Political Reform and Fiscal Decentralization Revised

8/14/2019 Political Reform and Fiscal Decentralization Revised

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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 wherepublic 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

.01234,760.

08% to Total 82.37% 17.63%Expenditure

1,029,377.66

194,736.81

% to Total 84.09% 15.91%*Net of IRA of P146,591.95 million**Inclusive of IRA of P146,591.95 millionSource: Philippine Commission on Audit 2007 Financial Reports


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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 (2004Figures; 100M

Yuan)

Central LocalRevenue 14,503.

1011,893.

37% to Total 54.90

%45.10

%Expenditure

7,894.08

20,592.81

% 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

Peoples 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


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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 politicalbenefactors 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.)

LocalGovernment

Units IRA

% to

Total Local Taxes % to Total

IRA and IncomeLocal

Taxes &

Income

TOTAL146,591,948

.4082,349,413

.05

Provinces43,011,998.

49 29.34%8,963,717.

84 83%

Cities43,043,605.

14 29.36%55,972,204

.00 43%

Municipalities60,536,344.

81 41.30%17,453,490

.92 78%

Source: Figures are from the Philippine Commission on Audit 2007 Financial Reports and BIR website

These are the sources of LGU Revenue:


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The Philippines

Local Taxes such as:

Business Tax ( neglible for non-domicle areas of largecorporations).

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 revenuecollections based on the third preceding year (Regional distribution is asfollows: Provinces 23%; Cities 23%; Municipalities 34%; and Barangays20%

Non-Tax Revenue

Share in national wealth exploitation in their area

Share in the earnings of government agencies or government-owned orcontrolled corporations engaged in the utilization and development ofnational wealth in their area based on the following: 1% of the grosssales or receipts of the preceding calendar year or 40% of mining taxes,royalties, forestry or fishery charges and such other taxes, fees orcharges including related surcharges, interests, or fines, whichever ishigher

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, Chinas 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


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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%


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United Kingdom 39.00%

Australia 30.50%

Japan 27.40%

Philippines15.40

%

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 sincethe 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 apatheticfrom 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


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individual, community and enterprise initiatives towards productive and

dignified lives. That is the principle of Subsidiarity.

ANNEX 1

LOCAL GOVERNMENT EXPENDITURE ALLOCATION

The Philippines


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The general expenditure which localgovernments incur is consist of:

Personal Services (45-55% ofthe total budget)

Infrastructure development and

maintenance

The cost of delivering basicservices out of local governmentexistence

Payments of debts and othermandatory 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 troopsExpenditure for capital constructionExpenditure for comprehensivedevelopment of agricultureExpenditure for circulating fundsExpenditure for city maintenanceExpenditure for developing land and seaareaExpenditure for foreign affairs

Expenditure for geological prospectingExpenditure for governmentadministrationExpenditure for innovation enterprisesExpenditure for national defenseExpenditure for operating expenses ofagriculture, forestry, water conservationand meteorologyExpenditure for operating expenses ofdepartment of industry & transportationExpenditure for operating expenses ofdepartment of commerce

Expenditure for operating expenses ofdepartment of culture, sport &broadcasting

Expenditure for operating expenses ofeducationExpenditure for operating expense s ofdepartment of sciencesExpenditure for operating expenses ofdepartment of tax, etc.Expenditure for price subsidiesExpenditure for public security agency,procuratorial agency and court of justice.

Expenditure for public healthExpenditure for pensions and relief funds forsocial welfareExpenditure for retired persons inadministrative departmentsExpenditure for supporting agricultureproductionExpenditure for science and technologypromotionExpenditure on subsidies to social securityprogramsExpenditure for supporting underdeveloped

areasExpenditure for special items and otherexpenditure

Source: Country Report China-United Nations Economic and Social Commission for Asia and the Pacific

Political Reform and Fiscal Decentralization Revised

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