reflected in underspent expenditures as assessed by the budget execution rate,
undermines effective service delivery. By hiring more qualified and dependable
employees, LGUs must enhance services. Corruption in the LGUs could perhaps develop
into a concern. In addition to constantly reviewing all projects, the LGU should scale up
its anti-corruption campaigns.
The Local Government Code restricts the ability of LGUs to determine local tax
rates and keeps the more revenue-productive taxes in favor of the central government,
even though the strategy used in the Philippines appears to be broadly consistent with
the standard model of tax assignment. Finding more revenue-generating levies for local
government entities is a difficulty. It should be noted that the lack of technical and
administrative capabilities, particularly among lower-income LGUs, combined with the
high complexity of local revenue codes, such as local business taxes, has acted as an
effective barrier to efficient local tax collection, which ultimately reinforces the vertical
fiscal imbalance.
According to the maxim "finance must follow function," local fiscal resources must
match the allocated budgetary amounts. If local government units are to fulfill their
intended role in a decentralized and devolved environment, they should have access to
more lucrative income sources and the freedom to exercise their taxing authority more
wisely, i.e., have sole discretion over determining the tax bases and rates. The LGUs
require true fiscal autonomy.
The necessity to examine the spending assignment itself is the second aspect of
the tax expenditure assignment problem. It's possible that some local government
spending obligations involve the provision of services with wider regional and even
national ramifications. The consultation workshops frequently brought up instances such
as environmental, agricultural, and health services. For instance, certain local
government units are actively pushing for the return of some devolved tasks, such as
health services, to the central government. It could be necessary to reconsider how local
governments are assigned expenses. Whether the relevant function has been delegated
or given to a low enough level of government determines whether local service delivery
is effective. Such rethinking ought to be done in accordance with acknowledged
guidelines for allocating expenses (such the "subsidiarity principle"). Reviewing the
expenditure assignment is crucial because, as Bahl noted, understanding the expenditure
assignment is necessary for the economically advantageous assignment of revenues
(1999).
The vertical fiscal gap caused by the imbalance between tax and expenditure
allocations and the complexity of municipal revenue rules is filled in a significant way by
intergovernmental fiscal transfers. They are crucial for addressing the vertical fiscal
imbalance as well. The total revenues coming to LGUs, even with the inclusion of the
IRA, yet fall short of their allocated expenditures. According to Manasan's estimation from
2005, the vertical fiscal imbalance with the IRA was less than 4% in 1998–2000, 6.9% in
2001, and more than 4% in 2003. Other methods, such as borrowing from the public and
private financial institutions and receiving more subsidies from the federal government or
legislators, must be used to close the remaining gap.
Spending reductions, unpredictable economic conditions, climate change, welfare
reform, young unemployment, housing shortages, and an aging population are just a few
of the unheard-of problems that local governments must grapple with. These problems
call for a completely different way of thinking. With limited resources, local leaders and
communities are always looking for and implementing novel ways to enhance
governance. The Philippines has demonstrated that fiscal decentralization has
substantial benefits. Despite how challenging they may be to obtain, these successes
ought to motivate you to keep progressing. It is important to take another look at how the
IRA is allocated, how it is used, and especially how it affects underprivileged areas. The
resolution of frequent and recurring audit concerns could be pursued with more vigor. To
reduce their reliance on the national government, local governments should strengthen
their capacity for performance management. It is important to increase civil society’s
involvement in local planning and decision-making. Community development involves the
entire community, after all.
Reference
Bahl, R. 1999. “Implementation rules for fiscal decentralization.” International Studies
Program, Georgia State University. January