Fiscal Decentralization in the Philippines


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The Global Urban Economic Dialogue Series, UN Habitat, 2011

Fiscal Decentralization in the Philippines

  2. 2. Fiscal Decentralizationin the PhilippinesUnited Nations Human Settlements ProgrammeNairobi 2011 Sec1:iii
  3. 3. The Global Urban Economic Dialogue SeriesFiscal Decentralisation in PhilippinesFirst published in Nairobi in 2011 by UN-HABITAT.Copyright © United Nations Human Settlements Programme 2011All rights reservedUnited Nations Human Settlements Programme (UN-HABITAT)P. O. Box 30030, 00100 Nairobi GPO KENYATel: 254-020-7623120 (Central Office)www.unhabitat.orgHS/129/11EISBN Number(Series): 978-92-1-132027-5ISBN Number(Volume): 978-92-1-132414-3DisclaimerThe designations employed and the presentation of the material in this publication donot imply the expression of any opinion whatsoever on the part of the Secretariat ofthe United Nations concerning the legal status of any country, territory, city or areaor of its authorities, or concerning the delimitation of its frontiers of boundaries.Views expressed in this publication do not necessarily reflect those of the UnitedNations Human Settlements Programme, the United Nations, or its Member States.Excerpts may be reproduced without authorization, on condition that the source is indicated.Acknowledgements:Director: Oyebanji OyeyinkaPrincipal Editor and Manager: Xing Quan ZhangPrincipal Author: Gilberto M. LlantoEnglish Editor: Roman RollnickDesign and Layout: Peter Cheseretiv
  4. 4. FOREWORD Ur b a n i z a t i o n provision of adequate housing, infrastructure, is one of the education, health, safety, and basic services. most powerful, irreversible forces The Global Urban Economic Dialogue series in the world. It presented here is a platform for all sectors is estimated that of the society to address urban economic 93 percent of development and particularly its contribution the future urban to addressing housing issues. This work carries population growth many new ideas, solutions and innovative will occur in the best practices from some of the world’s cities of Asia and leading urban thinkers and practitionersAfrica, and to a lesser extent, Latin America from international organisations, nationaland the Caribbean. governments, local authorities, the private sector, and civil society. We live in a new urban era with most ofhumanity now living in towns and cities. This series also gives us an interesting insight and deeper understanding of the wide Global poverty is moving into cities, mostly range of urban economic development andin developing countries, in a process we call human settlements development issues. It willthe urbanisation of poverty. serve UN member States well in their quest for better policies and strategies to address The world’s slums are growing and growing increasing global challenges in these areasas are the global urban populations. Indeed,this is one of the greatest challenges we face inthe new millennium. The persistent problems of poverty andslums are in large part due to weak urbaneconomies. Urban economic development isfundamental to UN-HABITAT’s mandate. Joan ClosCities act as engines of national economic Under-Secretary-Generaldevelopment. Strong urban economies of the United Nations,are essential for poverty reduction and the Executive Director, UN-HABITAT v
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  6. 6. ContentsFOREWORD iiiContents ivCHAPTER 1 INTRODUCTION 1 Objective of the Report 2CHAPTER 2 THE CONCEPT AND ELEMENTS OF FISCAL DECENTRALIZATION 5 Oates decentralization theorem 5 An adequate enabling policy environment 7CHAPtER 3 TAX-EXPENDITURE ASSIGNMENT 11 Local government tax revenues: trend and composition, 1989-2009 11 Local government expenditures: trend and composition, 1989-2003 19CHAPtER 4 iNTERGOVERNMENTAL FISCAL TRANSFERS 31 Instruments of intergovernmental fiscal transfers 31 Designing fiscal transfers 31 Philippine internal revenue allotment 33 Distributable resource pool 36 Distributive and allocative formula 38CHAPTER 5 LOCAL GOVERNMENT FINANCING48 40CHAPTER 6 CONCLUSIONS AND RECOMMENDATIONS 43Bibliography 44
  7. 7. Fiscal Decentralization in the PhilippinesLists of Figures, Tables and boxesList of figuresFigure 1 Three Branches of the Philippine Government 1Figure 2 Philippine Local Government Units 2Figure 3 Total Income, all LGUs, 1989-2009 14Figure 4 Distribution of Total Income, all LGUs, 1989-2009 (%) 16Figure 5 Distribution of Income by type of LGU, 1990 17Figure 6 Distribution of Income by type of LGU, 2009 17Figure 7 Distribution of LGU Expenditures, All LGUs 1988-2003 20Figure 8 Distribution of Total Expenditures - All Provinces, 1988-2003 22Figure 9 Distribution of Total Expenditures - All Municipalities, 1988-2003 23Figure 10 Distribution of Total Expenditures - All Cities, 1988-2003 24Figure 11 Local Income vs. Total Expenditure - All LGUs, 1988-2003 28Figure 12 Total Income with IRA vs. Total Expenditure - All LGUs, 1989-2003 29Figure 13 Total Income with IRA vs. Total Expenditure - by Type of LGU, 1990 29Figure 14 Total Income with IRA vs. Total Expenditure - by Type of LGU, 1990 29Figure 15 Local Income vs. Total Expenditures, by type of LGU, 1990 30Figure 16 Local Income vs. Total Expenditures, by type of LGU, 2003 30Figure 17 Release Procedure of the Internal Revenue Allotment99 34List of tablesTable 1 Tax assignment in cities, provinces and municipalities 12Table 2 Distribution of Local Income, All LGUs, 1989-2009 (in million pesos) 15Table 3 Distribution of LGU Expenditures, All LGUs, 1988-2003 21Table 4 Number of Awardees per Award Category (1994 – 2009) 26Table 5 Fiscal transfers to local government units 34Table 6 Percentage Shares of LGUs in the Internal Revenue Allotment 35Table 7 Distribution Formula for the Internal Revenue Allotment 35List of BoxesBox 1 Assessment level by type of land 13Box 2 An assessment of tax assignment to local government units 18Box 3 The internal revenue allotment vis-à-vis other sources of local income 36viii
  8. 8. chapter 1 IntroductionCHAPTER 1 INTRODUCTION Many developing countries, the Philippines bicameral and is composed of the Senate andincluded, have embarked on a major shift the House of Representatives. Senators arein policy and approach to development nationally elected while representatives areby decentralizing and devolving central elected by legislative districts. The judiciary isgovernment powers, functions and composed of the Supreme Court and the lowerresponsibilities to local government units.1 courts. As of 2011. the political subdivisionsIn 1991, the Philippine Congress enacted the are the 80 provinces, 138 cities, 1, 496Local Government Code, which devolved to municipalities, and 41, 945 barangays. Theylocal government units the great responsibility are collectively referred to as local governmentof providing the local populace with a range units. The barangay is the lowest tier of localof basic public goods and services. governance. A group of barangays comprise a municipality. The more urbanized and The Philippines has a presidential unitary developed barangays comprise a city. Theregovernment system. The national government are two types of cities: (a) highly urbanized,has three independent branches, namely, the which is independent of the province, andexecutive, the legislature, and the judiciary. (b) component cities (smaller cities). AThe executive is headed by a popularly elected cluster of municipalities or municipalitiespresident. The executive branch is functionally and component cities, comprise a province.organized into sectoral departments, each Each local government is headed by directlyheaded by a cabinet secretary appointed by elected officials, namely, a chief executivethe president. The legislature, or Congress, is and a legislative body called “sanggunians.”.1 In the Philippines, these comprise provinces, cities and Figure 1 shows the three co-equal branches of municipalities. In other countries, these local government units government in the Philippines. Figure 2 shows are commonly known as sub-national governments or sub- national units. Throughout this paper, I retain the conventional the structure or layers of local government term used in the Philippines, namely “local government units” (LGUs). units in the country.Figure 1. Three Branches of the Philippine Government EXECUTIVE BRANCH LEGISLATIVE BRANCH JUDICIAL BRANCH President Congress Supreme Court Vice President Court of Appeals Court of Tax Appeals House of Senate Representatives Sandiganbayan Cabinet Secretariat Regional Trial Courts Other Special Courts 1
  9. 9. Fiscal Decentralization in the PhilippinesFigure 2. Philippine Local Government Units Provinces Highly Urbanized Cities Municipalities Component Cities Barangays Barangays Barangays The 1991 Local Government Code in 1986” (Tayao 2010)3. Brillantes and(Republic Act 7160) provided local Tiu Sonco II (2010) saw decentralizationgovernment units with powers to tax and as reframing “the discourse of governancelevy various fees and charges, and to borrow when local governments begun to play a keyfrom the financial markets in order to raise role in governance in a country long steepedrevenues for financing local development. A with a history of excessive centralizationkey element of fiscal decentralization is the and dominance by the center, the latest ofinter-governmental fiscal transfer called the which was the domination by the Marcos‘internal revenue allotment,’ which is a block dictatorship”. These political scientists calledgrant to local government units based on a attention to the substantial changes madeformula designed by the Philippine Congress. in the politico-administrative system of the Philippines. They viewed the Code as a force, This is a ground-breaking legislation because which redefined the “notion of governanceit has decentralized and devolved significant by providing the enabling framework forpower and authority to local government units, local government-business partnerships, andunleashing tremendous opportunities for self- also local government-NGO partnerships,development at the local level2. In the period including opening the door to direct peoplepreceding its enactment into law, the central participation in governance”.(national) government exerted control overvirtually all aspects of local governance. The1991 Local Government Code endows local Objective of the Reportgovernment units with fiscal autonomy andaccountability to the local population, which The objective of this report is to determineconstitute a major departure from firm direction to what extent fiscal decentralization hasand control by the national government. empowered local government units in the Philippines to efficiently discharge the greater Local political scientists have enthusiastically responsibility over governance, public serviceobserved that “decentralization has been delivery and local development mandated tothe single most significant political reform them by the 1991 Local Government Code.after the fall of the Marcos dictatorship More specifically, it provides a descriptive2 The Philippines has political decentralization because powers analysis of fiscal decentralization in the are devolved to political leaders who are directly elected by or accountable to the population as opposed to de-concentration 3 Tayao, Edmund (2010), “Decentralization in the Philippines: or administrative decentralization where power is devolved to Impact on Politics and Governance,” unpublished paper, appointees of the national government. December 09.2
  10. 10. chapter 1 IntroductionPhilippines. It focuses on local government negates the advantages given to decentralizedfiscal policies and inter-governmental fiscal regimes of better local service delivery arisingtransfer and identifies local finance policy from closer matching of public services withreform issues, which policy makers should local preferences and greater efficiency in theaddress to enable local government units to provision of public goods. A recent paper byimprove their local revenue-raising effort.4 Llanto and Quimba (2010) provides someThe inability to raise adequate local revenues is empirical evidence that there has not beenat the core of the problem of local government a significant improvement in the deliveryunits in delivering local public services. A of health and education services despitereason behind this is the inadequate taxing devolution5. Their empirical analysis seems topowers assigned to local government units, indicate that decentralization has not resultedresulting in a vertical fiscal imbalance, which in an improvement in the delivery of localoccurs when the central government retains services, contrary to the popular notion, whichcontrol over major sources of tax revenues. tends to be based on anecdotal evidence. The intergovernmental fiscal transfer The report is organized as follows. Tocalled the internal revenue allotment (IRA) provide context to the discussion, Section 2significantly supplements or covers the provides a brief review of the concept of fiscalinadequacy in local revenue collection. The decentralization and its elements based onallocation or distribution formula for the recent literature. Section 3 discusses the tax-internal revenue allotment stands a close review expenditure assignment at the local level. Itand improvement even as it has become the first discusses the structure and compositionmost important source of revenue for many of local tax revenues, fees and charges andlocal government units, especially the poorer then describes the pattern of local governmentmunicipalities. The irony is that the internal spending with focus on health and education,revenue allotment may have had a disincentive major expenditure items for which data areeffect on local effort to raise revenues, making more readily available. A key finding is themany local government units dependent on it presence of an inefficient tax-expenditurefor funding local development and services. assignment, which has constrained theThe distribution formula for the IRA should envisaged development of local areas by localbe improved but Philippine local government people utilizing local resources. This confirmsunits must exert effort to raise local revenues earlier findings of Manasan (2007) who foundbecause failure to do so results in inefficient a mismatch between revenue resources andlocal service delivery and diminished expenditure needs of the various levels of localaccountability. The IRA received by local government.government units has not been adequateenough to finance comprehensive service An issue overlooked by many localdelivery and local development programs. researchers is the need for local government units to exert more effort to improve local A case can also be made about the need for expenditure management. The findings oflocal government units to improve local public Llanto and Quimba (2010) show that manyexpenditure management. Under-spending LGUs have been under-spending, which pointon vital local public goods and services outs out the need for more efficient localaffects the level of welfare of households and expenditure management. The key message of this section is the importance of providing4 In the Philippines, sub-national governments are called “local government units” (LGUs), which are comprised of provinces, 5 Llanto, Gilberto M. and Francis Quimba (2010), municipalities, cities and “barangays.” Barangays are the “Decentralization and Local Service Delivery,” paper prepared smallest political unit headed by a local elective officer called for the Local Government Foundation, unpublished. “barangay captain.” Municipalities and cities are comprised of several barangays , respectively. 3
  11. 11. Fiscal Decentralization in the Philippineslocal government units with ample power transfers, which cover both conditional andand authority to raise the necessary revenues unconditional fiscal grants. The biggest part ofto finance local development but at the same the fiscal transfers is composed of the internaltime, local government units must exert utmost revenue allotment. The current discourse andeffort in improving local public expenditure proposals to increase the amount of the IRA,management. It is commonplace to hear in and at the same time change the formula for itsvarious forums in the country complaints distribution has to be enlightened by findingsabout the inadequacy of local resources to of systematic research and study that has yet toaddress various development challenges. be undertaken. Policy makers cannot simplyLlanto and Quimba (2010) indicate that there rely on the narrow metric of politics to decideis room for improving service delivery even on this significant issue. There is a cryingunder a regime of constrained resources. need to produce an evidence-based policy recommendation on how to improve the use Section 4 analyzes intergovernmental fiscal of this important fiscal tool.transfers, basically the major block fiscalgrant called the “Internal Revenue Allotment Section 5 summarizes the status of local(IRA).” The IRA is the single biggest revenue government units’ access to developmentitem for many LGUs and the section points out capital and identifies areas for policy reform.outstanding issues affecting the efficacy of this It looks at the outstanding constraints tofiscal tool for helping with local development. access to the capital markets and officialPopular discourse on this topic inevitably development assistance and sketches pathwaysgravitates around suggestions to increase the to reform6. The final section pulls together theIRA from its current share of 40% of national findings in preceding sections, and draws someinternal revenue taxes to 50 percent and even conclusions and policy recommendations.60 percent with apparent disregard about theimplications of the suggestion to the financingof the country’s overall national development 6 The major issues on access to capital markets were firstagenda. There is a need for an in-depth presented and analyzed in Llanto, Gilberto M., and others (1998), Local Government Units’ Access to the Private Capitalresearch and analysis of the Philippine Markets, Makati City: Philippine Institute for Development Studies. Some of those issues have been resolved, many othersexperience with intergovernmental fiscal have remained outstanding.4
  12. 12. Chapter 2 THE CONCEPT AND ELEMENTS OF FISCAL DECENTRALIZATIONCHAPTER 2 THE CONCEPT AND ELEMENTS OF FISCAL DECENTRALIZATION7Oates decentralization theorem devolved vast powers to local government units, introduced a significant shift in the A working definition of decentralization policy and institutional framework foris that by Faguet (2005) who defines it as development. In their review of Philippine“the devolution by central, (that is, national) decentralization, local scholars (Brillantesgovernment of specific functions, with all of and Tiu, 2010; Tayao, 2010) noted thatthe administrative, political and economic the Philippine political and administrativeattributes that these entail, to democratic system has been dominated by the centrallocal (i.e. municipal) governments which are government since the time of the Spanishindependent of the center within a legally colonization. A long history of centralizationdelimited geographic and functional domain”. meant that policies, programs, funding,A common denominator behind policy allocation of resources, etc were controlledmakers’ decision to decentralize and devolve is and implemented by the central governmentthe belief that this paradigm shift can improve situated in Manila (somewhat derisivelythe allocation problem in the economy, called “imperial Manila”). Thus, 1991 Localimprove productive efficiency and bring about Government Code (Republic Act No. 7160)better cost recovery. In the last two decades, was a critical break point in the country’sdecentralization has been at “the center stage political and administrative framework. In hisof policy experiments in a large number of reading of recent Philippine political history,developing and transition economies in Latin Tayao (2010) called decentralization as “singleAmerica, Africa and Asia” (Bardhan 2003, most significant political reform after the fallpage 1) for a number of reasons. For example, of the Marcos dictatorship in 1986.”a motivation for decentralization in LatinAmerica was the disenchantment with military The thinking behind this is that greaterrule and dictatorships, which has created a involvement of LGUs or sub-national unitspolitical culture that places a premium on in service provision, including the provisiondecentralized decision making to prevent a of basic infrastructure such as local roads,return to the past. In China, decentralization farm-to-market roads, communal irrigationwas seen as a means for social cohesion, facilities, among others, will result in betterfaster economic growth and preservation of service delivery and accountability, providecommunist party rule (Shah, 1997). opportunities for people participation in development, and create an enabling In the Philippines, the enactment into law environment for local private sectorof the Local Government Code in October investments.10, 1991, which decentralized and and Proponents of decentralization claim that it7 The brief review of literature partly draws from Gilberto has provided a framework for responsive and M. Llanto, “Decentralization, Local Finance Reforms and New Challenges: The Philippines,” a paper presented at the accountable local governance. According to Third Symposium on Decentralization and Local Finance at the Institute for Comparative Studies in Local Governance Bird (1993) it has given local constituents what (COSLOG), National Graduate Institute for Policy Studies, Tokyo, Japan on March 10, 2009. they want and are willing to pay for, and the 5
  13. 13. Fiscal Decentralization in the Philippinesopportunity for greater local responsiveness and the harnessing of local energy for localand political participation. It has demonstrated development, which could make governmentsa potential to lead to more appropriate and to be “more responsive and efficient;” at thebetter-utilized facilities, lower costs per unit same time decentralization offers a practicalof service and improved operations and avenue for “diffusing social and politicalmaintenance (Klugman 1994)8. Devolution tensions and ensuring local cultural andis based on the subsidiarity principle and political autonomy” (Bardhan 2003, page 1).rests on the view that it results in improvedefficiency in the delivery of public services, and Joumard and Kongsrud (2003) add that ithence a more efficient allocation of resources can strengthen the democratic process, allowin the economy (Dabla-Norris 2006)9. This governments to tailor the supply of publicperspective draws from the classic distinction goods to local preferences and introduce somegiven by Musgrave about the different tasks competition across jurisdictions, thus raisingof government in an economy: allocation public sector efficiency. At the same time, it(which is better done by local governments), must be recognized that it can entail efficiencystabilization and redistribution (which are losses, and make it difficult to implementbetter done by central government). redistributive policies and complicate macroeconomic management (ibid). A These views echo the decentralization theorem contrarian view is that “decentralization may(Oates,1972, page 55), which maintains that increase the participation of people at the“each public service should be provided by the local level but sometimes it is only a smalljurisdiction having control over the minimum privileged elite group who get to participate”geographical area that would internalize (Conyers 1990, page 18) quoted by Oatesbenefits and costs of such provision.” Oates (1993). Faguet (2005) pointing out that there(1993) later observes that decentralization is a is little agreement concerning the effects ofmechanism to make policy more responsive to decentralization in the empirical literature,local needs and to involve the local populace says that pessimists argue local governmentsin processes of democratic governance10. The are too susceptible to elite capture, and tooeconomic case for decentralization is the lacking in technical, human and financialenhancement of efficiency that it introduces resources, to produce a heterogeneous rangebecause locally provided public goods, of public services that are both reasonablywhich are more responsive to local taste and efficient and responsive to local demand.preferences are superior to centrally determinedgoods. Decentralization provides for “tailoring For political decentralization to belevels of consumption to the preferences of effective, it should be accompanied bysmaller, more homogeneous groups” (Wallis fiscal decentralization. Many years ago in aand Oates 1988, page 5). Decentralization paper prepared for the World Bank Annualhas laid down the foundation of a new, major Conference on Development Economics,“institutional framework” for the provision Tanzi (1996) observed that decentralization ofof a range of benefits to local constituents fiscal activities can improve the allocation of public spending by making it more consistent8 However, according to Klugman (1994) greater efficiency need not necessarily accompany decentralization, given the risk of with local preferences. Oates (1996) cites the loss of economies of scale, duplication and overlap.9 Shah (2004) points out that the principle of subsidiarity potential contribution of decentralization in was introduced by the Maastricht Treaty for assignment of responsibilities among members of the European Union. enhancing allocative efficiency by providing According to this principle, taxing, spending and regulatory a menu of local outputs that reflects the functions should be exercised by the lowest levels of government unless a convincing case can be made for assigning the same to higher levels of government.10 While a discussion of the opposing views may be interesting, this paper will not dwell on it because it is outside the scope and objectives of the paper.6
  14. 14. Chapter 2 THE CONCEPT AND ELEMENTS OF FISCAL DECENTRALIZATIONvarying wishes and conditions in local areas11. placed on the marginal amount of services forFurthermore, it can provide “political glue for which recipients are willing to pay is just equalcountries with regional ethnic diversity” (Tanzi to the benefit they receive (Ebel and Yilmaz,1996, page 295)12. Fiscal decentralization 2002; Oates 1972, 2006 )14 To implementis not always seen as conferring unmitigated this, sub-national (local) governments must bebenefits to the local populace. Fiscal given the authority to exercise “own source”decentralization is not without its share of taxation at the margin and be in a financialcontroversy. Oates (2006) mentions some position to do so. This is the essence of fiscalanalysis that “reveals its dark side, especially decentralization (Ebel and Yilmaz 2002).in practice” and that “raises some seriousquestions about its capacity to provide an Following Smoke (2001), the key elementsunambiguously positive contribution to an that should be included in a good fiscalimproved performance of the public sector” decentralization program are as follows:(pages 2-3). Smoke (2001) alludes to potential (a) an adequate enabling environment; (b)macroeconomic dangers and growth retarding assignment of an appropriate set of functionseffects of fiscal decentralization, indicating to local governments; (c) assignment of anhowever that most of the evidence is anecdotal appropriate set of local own-source revenuesand relevant only under particular uncommon to local governments; (d) the establishmentcircumstances or focused on correctable rather of an adequate intergovernmental fiscalthan inherent problems. transfer system; and (d) the establishment of adequate access of local governments to This is not the place to expound on this development capital.interesting facet of fiscal decentralization aspointed out by Oates and others but certainlyit poses a challenge to fiscal decentralization An adequate enabling policyanalysts. Suffice it to say at this point that environmentthere is a need for more research and theproduction of comparative information on To begin with an enabling policythe extent to which and the conditions under environment for fiscal decentralization, whichwhich the alleged benefits and disadvantages is clearly stated in constitutional mandateof fiscal decentralization have been realized or law, defining some minimum level of(Smoke 2001).13 autonomy, rights and responsibilities for local governments is important. The return of The decentralization theorem argues that democratic governance in the Philippines aftersub-national governments can more efficiently the 1986 People Power Revolution followingprovide public services to identifiable a long period of martial rule in the 70s andrecipients up to the point at which the value 80s has provided an enabling environment for11 Oates, Wallace (1996), “Comment on ‘Conflicts and Dilemmas decentralization. The series of freely elected of Decentralization’ by Rudolf Hommes,” in Bruno, Michael and Boris Pleskovic, editors, Annual World Bank Conference on democratic governments since then have Development Economics, Washington, D.C.: The World Bank, continued to recognize that it is good for a pages 351-353.12 Tanzi, Vito (1996), “Fiscal Federalism and Decentralization: A functioning democracy to allow local leaders Review of Some Efficiency and Macroeconomic Aspects,” in Bruno, Michael and Boris Pleskovic, editors, Annual World Bank and people to have the power and responsibility Conference on Development Economics, Washington, D.C.: The World Bank, pages 295-316. of deciding what goods and services to13 Smoke, Paul (2001) “Fiscal Decentralization in Developing Countries: A Review of Current Concepts and Practice,” Democracy, Governance and Human Rights Programme 14 Robert D. Ebel, Robert and Serdar Yilmaz (2002), “On the Paper Number 2, United Nations Research Institute for Social Measurement and Impact of Fiscal Decentralization,” Policy Development, February. Professor Smoke declares that Research Working Paper 2809, The World Bank, March; anecdotal evidence and case studies provide some insights but Oates, Wallace (2006), “On the Theory and Practice of Fiscal there is a need for more policy experimentation and systematic Decentralization,” IFIR Working Paper No. 2006-05, May; research to understand the prospects for fiscal decentralization Oates, Wallace E. 1972. Fiscal Federalism. New York: Harcourt in developing countries. Brace Jovanovich 7
  15. 15. Fiscal Decentralization in the Philippinesproduce and finance. The enactment into law Tax Code (Presidential Decree 231), and theof the 1991 Local Government Code signals a Real Property Tax Code (Presidential Decreemajor departure from the traditionally centrist 464).approach to governance and development indeveloping countries, which view the problem In the Philippines, the 1991 Localof development as one requiring the presence Government Code devolved to localof a strong central government that will lay government units the responsibility ofdown policy directions and allocate resources delivering local and basic public servicesaccordingly. It may be recalled that before the and raising local or own-source revenuesabove-mentioned period of martial rule, there for financing their expenditure assignment.were a series of policy reforms leading toward Under the Local Government Code, locallocal autonomy. government units have autonomy in deciding on the composition of local spending, taxing Atienza (2006) related the quest for and borrowing that they would need to meetdecentralization and autonomy in a recent local development objectives. Thus, localstudy15. The 1991 Local Government Code government units are now responsible for themay be a radical piece of legislation but it following areas: land use planning, agriculturalis not the first decentralization law in the extension and research, community-country and it passed after five years of debate based forestry, solid waste disposal system,in Congress (Uchimura and Suzuki 2009)16. environmental management, pollutionGuevara (2004) recounted that in 1959 the control, primary health care, hospital care,Local Autonomy Act (Republic Act 2264) social welfare services, local buildings andwas passed to grant fiscal and regulatory structures, public parks, municipal servicespowers to local governments. In 1967, the and enterprises such as public markets andDecentralization Act (Republic Act 5185) abattoirs, local roads and bridges, healthincreased the financial resources and powers facilities, housing, communal irrigation, waterof local governments. The 1973 Constitution supply, drainage, sewerage, flood control andof the Philippines mandated that the state inter-municipal telecommunications.“shall guarantee and promote the autonomyof local governments to ensure their fullest The Local Government Code also transferreddevelopment as self-reliant communities.” to local government units certain regulatoryMartial rule stymied those reform efforts. functions. The fiscal transfers to localThe 1991 Local Government Code, then, governments were likewise increased, with“institutionalized a systematic allocation of 40% of internally generated taxes allocatedpowers and responsibility between the national to local governments through the Internaland local governments” (Guevara 2004, page Revenue Allotment (IRA). In addition, the1)17. The 1991 Local Government Code was Code encouraged the local government unitsa landmark legislation that gave rise to a major to explore alternative sources of revenue byshift in local governance (Manasan 2007). exercising their corporate powers in partnershipThe Code consolidated and amended the with the private sector. An innovationLocal Government Code of 1983, the Local introduced by the Code is the provision of a framework for active participation of non-15 Atienza, Maria Ela (2006), “Local Governments and Devolution in the Philippines,” in Noel Morada and Teresa Encarnacion, governmental organizations and civil society editors, Philippine Politics and Governance: An Introduction, Department of Political Science, University of the Philippines. in local governance18. Indeed, the new16 Uchimura, Hiroko and Yurika Suzuki (2009), “Measuring Fiscal Decentralization in the Philippines,” IDE Discussion Paper No. 18 For a detailed discussion, see Brillantes, Alex, Gilberto 209, Institute of Developing Economies, July. M. Llanto, James Alm and Gaudioso Sosmena (2009),17 Guevara, Milwida (2004), “The Fiscal Decentralization Process “Decentralization and Devolution in the Philippines: Status, in the Philippines: Lessons from Experience,” http://www.econ. Triumphs, Tests and Directions,” Report submitted to the Department of the Interior and Local Government, unpublished i2004-revised2.pdf, date accessed August 29, 2011. paper, April 298
  16. 16. Chapter 2 THE CONCEPT AND ELEMENTS OF FISCAL DECENTRALIZATIONinstitutional framework for local development The succeeding sections of this paperhas generated an enthusiastic response on the first outline the current status of (a)part of local government units (LGUs) to the tax-expenditure assignment, (b) thedeliver better public services to local citizens. intergovernmental fiscal transfer (IRA), andIt has promoted local autonomy by devolving (c) the access of local government units toexpenditure responsibilities and vested greater development capital through borrowing, andtaxing powers on local government units19. then highlight outstanding issues or problems which should be addressed by policy makers.19 The paper does not discuss the Organic Act of Muslim Mindanao, which transfers to the regional government of the Autonomous Region of Muslim Mindanao all powers, functions, and responsibilities heretofore being exercised by the central government except (a) foreign affairs, (b) national defense, (c) postal service, (d) fiscal and monetary policy, (e) administration of justice, (f) quarantine, (g) citizenship, naturalization and immigration, (h) general auditing, civil service and elections, (i) foreign trade, (j) maritime, land and air transportation and communications that affect areas outside the ARMM, and (k) patents, trademarks, trade names and copyrights. For a discussion see Manasan (2005). 9
  17. 17. Fiscal Decentralization in the Philippines10
  18. 18. Chapter 3 TAX-EXPENDITURE ASSIGNMENTCHAPTER 3 TAX-EXPENDITURE ASSIGNMENT A principal challenge faced by LGUs and Expenditures) from the Commission onis finding the means to raise adequate Audit’s Annual Financial Reports for Localfinancing for local development. The LGUs Government Units for the years 1989 to 2009.are a heterogeneous group with varyingadministrative, financial and technicalcapacities. There is also great variation in the Local government tax revenues:level of local development with the few highly trend and composition, 1989-2009urbanized cities enjoying bigger and morebuoyant tax bases. The rest of the LGUs are Table 1 summarizes the various taxes thatcomposed of smaller cities and municipalities are assigned to local government units bywith weaker local economies. Provinces are the Local Government Code. The Codealso a heterogeneous lot with great variation has empowered local government units toin economic, administrative, financial, and set local tax rates and collect own-sourcetechnical capacities. The rising expectations revenues. Only cities and provinces can levyof the local populace for more and better the real property tax. The former shares thequality public services has to be matched by proceeds with their barangays while provincesthe ability of local government units to find share the proceeds with the municipalities andsubstantial funding and to have better and barangays. Both provinces and cities are alsomore efficient implementation of programs authorized to impose a tax on the transfer ofand project for local development. The 1991 real property, sand, gravel, and other quarryLocal Government Code assigned taxing and resources; amusement places; franchises;spending powers to local government units. It professionals; delivery vans and trucks; andis an acknowledged principle that matching idle lands. On the other hand, municipalitiesexpenditure and tax assignments is desirable and cities, but not provinces, are allowed tobecause this will enable the local governments levy the community tax and the local businessto shape the supply of public goods according tax (i.e.,turnover tax levied on the grossto local preferences and willingness to pay receipts of businesses/traders)22.(Jourmard and Kongsrud 2003)20. The main sources of local incomes are To assess the fiscal performance of the LGUs, the IRA, property tax, the business tax, andtime series data covering pre-decentralization service and business income from various localperiod (1989-1991) up to the present were economic enterprises. However, Section 133 oftabulated21 Income data were obtained from the Code also provides a detailed list of taxes,the Statement of Income and Expenses (SIE) 22 The first tier of government is the central government which operates through departments (ministries). The second tierwhile expenditure data were from the SAAOB of government is composed of local government units (LGUs) and one autonomous region, the ARMM. In general, the local(previously called Schedule of Appropriations government structure is composed of three layers. Provinces comprise the first layer. In turn, the province is divided into20 Joumard, Isabelle and Per Mathis Kongsrud. 2003. “Fiscal municipalities and component cities, each of which is further relations across government levels.” Economics Department subdivided into barangays, the smallest political unit. At the Working Papers No. 375, Organization for Economic same time, independent cities (or highly urbanized cities) exist Cooperation and Development, December 10. at the same level as the provinces, i.e., they share the same21 Sources: Commission on Audit’s Annual Financial Reports for functions and authorities. Independent cities are divided directly Local Government Units into barangays (Manasan 2005). 11
  19. 19. Fiscal Decentralization in the Philippineswhich are revenue-productive but which only taxes, customs duties, value-added tax, and thethe central government can impose. These excise taxes on alcoholic beverages, tobaccoinclude the individual and corporate income products and petroleum products.Table 1. Tax assignment in cities, provinces and municipalities Tax base Cities Provinces Municipalities Barangays Transfer of real property X X Business of printing and publication X X Franchise X X Sand, gravel and other quarry resources X X * * Amusement places X X * Professionals X X Real property X X * * Delivery vans and trucks X X Idle lands X X Business X X X Community tax X X * *shares in the proceeds of levy of province Local generated revenues are basically the Tax Revenues includes Property Tax, Businesstax revenues and non-tax revenues obtained Tax and Licenses and Other Taxes. Propertyfrom regulatory fees, service charge, income Tax is composed of real property tax, propertyfrom local enterprises and other receipts. The transfer tax, real property tax on idle lands,share of local own source revenues and non- special assessment tax and special educationtax revenues to total LGU income was at 62 tax. Under Property Tax, the major one is thepercent in 1989, decreasing over time. In real property tax. Provinces can levy a real2009, it stood at 33 percent. As IRA’s share property tax not exceeding 1% of the assessedin the total LGU income increased through value of the real property. For cities, the realthe years, tax revenues and non-tax revenues’ property tax rate should not exceed 2% of theshare decreased. Please see Table 2 and Figure assessed value of the real property. The Local3. From 38 percent in 1989 Tax Revenues Government Code defines the maximumshares dropped to 29 percent in 1992, and assessment level for each type of real propertyto 22 percent by 2009. As for the Non-Tax (Box 1). The assessment level varies from localRevenues, from 24 percent in 1989 it was government to local government based ondown to 13 percent in 1992. By 2002 Non- local ordinances passed by the legislative bodyTax Revenue was at its lowest at 7.5 percent, (“sanggunian”).then slowly picked up and was 11 percent by2009.12
  20. 20. Chapter 3 TAX-EXPENDITURE ASSIGNMENTBox 1. Assessment level by type of land Assessment level on lands % (maximum under Local Government Code) Residential 20% Commercial 50% Industrial 50% Mineral 50% Timberland 20% The Local Government Code defines community tax, amusement tax, tax on sand“assessed value” (AV) as the fair market and gravel and other quarry products, etc.value of the real property multiplied by the Non-Tax Revenues on the other hand consistsassessment level. It is synonymous to taxable of Service Income, Business Income, Othervalue. The assessment level is the percentage Income and Capital Revenues. Service Incomeapplied to the fair market value to determine is classified as Government Services andthe taxable value of the property. On the other Operating and Service Income in earlier years,hand, “fair market value” is defined by the and Service Income + Permits and Licenses inLocal Government Code as fair market value” later years. Business Income includes incomeas the price at which a property may be sold from local economic enterprises or LEESby a seller who is not compelled to sell and such as markets, slaughterhouses, waterworksbought by a buyer who is not compelled to and transportation systems, and hospital feesbuy. The real property tax (RPT) is computed among others. Other Income consists of LGUas follows: Shares from National Wealth, Economic Zones, EVAT and Tobacco Exise Tax, and RPT = AV x rate. other miscellaneous income. Capital Revenues Buyers of real property pay a one-time are mainly income from the sale of assets butproperty transfer tax when title to a real in later years it also included receipts fromproperty passes on to them. The special the sale of confiscated goods and properties,education tax is an additional 1% tax on the disposed assets, securities and gains fromassessed value of real property in addition foreign the basic real property tax. A special The Property Tax has been the largestassessment tax on real property may be levied contributor when it comes to own-sourceto address a local development goal23. On the revenues with a share of 22 percent in 1989,other hand, the real property tax on idle lands followed by Business Taxes and Licenses andhas generally not been implemented by local Business Income both at 10 percent but latergovernment units due to political constraints. years especially after devolution, show that Business tax and licenses, or taxes on goods IRA has become a dominant source. Pleaseand services in other years, includes business see Figure 4. The local government unitstax, franchise tax, occupation tax, printing depended more on the IRA and this hasand publication taxes, tax on fishing vessels eroded the effort of local government units toand tax on delivery trucks and vans among collect own-source revenues. For many localothers. Under the category of Other Taxes are government units, it is much easier to just rely on the IRA transfer than it is to collect real23 Recently Quezon City, one of the largest highly urbanized cities imposed a special levy of 0.5 percent on residential lots with property taxes and business taxes24. an assessed value of Pesos 100,000.00 (approximately US$2, 325.00 at the current exchange rate of Pesos 1 to US$ 1) to finance the construction of housing for informal settlers in the 24 The disincentive effect of IRA is discussed in succeeding city.. paragraph below. 13
  21. 21. Fiscal Decentralization in the Philippines In general, there is a general downward percent and 6 percent in 1989 to 2 percenttrend in the contribution of total local tax and 1 percent in 2009 respectively. Businessand non-tax revenues to LGU income. By Tax, Service Income and Other Income did2009 Property Tax is only at 11 percent not change that much through the years. It isof total LGU income while Business tax important to note that this general situation isdropped to 9.6 percent from its level of 10.5 true for provinces and municipalities but notin 1990 before the 1991 Code. Other Taxes for cities as indicated below.and Capital Revenue also went down from 4Figure 3: Total Income, all LGUs, 1989-2009200,000180,000160,000140,000120,000100,000 80,000 60,000 40,000 20,000 0 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2008 2009 Total Tax Revenues Total Non Tax Revenues IRA14
  22. 22. Table 2. Distribution of Local Income, All LGUs, 1989-2009 (in million pesos)   1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2008 2009 Property Tax 21.9 22.9 21.4 16.3 13.3 13.0 13.6 14.2 14.2 13.9 12.8 12.7 13.4 12.4 13.4 13.4 13.6 12.5 11.8 10.7 Business Tax 11.5 10.5 10.0 9.3 13.3 8.8 9.5 10.9 10.3 10.3 10.0 9.4 10.1 10.0 10.0 10.7 10.8 10.8 10.9 9.6 Other Taxes1 4.7 3.6 3.5 3.5 5.7 2.8 3.2 2.7 2.7 2.8 2.4 2.4 2.0 1.7 1.9 1.7 1.7 1.6 1.6 1.5 TOTAL TAX REVENUES 38.1 37.0 34.8 29.1 32.3 24.7 26.3 27.8 27.2 27.1 25.1 24.4 25.5 24.1 25.3 25.8 26.1 24.9 24.3 21.8 Service Income2 4.0 3.4 3.1 3.8 3.1 3.0 2.9 3.2 3.0 2.8 2.7 2.6 2.8 2.6 2.7 3.0 3.3 3.3 3.5 3.3 Business Income3 11.6 12.2 11.3 6.7 5.8 5.7 5.2 5.7 5.4 5.5 4.8 4.6 4.7 3.2 3.2 3.9 3.8 3.9 3.9 4.1 Other Income 2.6 3.0 2.2 1.1 1.2 1.0 1.8 1.2 1.0 0.9 0.8 1.2 1.1 1.7 2.3 2.5 2.1 3.0 3.7 2.7 Capital Revenue 6.1 1.3 1.2 1.2 0.1 0.0 0.1 0.4 0.7 0.3 0.1 0.1 0.2 0.0 0.0 0.3 1.0 0.0 0.8 0.8 TOTAL NON TAX REVENUES 24.2 20.0 17.7 12.7 10.2 9.7 10.0 10.5 10.1 9.4 8.4 8.5 8.7 7.5 8.3 9.7 10.2 10.1 11.9 10.9 IRA 37.7 43.0 47.4 58.1 57.5 65.6 63.7 61.7 62.6 63.5 66.5 67.2 65.8 68.3 66.4 64.5 63.7 64.9 63.8 67.3 TOTAL LOCAL INCOME 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 Source: Annual Financial Reports 1989-2009 1 - Includes Shares from National Wealth, Economic Zones, EVAT and Tobacco Exise Tax, PAGCOR/PCSO  2 - Includes regulatory fees and permits and licenses 3 - Includes receipts from local enterprises such as markets, slaughterhouse, transportation system, waterworks system, and hospital fees TAX-EXPENDITURE ASSIGNMENT Chapter 315
  23. 23. Fiscal Decentralization in the PhilippinesFigure 4: Distribution of Total Income, all LGUs, 1989-2009 (%) 2009 2008 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 -10 0 10 20 30 40 50 60 70 80 Property Tax Business Tax Other Taxes Service Income Business Income Other Income Capital Revenue IRA16
  24. 24. Chapter 3 TAX-EXPENDITURE ASSIGNMENT Figures 5 and 6 compare the source of amounts of IRA individually because there areincome of LGUs before (1990) the passage of fewer of them to divide the pie, so to speak.the 1991 Code and after several years (2009). This has motivated municipalities to of gettingThe broad taxing powers benefited more the higher amounts of IRA individually becausecities than provinces and municipalities. They there are fewer of them to divide the pie, sohave been dominant in all types of local taxes to speak. This has motivated municipalitiesand the internal revenue allotment. The cities to convince legislators to pass special lawshave also the advantage of getting higher converting them into cities.Figure 5: Distribution of Income by type of LGU, 1990 80 70 60 50 40 30 20 10 0 Property Business Other Service Business Other IRA Total tax tax taxes Income Income Income Income Provinces Cities MunicipalitiesFigure 6: Distribution of Income by type of LGU, 2009 80 70 60 50 40 30 20 10 0 Property Business Other Service Business Other IRA Total tax tax taxes Income Income Income Income Provinces Cities Municipalities 17
  25. 25. Fiscal Decentralization in the Philippines An examination of revenue figures over the are most dependent on IRA. In an extremeperiod 1989-2009 indicates a significant decline case, the IRA allocations sometimes accountin the share of provinces and municipalities in for 95 percent of local revenues and, in at leasttotal LGU own-source revenue. This contrasts one case, 114 percent of total expenditureswith the continuous increase in the share (ADB 2005)26. The dependence on IRAof cities in total LGU own-source revenue. results in weaker local fiscal autonomy, whichAn outstanding problem faced by provinces creates opportunities for greater control by theand municipalities is how to raise substantial central government, contrary to the envisagedrevenues when they do not have very productive situation of local governments able to respondtax bases to begin with. The 1991 Code have to local needs and to match local outputsput certain limits on their taxing powers. with local preferences. To wean themselvesCities are more fortunate because they have away from central government control localbroader taxing powers than municipalities and government units should strive for greater fiscalprovinces. Please see Table 1 above. autonomy by working to significantly improve own-source revenues. Improving the collection Because of an inefficient tax assignment, of real property and local business taxes is anit is only the cities, which have the capacity important step to boost local fiscal raise the needed revenues. As Manasan(2007) has observed the distribution of Limits on sub-national governmentown-source revenues is in favor of cities, discretion to determine tax rates and tax basesand partly in favor of municipalities away significantly reduce local fiscal autonomyfrom provinces25. The cities have larger tax (Joumard and Kongsrud 2003).bases and consequently, buoyant revenuesources but the majority of local government Various researchers such as Manasan, Cuenca,units, that is, the municipalities have weaker Uchimura and Suzuki, Capuno, and Llanto,tax bases and thus, do not raise sufficient among others have noted the inefficiency inown-source revenues. They have remained tax assignment to local government units independent on fiscal transfers, principally the the Philippines. Manasan (2005) provides ainternal revenue allotment (IRA) for funding good summary27 as shown in Box 2.local development activities. 26 Asian Development Bank (2005), Decentralization in the Philippines: Strengthening Local Government Financing & The dominance of IRA as revenue source Resource Management in the Short Term, Mandaluyong City:is very obvious. Provinces and municipalities Asian Development Bank 27 Manasan, Rosario G. 2005. “Local Public Finance in the Philippines: lessons in autonomy and accountability.” Philippine25 Manasan, Rosario (2007), “Decentralization and Financing Journal of Development. Second Semester 2005, Vol. XXXII of Regional Development,” in Balisacan, Arsenio and Hal Hill, No. 2: 32-102. editors, The Dynamics of Regional Development: The Philippines in East Asia, Quezon City: Ateneo de Manila University Press. Box 2. An assessment of tax assignment to local government units • The Philippine tax assignment appears to be largely consistent with the traditional view of tax assignment. • It scores low on the autonomy criterion because (a) the Code fixes the tax rate of some of the taxes that are assigned to LGUs; (b) the Code sets limits (floors and ceilings) on the tax rates that LGUs may impose and maximum allowable rates are rather low; (c) in terms of real property assessment levels, the Code sets maximum assessment rates for different classes of property; (d) the Code mandates that tax rates can only be adjusted once in five years and by no more than 10 percent.18
  26. 26. Chapter 3 TAX-EXPENDITURE ASSIGNMENT • Future Code amendments should consider giving LGUs greater discretion in setting tax rates by raising the maximum allowable tax rates. • There is a need to move away from tax rates that are not indexed to inflation. • There is a need to simplify the structure of local business tax because different categories of firms are subject to different rate schedules. • There is a need to improve the tax administration machinery of local governments, e.g., employ certified public accountants to improve tax audit capability; use automation to improve revenue performance, etc. • There is a need to revise the schedule of market values for real property purposes because many provinces and cities have done a general revision of such schedules only once since 1991. • There is a need for many LGUs to revise their tax codes since only a few have made revision since 1992 even if some tax rates are not indexed to inflation. There are current legislative bills to modify 1992. In 1993 it dropped to 40 percent andthe taxing powers of LGUs, e.g., Senate Bill maintained this level in the following years.1458, which recommends transferring themandate to tax sand, gravel, and other quarry The second largest local governmentresources to cities and municipalities. House expense is on Economic Services with a shareBill 1607 seeks to give additional sources of of 35 percent in 1989 which steadily declinedrevenue to provinces by requiring component through the years, with only 22 percent sharecities to share their collection from real to total LGU expenditures by 2003. property taxes with the provinces. These Economic Services refers to activities directedproposals should be carefully examined in towards the promotion and enhancementview of the inequities in tax assignments and and the attainment of desired economicthe IRA allocation formula. growth. Included in this category are agricultural, veterinary and natural resource services, architectural and engineeringLocal government services, operation of local enterprises suchexpenditures: trend and as markets, slaughter house, transportationcomposition, 1989-200328 and waterworks among others, cooperative programs, livelihood projects and other Table 3 and Figure 7 show that local economic development programs.governments spent most of their resources onGeneral Public Services. General Public Services Rounding up the major components of LGU(GPS) include the essential requirements to expenditure are education and health servicesrun the government such as the executive and housing and community development.and legislative services, treasury, assessment, Education, Culture, Sports and Manpowerbudgeting and auditing services, property Development covers expenditures for theand supply administration, and information support of schools and education facilities,services. GPS is highest in the late 80s thru planning and manpower development, sports,early 90s, reaching its peak at 49 percent in cultural preservation and enrichment. Health Services pertains to expenditures for national28 The period covered does not include the following years: 2004-2009 because of noise in the latter years. There is a need health programs including medical, dental and to review the Schedule of Appropriation, Allotment, Obligation and Balances (SAAOB) for local government units especially in nutrition services. Housing and Community view of the recent shift to the New Government Accounting System (NGAS). Development includes expenditures for the 19
  27. 27. Fiscal Decentralization in the Philippinesprovision of housing and sanitary services, of their budgets to general public services.promotion of community development, slum Expenditure for economic services follows asclearance, zoning and pollution control. the second biggest item of expense. There is a need to review local public expenditure Education, Culture, Sports and Manpower management for more efficient allocation ofDevelopment experienced a rise and fall trend resources. It seems that there is a relativelystarting with an 8 percent share in total small allocation of investment in humanexpenditure in 1988, dropping to 4 percent capital (education, health and nutrition) andin 1991 and then back at 8 percent in 1992. infrastructure relative to other expenditureA steady decline followed until it reached its items. General public services are basically forlowest point in 2002 at 5 percent. Though general administration needed for the dailyHealth Services also experienced a decline from routine of running a local government. A1988 to 1992, it posted a 7 percent increase recent paper by Llanto and Quimba (2010)from 4 percent in 1992 to 11 percent in 1993. hypothesizes that local governments haveShare of Housing and Community Development under-spent for health and education. Whilein the total expenditure did not change that the common view is that local governmentsmuch posted a 5 percent share in1988 are so cash-strapped that they do not have the Figures 8, 9 and 10 indicate how the funds for better service delivery, it may be thatdifferent type of LGUs allocated their a more efficient expenditure management maybudgets. All of them allocate a bigger portion be able to address the lack of service delivery among the local population.Figure 7: Distribution of LGU Expenditures, All LGUs 1988-2003100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Other Purposes Economic Services Social Services Housing and Community Dev’t Social Security, Labor & Welfare Employment Health, Nutrition & Population Control Education, Culture, Sports General Public Services20
  28. 28. Table 3. Distribution of LGU Expenditures, All LGUs, 1988-2003   1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 GRAND TOTAL 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 GENERAL PUBLIC SERVICES 40.88 43.19 47.32 44.53 49.32 41.77 40.02 38.36 39.44 39.20 39.87 39.93 40.41 40.66 44.42 41.25 EDUCATION,CULTURE, SPORTS 8.01 6.78 3.94 3.58 8.09 7.35 7.11 7.16 7.54 8.06 8.59 7.45 7.35 7.59 5.24 6.30 HEALTH, NUTRITION & POPULATION CONTROL 5.53 4.94 4.55 4.19 4.34 11.15 11.60 11.41 12.43 12.18 12.66 12.22 11.58 11.43 11.43 10.85 SOCIAL SECURITY, LABOR & WELFARE EMPLOYMENT 0.74 0.64 0.71 0.70 0.12 0.03 0.08 0.07 0.07 0.08 0.05 0.03 0.04 0.02 0.03 0.02 HOUSING & COMMUNITY DEV’T 5.37 5.31 4.58 4.83 5.76 5.96 6.12 5.78 4.84 4.35 4.23 4.39 4.28 5.11 3.92 4.79 SOCIAL SERVICES 1.67 1.95 2.21 2.13 1.66 2.32 2.15 2.06 2.19 2.18 2.22 2.19 2.34 2.45 2.29 2.42 ECONOMIC SERVICES 34.96 32.84 32.24 35.76 25.49 25.48 26.29 27.62 26.60 25.95 24.09 25.19 25.04 24.56 22.30 22.36 OTHER PURPOSES 2.83 4.36 4.45 4.27 5.22 5.95 6.63 7.52 6.89 8.01 8.28 8.60 8.96 8.19 10.37 12.01 TAX-EXPENDITURE ASSIGNMENT Chapter 321
  29. 29. Fiscal Decentralization in the PhilippinesFigure 8: Distribution of Total Expenditures - All Provinces, 1988-2003 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 0 10 20 30 40 50 Other Purposes Economic Services Social Services Housing and Community Dev’t Social Security, Labor & Welfare Employment Health, Nutrition & Population Control Education, Culture, Sports General Public Services22
  30. 30. Chapter 3 TAX-EXPENDITURE ASSIGNMENTFigure 9: Distribution of Total Expenditures - All Municipalities, 1988-2003 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 0 10 20 30 40 50 60 70 Other Purposes Economic Services Social Services Housing and Community Dev’t Social Security, Labor & Welfare Employment Health, Nutrition & Population Control Education, Culture, Sports General Public Services 23
  31. 31. Fiscal Decentralization in the PhilippinesFigure 10: Distribution of Total Expenditures - All Cities, 1988-2003 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 0 10 20 30 40 50 Other Purposes Economic Services Social Services Housing and Community Dev’t Social Security, Labor & Welfare Employment Health, Nutrition & Population Control Education, Culture, Sports General Public Services24
  32. 32. Chapter 3 TAX-EXPENDITURE ASSIGNMENT A joint study by the Asian Development units is an empirical question. There has beenBank and the World Bank in 2005 pronounced an improvement in public service delivery butthat overall the devolution of expenditure perhaps not in a significant way for all localresponsibilities to LGUs is consistent with the government units. Llanto and Quimba (2010)principle of subsidiarity (ADB 2005)29. The report recent findings of a survey conductedreport also noted that few devolved activities by the Philippine Institute for Developmenthave spillover benefits outside LGU territorial Studies, namely that:jurisdictions and that the Code allowed LGUs • For health, despite more than 10 yearsto regroup into larger cooperative units when after devolving this function to localthey deem appropriate. As proof, it cited government units, there is still an overlap inseveral cases of inter-LGU cooperation in the provision of services by LGUs and thecoastal resource management, solid waste national government. LGUs still have notmanagement, water supply development fully built capacity to provide better healthand distribution, and construction of inter- care services. Finally, LGUs and the centralmunicipal roads. Metropolitan arrangements government’s Department (Ministry) ofhave also appeared in several places. Loehr Health have not clearly identified cost-and Manasan (1999) find that the devolution sharing and assignment of functionsof expenditure responsibilities to LGUs is regarding delivery of health service.generally consistent with the decentralizationtheorem. The devolved activities are those “that • For education, the School Basedcan be provided at lower levels of government Management approach which centers on. . . and few of them have benefits that spill giving the authority to school principals andover outside the territorial jurisdiction of involving parents and other stakeholders inthe LGUs with exception of those related to school decisions is a good start for properenvironmental management” (Manasan 2005, phasing and right-sizing of functions yetpage 37)30. to be devolved. However, there is need for clear and proper delineation of functions, During the period after the enactment of capacities and funds between local andthe Local Government Code, there seems to national a marked increase in LGU spending asmore resources had been made available to • For LGUs to better manage their ownLGUs. A JICA study (2008) notes that the top water resources there is a need for a clearthree service areas where improvement with delineation of powers, functions, anddevolution was noted in sample provinces, responsibilities, institutional development,cities and municipalities are: 1) social welfare; and source of financing.2) health and nutrition; and 3) agriculture Pending better data and the conduct ofand fisheries. Undoubtedly the changes more systematic and in-depth studies, therebrought about the passage of the 1991 Local seems to be at best only anecdotal evidenceGovernment Code have resulted in an increase supporting claims of improvement in servicein LGU spending. delivery in several local government units. On the other hand, whether there has been an For example, Klugman (1994) reportsoverall improvement of public service delivery, a Philippine study by Jimenez and othersgovernance and local development now that (1988) that for given levels of enrolmentthese functions are with local government and quality, schools which rely more heavily29 Asian Development Bank (2005), Decentralization in the on local funding are more efficient. There Philippines: Strengthening Local Government Financing & Resource Management in the Short Term, Mandaluyong City: is a lower cost of delivery of education Asian Development Bank30 An exception is education (Manasan, 2005). services. They also find that students at 25