BWorld 591, Devolution and rightsizing the bureaucracy

* BusinessWorld March 27, 2023.
------------

Among the good news in public finance so far this year is that the government has generated a budget surplus of P45.75 billion in January vs. a budget deficit of P23.38 in January last year. The key was the big jump in revenues, from only P278.08 billion in January 2022 to P348.17 billion in January 2023, an increase of P70 billion even without any tax hike, just through the opening up of the economy from the horrible authoritarian lockdown of the previous administration.

The bad news is that financing or new borrowings remain high — from P437.2 billion in January 2022 to P366 billion in January 2023. There is a need to control National Government spending while revenues must continue rising via continued economic opening and better tax administration.

Recently, President Ferdinand Marcos, Jr. announced a postponement in full devolution of certain functions to local government units (LGUs), from 2024 to a later period as a result of the implementation of the Mandanas ruling by the Supreme Court (which gives LGUs a bigger share of the tax collections of the National Government). See these reports last week in BusinessWorld: “NEDA ordered to conduct study on delayed devolution timeline” (March 21) and “Marcos calls for flexibility in devolving functions to LGUs” (March 22).

The President’s concern and that of his economic team to allow weaker LGUs recover faster via continued high involvement of National Government agencies (NGAs) is understandable. But the bigger picture perhaps would be the huge annual deficit, huge annual borrowings, and huge public debt stock, and all of which should significantly decrease in a short period of time to allow more resources to be spent on productive expenditures.

Interest payment alone has been rising fast — from P361 billion in 2019 to P429 billion in 2021 and P503 billion in 2022.

The Philippines’ grants to other government units (GOGU), the LGUs, was 21-23% of expenses in 2019-2020 (IMF data), comparable to those of Indonesia and Thailand, and higher than Malaysia (see Table 1).

This implies that with the Mandanas ruling, the Philippines will have a higher percentage of grants to LGUs than its three neighbors in the ASEAN. It is only right that some of the NGAs’ budgets should decrease, again to help control overall spending and borrowings, while LGUs with bigger budgets must have more functions. The key is to encourage more competition among LGUs — peace and order competition, tax and ease of business competition, energy and infrastructure competition, etc.

In a presentation, “Rethinking the LGU Share. Devolution Ready: Gearing Up for Full Devolution” (July 8, 2021), by House Deputy Secretary General and Director General of Congressional Policy and Budget Research Department (CPBRD) Romulo E.M. “Jun” Miral, Jr., he proposed, among others, that: 1.) from the national tax share of LGUs, at least 15% should go to health services, 10% to agriculture and/or fisheries, and, 2.) LGUs should provide a set of minimum standards of public services by addressing the fiscal gap, computed as expenditure needs minus revenue capacities.

If proposals like this are implemented, then the budgets of the departments of Health, Agriculture, and others must decrease as LGUs provide more local health services and agriculture modernization.

I checked the receipts by LGU, and saw that municipalities and provinces are heavily dependent on their share from National Tax Collection (NTC) while cities are less dependent on NTC and mobilize their own local revenues, like local business taxes and fees.

Devolution of functions by certain NGAs is related to the administration’s National Government Rightsizing Program (NGRP) that envisions creating an agile and efficient government. The President will have the authority to make changes in functions, organizational actions, and provide safety nets for affected employees of the agencies, without affecting overall service delivery to the public.

These recent reports in BusinessWorld track and update the status of the bill: “House approves rightsizing bill on 2nd reading” (March 9), “Government restructuring bill clears House on third reading” (March 14). Fast and good development.

There is one anomaly in the health sector. While the NGRP intends to reduce the size of the bureaucracy, a bill that passed in the lower House and its counterpart Senate Bill 1869 expands the bureaucracy by creating the Philippine Center for Disease Prevention and Control (CDC). This new bureaucracy will be an addition to the Health department structures and it will have national and regional offices.

The COVID lockdowns in the Philippines for over two years plus mandatory vaccination (and otherwise mandatory PCR test results) show that a centralized, one-size-fits-all policy is wrong and destructive. Provinces and municipalities achieved natural herd immunity at different rates but all provinces were treated the same when it came to mobility restrictions. This resulted in a GDP contraction of -9.5% in 2020, the worst in Asia and the worst in Philippine records since the post World War II period. The 5.7% growth in 2021 was far from a recovery to the 2019 level.

The Senate should not rush that new centralized, one-size-fits-all bureaucracy. The Senate should instead review what happened regarding post-vax injuries and deaths of many people.
--------------

See also:
BWorld 588, Addressing high inflation and tax leakage, March 25, 2023
BWorld 589, Sustained growth via stable and ample electricity, March 26, 2023
BWorld 590, No energy transition happening, only RE addition to fossil fuels, April 03, 2023.