OF SUBSTANCE AND SPIRIT By DIWA C GUINIGUNDO Diwa C. Guinigundo I would have wanted to conclude this four-column series on central banks and monetary policy with some proposition on the role of monetary authorities in promoting financial inclusion and helping achieve more inclusive economic growth. Inclusive growth ensures no one is left behind. When the tide goes up, everybody is better off. But there are more urgent issues faced by the proponents of sustainable and self-sustaining growth momentum in the Philippines. These urgent issues are well captured by the Development Budget Coordination Committee’s Fiscal Risks Statement 2020 that “demonstrates the (Philippine) government’s commitment to ensure macroeconomic stability towards higher and inclusive growth.” One of these urgent issues came out a few days ago when the broadsheets highlighted the Statement’s pronouncement of fiscal risk deriving from the Supreme Court’s July, 2018, ruling on the computation of the Internal Revenue Allotment (IRA) for local government units (LGUs). Based on the high court’s ruling, the computation of the LGUs’ share would be broadened to include not only the current internal revenue base collected by the BIR but also collections by the Bureau of Customs (tariff duties), ARMM (collection of autonomous region), extraction of national wealth from the ground (could be specific to a locality), excise taxes from tobacco products (produced in a few places), among others. NEDA estimates that this ruling could result in an additional allocation of a few hundred billion pesos starting in 2022 to LGUs and therefore this could suggest a possible reduction of allocation for other purposes, including infrastructure and social services undertaken by the National Government (NG) given a finite budget. What is the issue here? This is a clear case of a zero-sum game if the functions normally carried out by the National Government are not devolved to the LGUs. The LGUs will benefit from the change in the computation based on a bigger number if they would continue to be doing basically the same local functions. The NG, however, will suffer from a smaller allocation with the same nation-wide scope of infra projects and social services. This is the reason NEDA is calling for an increase in the absorptive capacity of LGUs; otherwise, the high court’s ruling may pose a clear and present danger to macroeconomic stability.This is the reason the Department of Budget and Management (DBM) has embarked on a study of possible measures to prevent some serious fallout to the sustainability of the targeted fiscal deficit. Unless an appropriate recalibration of the functions of the NG and the LGUs is established, the ruling as it stands would definitely have some negative repercussions on fiscal sustainability. The NG’s motion for reconsideration of the ruling was denied but the high court agreed to NG’s suggestion that the ruling be implemented prospectively beginning with the 2022 budget cycle, NEDA’s basis for its estimate. But first things first. It would be useful to take heed of some initial challenges to decentralization. Following the passage by Congress of the Local Government Code in 1991, the Philippine Institute for Development Studies (PIDS) noted the devolution of certain powers to local government units giving them political, administrative and fiscal autonomy. In the next two decades, PIDS observed that the impact of decentralization has been quite mixed. “Inequality in the (Philippines) has remained high relative to East Asian neighbors, and the poverty profile has barely changed…. Poverty has remained highly concentrated in the rural areas…. Effective decentralization has not been realized….” PIDS explained the riddle in terms of the failure to complement devolution with revenue-raising powers, clear division of responsibilities, and bureaucratic capacity building. In short, the mandate to deliver on certain social services, while devolved, was not supported by capacity building efforts to allow the LGU’s to perform. At some point, other PIDS studies show that certain functions continue to be carried out by national departments like DPWH constructing local roads. Some local government units continue to depend on DBM guidelines on crafting salary scales despite the autonomy given them by law. Most important, if local government units cannot collect the appropriate amount of taxes to fund their own projects, especially in health and education as well as other devolved functions following the law, it is not surprising that they have very little capacity for self-reliance. They cannot effectively assess public finance on the ground. What have we seen at the Bangko Sentral ng Pilipinas for the last twenty years? Under the law, all proposals of the NG, local governments, government-owned and controlled corporations, among other public entities, have to go through the BSP for the assessment of their monetary implications. Based on this authority, the BSP has processed more and more loan applications of local government units including barangays. They have been borrowing from some commercial banks and the DOF’s Municipal Development Fund Office for both infrastructure and better delivery of social services, including the construction of public markets, slaughterhouses, and acquisition of vehicles and heavy equipment. While still manageable relative to the loan portfolio of the entire banking system, increasing LGU borrowings can reflect the execution of higher level of local government activity. But it can also suggest lower capacity to impose and collect local taxes, fees, and charges despite the automatic release of their share of the Internal Revenue Allotment (IRA) that they pledge for their borrowings from the banks. The DBCC is therefore correct in identifying the Supreme Court’s ruling as a fiscal risk. There is now an added urgency here because it has been reported that the League of Provinces of the Philippines is now requesting the implementation of the new basis of computation of LGUs’ “just share” and the release of the adjusted IRA be made on yes, July 1, 2019. It is a fiscal risk because unless Congress amends the sharing arrangement from 40 percent of all national taxes as defined by the Supreme Court ruling for LGUs, this will be a recurring fiscal drag to public finance, Without new taxes — and passing this through Congress is in itself a big, big challenge — or some reallocation of expenditure, this could increase the NG’s propensity to borrow. This strikes at the very heart of NG’s commitment to limit the fiscal deficit to only 3.2 percent of GDP through 2022 and keep the debt to GDP ratio at a declining trend. It is a fiscal risk because if the request of the League that this be done this year is given due course contrary to the prospective application of the high court’s decision, we estimate that this would require several hundreds of billions for the next few years. The proposal is clearly untimely. LGUs are not exactly prepared to take on the devolved — and still to be devolved — governmental functions in the future. Public finance is not exactly in surplus for NG to be able to afford this latest demand. Good monitoring of LGUs’ capacity and achievements will therefore be a good idea. It is a fiscal risk because the ruling, to be more meaningful and functional, should be complemented by more devolution and corresponding capacity building. It will also require a change in the LGUs’ mindset about governance. This is a process that takes time to complete at a high cost in net present value. Unless these issues are resolved, against the backdrop of more uncertain, highly volatile global environment, our growth prospects may be somewhat dissipated and we shall have more to explain to our people. Let’s take to heart this Haitian proverb: “DèyèMòn Gen Mòn.” This is what we are seeing in this fiscal risk. Mountains after mountains of challenges.