DBM tells agencies to focus on national projects as higher LGU funding looms

MANILA, Philippines—The Department of Budget and Management (DBM) has ordered agencies to refocus their cash-based budgets for 2022 on programs and projects of national importance.

The order came amid tighter fiscal space due to foregone revenues from measures to help businesses fight the pandemic plus the bigger budgets for local governments in 2022 when the implementation of the Supreme Court’s Mandanas ruling goes on full swing.

Budget Secretary Wendel Avisado said in National Budget Memorandum No. 141 issued on June 15 that at least P139.5 billion in revenue loss was expected in 2021 from implementation of the newly enacted Corporate Recovery and Tax Incentives for Enterprises (CREATE), Financial Institutions Strategic Transfer (FIST) laws and the pending Government Financial Institutions Unified Initiatives to Distressed Enterprises for Economic Recovery (GUIDE) law.

CREATE already reduced the corporate income tax rate to 20-25 percent from 30 percent previously effective in July 2020, while FIST will absorb banks’ bad loans due to the pandemic-induced recession. GUIDE, once passed into law, will allow government financial institutions (GFIs) to offer more loans to save badly-hit industries.

Avisado said these foregone revenues were nonetheless “expected to be injected into the economy, giving firms and business with additional resources to help them recoup losses from the pandemic, keep operations afloat, and support future expansions.”

Prior tax reforms like the Tax Reform for Acceleration and Inclusion (TRAIN) and recent sin-tax laws, meanwhile, would generate an additional P122.9 billion and P43.6 billion in incremental revenues for 2021, Avisado said.

This year’s tax and non-tax revenue target of P2.88 trillion remained lower than the pre-pandemic collections of P3.14 trillion in 2019.

For 2022’s proposed P5.024-trillion cash-based national budget, Avisado said national government agencies should no longer duplicate the programs, activities and projects to be devolved to local government units (LGUs) and instead “shift to addressing emerging national program concerns.”

Local Budget Memorandum No. 82 issued by Avisado last June 14 said 40 percent of 2019 tax collections of the bureaus of Internal Revenue (BIR) and of Customs (BOC) as well as other agencies yielded P959.04 billion in national tax allotment (NTA) for LGUs next year.

The NTA — formerly called the internal revenue allotment (IRA) — starting 2022 will be from two-fifths of all taxes collected three years prior. The Mandanas ruling contained allowable deductions and earmarking against total tax collections.

As the Inquirer earlier reported, LGUs’ indicative 2022 NTA jumped from an estimated IRA of only P846.31 billion for 2022 without the Mandanas ruling. In 2021, LGUs’ IRA amounted to P695.49 billion.

Next year’s implementation of the Supreme Court’s 2018 decision on the Mandanas-Garcia petitions reduced the government’s fiscal space, which prompted President Rodrigo Duterte to issue Executive Order (EO) No. 138 last month to transfer to LGUs spending on local infrastructure, agriculture, social welfare, health care, and livelihood, among other sectors included in the Local Government Code.

“With the cost of ongoing programs/projects and automatic appropriations already accounting for nearly 94 percent of the proposed total cash budget next year, the government is left with only some P329.8 billion (6.6 percent of the proposed fiscal year 2022 budget) for new and expanded programs and projects under tier two,” said Avisado.

“This compares with the P714.3 billion average fiscal space for tier two of the last five years (2017-2021),” Avisado said.

In the national government’s budgeting process, tier one referred to ongoing, multi-year programs, activities and projects, while tier two covered new high-priority initiatives.

Among the national government’s priorities for the 2022 spending plan, which will be pitched to Congress when it resumes session next month, included the national mass vaccination program, the national ID system, the growth equity fund (GEF) to assist the “poorest and least-capable” LGUs in their transition to the Mandanas ruling, the establishment of the Virology Science and Technology Institute of the Philippines, as well as family planning and nutrition programs.

Avisado said 2022’s revenues were expected to revert to pre-pandemic levels and hit P3.29 trillion while the national government had programmed to spend P4.95 trillion “as it begins its fiscal consolidation program to lessen borrowings and overall debt, and gradually rebuilds its fiscal health overtime.”

But as LGUs’ 2023 NTA will be derived from 2020 tax collections which had been weakened by the COVID-19 pandemic, Avisado urged local governments to take into consideration the possibly lower allotments spilling over up to 2024.

“LGUs are encouraged to plan out their spending not only for fiscal year 2022, but also for the next two years, and to proactively strengthen and enhance their local revenue-generation capacity to meet the increasing needs of their constituents and efficiently manage their cash flows to mitigate the said expected down trend of NTA” in 2023 and 2024, the budget chief said.

TSB