A federal system of government may be ideal in making growth inclusive, but the pending versions in Congress lack the clear mechanics in making economic growth sustainable.
The country’s economic managers fear that a federal form of government might have dire economic consequences in the long run, especially since the draft federal constitution contains ambiguous provisions on the allocation of expenditures for the would-be federated government and its federated regions.
Finance Secretary Carlos Dominguez III called for further discussions on the issue, saying the economic team has the responsibility to point out the unclear provisions in the proposed draft charter “especially when the possible repercussions could result in dire, irreversible economic consequences.”
“We welcome a discussion on the draft so that it is clear and unambiguous. We do not want the revenue assignment and the expenditure assignment to be misunderstood, as what happened in the recent case involving the Internal Revenue Allotment (of the local government units),” Dominguez said.
He said while the draft Charter contained provisions on the taxation powers of the Federal Government and the Federated Region and a provision on revenue assignment in which the regions would be given a 50-percent share in income, excise, value-added taxes and customs duties, “there is no provision on expenditure assignment.”
The draft Constitution enumerated the exclusive powers of the Federal Government and the Federated Regions but was silent on the funding source for the exercise of the powers, he said.
“As we pointed out earlier, we never stated that we are against federalism. Rather, with respect to the fiscal provisions of the proposed Constitution, there are ambiguous provisions on revenue assignment and there are no provisions on expenditure assignment,” the Finance chief said. “There are, likewise, principles on revenue sharing that do not appear to be well studied.”
Dominguez cited that while the draft Constitution provided for an Equalization Fund, which should not be less than 3 percent of the annual General Appropriations Act, it did not state if this would be taken from the share of the Federal Government or of the Federated Regions.
The Equalization Fund refers to the allocation for the federated regions that would be distributed based on the needs of each region, with priority given to those that require greater support to achieve financial and economic sustainability as determined by a “Federal Intergovernmental Commission.”
The recently enacted Bangsamoro Organic Law also provides for a 5 percent block grant. “It is not clear from whose share this will come from,” Dominguez said.
He said given these ambiguities, “it is our duty and responsibility to point these out and engage in a healthy, level-headed discussion, especially when the possible repercussions could result in dire, irreversible economic consequences.”
“We believe that these should be set out clearly so that they adhere to the principle that ‘funds follow function and ‘funds follow program,’” Dominguez said.
Dominguez said based on the fiscal provisions of the draft federal Charter, the federal government would incur a deficit of 6.7 percent, which may result in a credit rating downgrade for the Philippines.
A credit rating downgrade would lead to higher interest rates, Dominguez warned.
To avoid the negative economic consequence and maintain the current deficit target of 3 percent, Dominguez said: “the Federal government will have to cut its expenditure program by P560 billion.”
“This means the national government may have to lay off 95 percent of its employees, or reduce the funds for the ‘Build Build Build’ program by 70 percent, or a combination of both,” he said.
