Shift to federalism to cost gov’t P253.5B, says Neda | Inquirer Business

Shift to federalism to cost gov’t P253.5B, says Neda

Disruption to economic growth, infra development seen
By: - Reporter / @bendeveraINQ
/ 05:32 AM August 31, 2018

If implemented next year, the shift to a federal form of government will cost up to P253.5 billion and this will be on top of the current cost of running the government, according to the National Economic and Development Authority.

Also, in its presentation to the Economic Development Cluster on Wednesday afternoon, a copy of which was obtained by reporters, Neda said the proposed federal charter would lead to “inevitable disruptions to the economy’s growth momentum and progress in infrastructure improvement efforts.”


In an interview after the meeting led by Finance Secretary Carlos G. Dominguez III and Socioeconomic Planning Secretary Ernesto M. Pernia, Neda Undersecretary Rosemarie G. Edillon told reporters that the projected added expenses arising from the shift to federalism would bring about “fiscal pressures” and pressure on the budget deficit cap.

Under two scenarios using the draft federal charter, the incremental cost of federalism would be a minimum of P156.6 billion and a maximum of P243.5 billion on average.


In the first year of implementation, an additional P10 billion would be spent on building new offices for each of the 18 federated regions, Edillon said.

“The first year of transition will require additional capital outlay to fund construction or expansion of administrative buildings to house the federated regional governments, besides additional vehicles and various equipment,” Neda said in the presentation.

As such, the first year of implementing a federal form of government will cost the government between P166.6 billion and P253.5 billion.

The incremental costs will cover personnel services, maintenance and other operating expenses, as well as the equalization fund equivalent to not less than 3 percent of the yearly national budget.

Under the draft charter, the equalization fund would be allocated for each of the federated regions, based on how much a region needs.

The bigger amount would be granted to regions that need larger support to become economically and financially sustainable, as assessed by a Federal Intergovernmental Commission.

Edillon said the additional expenses would be equivalent to 2.8-3.4 percent of gross domestic product. This would be on top of the budget deficit cap earlier programmed by the government for the medium term, which was 3 percent of GDP.


Edillon explained that the first scenario considered a “one-is-to-one” split of expenditures by the federal government and the federated regions.

The second scenario, meanwhile, considered the possibility that the federated regions would collect some of the revenues previously collected by the national government and no longer remit it to the federal government.

In its report, Neda said that the “estimates show that the split in the spending between the federal government and federated regions is not 50:50, but 60:40.”

Neda’s estimates “did not include subsidy, tax expenditures, interest payments, net lending, financial expense and capital outlay,” it said.

If the said expenditures were included, the split in spending would be 80:20, with the bigger share to be shouldered by the federal government, Neda said.

As such, there will be mismatch not only in funds but also in spending, the report said.

Neda warned that a mismatch in funds as well as spending “will impede the delivery of goods and services under jurisdictions,” especially for the federal government.

As such, the proposed charter would lead to “unquantifiable economic costs,” Neda said.

“Repercussions and externalities include impact on foreign direct investment and international trade, [and] reaction of credit rating agencies to fiscal deficit and debt effects,” it said.

Also, Neda said the “confusing” use of the terms “federal government,” “government,” “state,” “federal republic,” “Philippine economic system,” as well as “federal law” needed to be clarified.

In general, Neda said it was “difficult to ascertain whether or not a federal structure will work in the Philippines.”

As such, the agency recommended a 15-year transition road map in the report it submitted to the Constitutional Review Committee.

For Neda, “whether or not the structure of government will be changed, a forward-looking strategy is to strengthen the capacities of the bureaucracy at both the regional and local levels to take on central office functions.”

For these reasons, Neda recommended the conduct of an immediate comprehensive review of the 1987 Constitution as well as the Local Government Code and the Administrative Code; strengthening the Regional Development Councils; and relocating the country’s capital outside of the National Capital Region.

Neda said the NCR should be decongested while reducing the NCR-centricity of economic growth.

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