A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Manasan, Rosario G. Working Paper An assessment of the fiscal features of the PDP Laban model of Philippine Federalism 1.0 and the Gonzales-De Vera Federal model PIDS Discussion Paper Series, No. 2018-14 Provided in Cooperation with: Philippine Institute for Development Studies (PIDS), Philippines Suggested Citation: Manasan, Rosario G. (2018) : An assessment of the fiscal features of the PDP Laban model of Philippine Federalism 1.0 and the Gonzales-De Vera Federal model, PIDS Discussion Paper Series, No. 2018-14, Philippine Institute for Development Studies (PIDS), Quezon City This Version is available at: http://hdl.handle.net/10419/211033 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle You are not to copy documents for public or commercial Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich purposes, to exhibit the documents publicly, to make them machen, vertreiben oder anderweitig nutzen. publicly available on the internet, or to distribute or otherwise use the documents in public. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, If the documents have been made available under an Open gelten abweichend von diesen Nutzungsbedingungen die in der dort Content Licence (especially Creative Commons Licences), you genannten Lizenz gewährten Nutzungsrechte. may exercise further usage rights as specified in the indicated licence. www.econstor.eu SEPTEMBER 2018 DISCUSSION PAPER SERIES NO. 2018-14 An Assessment of the Fiscal Features of the PDP Laban Model of Philippine Federalism 1.0 and the Gonzales-De Vera Federal Model Rosario G. Manasan The PIDS Discussion Paper Series constitutes studies that are preliminary and subject to further revisions. They are being circulated in a limited number of copies only for purposes of soliciting comments and suggestions for further refinements. The studies under the Series are unedited and unreviewed. The views and opinions expressed are those of the author(s) and do not necessarily reflect those of the Institute. Not for quotation without permission from the author(s) and the Institute. CONTACT US: RESEARCH INFORMATION DEPARTMENT Philippine Institute for Development Studies [email protected] 18th Floor, Three Cyberpod Centris - North Tower https://www.pids.gov.ph EDSA corner Quezon Avenue, Quezon City, Philippines (+632) 372-1291/(+632) 372-1292 An Assessment of the Fiscal Features of the PDP Laban Model of Philippine Federalism 1.0 and the Gonzales-De Vera Federal Model Rosario G. Manasan PHILIPPINE INSTITUTE FOR DEVELOPMENT STUDIES September 2018 Abstract The paper highlights the importance of the design of the fiscal features of the federal system of government in ensuring that the potential benefits from its adoption are realized. The economic literature on fiscal federalism posits a framework that delineates the potential benefits that ensues from the adoption of a federal system of government and expounds on the principles that can guide the design of the elements of the fiscal architecture to support the achievement of said benefits. This paper presents an approach on how to assess the design of the fiscal aspects of alternative federal models and illustrates its application in evaluating the the PDP Laban Model of Philippine Federalism 1.0 and the Gonzales-De Vera model. The approach that is followed in the conduct of the assessment essentially involves the benchmarking of the relevant provisions of these two models against the guiding principles emanating from the fiscal federalism literature related to the design of the fiscal features of a federal system of government. The assessment also takes into consideration current practice by reviewing the constitutions of various countries that have a federal system of government at present. Keywords: Decentralization, expenditure assignment, equalization transfers, federal government, fiscal autonomy, intergovernmental transfers, political dynasties, political party, tax assignment, unitary government, vertical fiscal gap, vertical fiscal imbalance i Table of Contents 1. Introduction ............................................................................................................. 1 2. Overview of the Fiscal Federalism Framework ..................................................... 3 3. Fiscal Features of the PDP-Laban Model 1.0 and the Gonzales-De Vera Model . 5 3.1. Degree of Autonomy of Regional Governments............................................... 6 3.2. Expenditure Assignment .................................................................................. 6 3.3. Tax/ Revenue Assignment ............................................................................ 14 3.4. Intergovernmental Fiscal Transfers ............................................................... 18 3.5. Subnational Government Borrowing and Debt Management ......................... 23 4. Fiscal Cost of Adopting A Federal System of Government ................................ 27 5. Conclusion ............................................................................................................. 28 6. Bibliography .......................................................................................................... 29 List of Box Box 1. Distinction between multi-tiered unitary system of government and federal system of government ........................................................................................................ 4 List of Tables Table 1. Gross regional domestic product (GRDP), per capita household income and poverty incidence across regions ............................................................................ 2 Table 2. Functional assignment under the 1991 Local Government Code .......................... 11 ii An Assessment of the Fiscal Features of the PDP Laban Model of Philippine Federalism 1.0 and the Gonzales-De Vera Federal Model Rosario G. Manasan* 1. Introduction The shift to a federal system of government is one of President Rodrigo Duterte’s campaign promises and he reiterated this thrust in his first State of the Nation Address (SONA) in 2016. It has strong support among the members of the super majority at the House of Representatives (HOR), being part and parcel of proposed constitutional revision/ amendments that are currently being deliberated by the HOR Committee on Constitutional Amendments.1 On the other hand, the PDP Laban headed by Senate President Aquilino Pimentel III, is actively involved in the advocacy and design of a “federalism model” for the Philippines. The PDP Laban draft Constitution, which was crafted under the auspices of the PDP Laban Federalism Institute and which proposes the adoption of a semi-presidential federal system of government, was submitted to the HOR Committee on Constitutional Amendments on September 27, 2017. Meanwhile, another draft “Constitution of the Federal Republic of the Philippines” was presented by ABS Party-list Congressman Eugene de Vera and Pampanga Congressman Aurelio Gonzales Jr. to the same Committee on August 2, 2017. In the meantime, a Consultative Commission, created by the President last January 24, 2018 to review the 1987 Constitution and to draft a new Constitution that it will recommend to the President before the latter delivers his SONA in July 2018. The federalism discourse in the public arena is oftentimes framed along two strands. First, the adoption of a federal system of government is seen as a means to reverse the “unequal allocation of resources between “imperial Manila” and the rest of the country” (Taruc 2016). Proponents of federal movement argue that the dominance of “imperial Manila” has resulted in the persistence of wide regional disparities in per capita household incomes, per capita Gross Regional Domestic Product (GRDP) and poverty incidence. They point out that the share of NCR in the national government budget is disproportionately large, accounting for over 14% of total appropriations under the 2016 General Appropriations Act (GAA), for instance, compared to the combined share of the remaining 7 regions in Luzon (21%), the aggregate share of the 3 regions in the Visayas (10%), and the share of the 6 regions in Mindanao taken together (13%) [Malaya 2016]. The cumulative effect of such disproportionately favorable treatment of NCR and its periphery over the years, they note, is reflected in the highly uneven level of economic development across the region and the persistence of poverty with the “rich regions becoming richer and the poor regions, much poorer” (PDP Laban Federalism Institute 2017). They then argue that a federal system of government will address this problem by allowing regional or state governments to “retain more of their income” and “channel their own funds toward their own development instead of the bulk of the money going to the national government” (Ranada and Villarete 2016; So 2016). However, closer scrutiny of the provincial level per capita household income from the Family Income and Expenditure Surveys (FIES) of 1985, 1991, 1994, 1997, 2003, 2006, 2009 and 2015 provides * Senior