Fiscal Decentralization in the Philippines
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FISCAL DECENTRALIZATION IN THE PHILIPPINES FISCAL DECENTRALIZATION IN THE PHILIPPINES United Nations Human Settlements Programme Nairobi 2011 Sec1:iii The Global Urban Economic Dialogue Series Fiscal Decentralisation in Philippines First published in Nairobi in 2011 by UN-HABITAT. Copyright © United Nations Human Settlements Programme 2011 All rights reserved United Nations Human Settlements Programme (UN-HABITAT) P. O. Box 30030, 00100 Nairobi GPO KENYA Tel: 254-020-7623120 (Central Office) www.unhabitat.org HS/129/11E ISBN Number(Series): 978-92-1-132027-5 ISBN Number(Volume): 978-92-1-132414-3 Disclaimer The designations employed and the presentation of the material in this publication do not imply the expression of any opinion whatsoever on the part of the Secretariat of the United Nations concerning the legal status of any country, territory, city or area or of its authorities, or concerning the delimitation of its frontiers of boundaries. Views expressed in this publication do not necessarily reflect those of the United Nations 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 Oyeyinka Principal Editor and Manager: Xing Quan Zhang Principal Author: Gilberto M. Llanto English Editor: Roman Rollnick Design and Layout: Peter Cheseret iv FOREWORD Urbanization 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 practitioners Africa, and to a lesser extent, Latin America from international organisations, national and the Caribbean. governments, local authorities, the private sector, and civil society. We live in a new urban era with most of humanity 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 and in developing countries, in a process we call human settlements development issues. It will the 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 areas as are the global urban populations. Indeed, this is one of the greatest challenges we face in the new millennium. The persistent problems of poverty and slums are in large part due to weak urban economies. Urban economic development is fundamental to UN-HABITAT’s mandate. Joan Clos Cities act as engines of national economic Under-Secretary-General development. Strong urban economies of the United Nations, are essential for poverty reduction and the Executive Director, UN-HABITAT v vi CONTENTS FOREWORD III CONTENTS IV CHAPTER 1 INTRODUCTION 1 Objective of the Report 2 CHAPTER 2 THE CONCEPT AND ELEMENTS OF FISCAL DECENTRALIZATION 5 Oates decentralization theorem 5 An adequate enabling policy environment 7 CHAPTER 3 TAX-EXPENDITURE ASSIGNMENT 11 Local government tax revenues: trend and composition, 1989-2009 11 Local government expenditures: trend and composition, 1989-2003 19 CHAPTER 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 38 CHAPTER 5 LOCAL GOVERNMENT FINANCING48 40 CHAPTER 6 CONCLUSIONS AND RECOMMENDATIONS 43 BIBLIOGRAPHY 44 FISCAL DECENTRALIZatION IN THE PHILIPPINES LISTS OF FIGURES, TaBLES AND BOXES LIST OF FIGURES Figure 1 Three Branches of the Philippine Government 1 Figure 2 Philippine Local Government Units 2 Figure 3 Total Income, all LGUs, 1989-2009 14 Figure 4 Distribution of Total Income, all LGUs, 1989-2009 (%) 16 Figure 5 Distribution of Income by type of LGU, 1990 17 Figure 6 Distribution of Income by type of LGU, 2009 17 Figure 7 Distribution of LGU Expenditures, All LGUs 1988-2003 20 Figure 8 Distribution of Total Expenditures - All Provinces, 1988-2003 22 Figure 9 Distribution of Total Expenditures - All Municipalities, 1988-2003 23 Figure 10 Distribution of Total Expenditures - All Cities, 1988-2003 24 Figure 11 Local Income vs. Total Expenditure - All LGUs, 1988-2003 28 Figure 12 Total Income with IRA vs. Total Expenditure - All LGUs, 1989-2003 29 Figure 13 Total Income with IRA vs. Total Expenditure - by Type of LGU, 1990 29 Figure 14 Total Income with IRA vs. Total Expenditure - by Type of LGU, 1990 29 Figure 15 Local Income vs. Total Expenditures, by type of LGU, 1990 30 Figure 16 Local Income vs. Total Expenditures, by type of LGU, 2003 30 Figure 17 Release Procedure of the Internal Revenue Allotment99 34 LIST OF TABLES Table 1 Tax assignment in cities, provinces and municipalities 12 Table 2 Distribution of Local Income, All LGUs, 1989-2009 (in million pesos) 15 Table 3 Distribution of LGU Expenditures, All LGUs, 1988-2003 21 Table 4 Number of Awardees per Award Category (1994 – 2009) 26 Table 5 Fiscal transfers to local government units 34 Table 6 Percentage Shares of LGUs in the Internal Revenue Allotment 35 Table 7 Distribution Formula for the Internal Revenue Allotment 35 LIST OF BOXES Box 1 Assessment level by type of land 13 Box 2 An assessment of tax assignment to local government units 18 Box 3 The internal revenue allotment vis-à-vis other sources of local income 36 viii CHAPTER 1 INTRODUCTION CHAPTER 1 INTRODUCTION Many developing countries, the Philippines bicameral and is composed of the Senate and included, have embarked on a major shift the House of Representatives. Senators are in policy and approach to development nationally elected while representatives are by decentralizing and devolving central elected by legislative districts. The judiciary is government powers, functions and composed of the Supreme Court and the lower responsibilities to local government units.1 courts. As of 2011. the political subdivisions In 1991, the Philippine Congress enacted the are the 80 provinces, 138 cities, 1, 496 Local Government Code, which devolved to municipalities, and 41, 945 barangays. They local government units the great responsibility are collectively referred to as local government of providing the local populace with a range units. The barangay is the lowest tier of local of 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. There government system. The national government are two types of cities: (a) highly urbanized, has three independent branches, namely, the which is independent of the province, and executive, the legislature, and the judiciary. (b) component cities (smaller cities). A The executive is headed by a popularly elected cluster of municipalities or municipalities president. The executive branch is functionally and component cities, comprise a province. organized into sectoral departments, each Each local government is headed by directly headed by a cabinet secretary appointed by elected officials, namely, a chief executive the 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 FISCAL DECENTRALIZatION IN THE PHILIPPINES Figure 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 decentralization government units with powers to tax and as reframing “the discourse of governance levy various fees and charges, and to borrow when local governments begun to play a key from the financial markets in order to raise role in governance in a country long steeped revenues for financing local development. A with a history of excessive centralization key element of fiscal decentralization is the and dominance by the center, the latest of inter-governmental fiscal transfer called the which was the domination by the Marcos ‘internal revenue allotment,’ which is a block dictatorship”. These political scientists called grant to local government units based on a attention to the substantial changes made formula designed by the Philippine Congress.