Intergovernmental fiscal relations in the Philippines

Abstract

The study examines intergovernmental fiscal relations in the Philippines focusing on central government transfers to local governments. The main objective of the study is to assess whether central government transfers promote equity and local revenue mobilisation. The fiscal capacity, measured by the fiscal gap, serves as the basis of the assessment. Using the province as the unit of analysis, the fiscal gaps of local governments were 1neasured as the difference between expenditure needs and revenue capacities. The revenue capacities and revenue efforts of local governments were first measured based on the relationship between their revenues and socioeconomic characteristics using a random coefficient regression model. The expenditures of local governments were then regressed on the estimated revenue capacities and various socioeconomic factors that can affect the costs of providing government services. The expenditure regression results were used to measure expenditure needs representing the relative disabilities of local governments to provide services at 'normal costs' due to factors beyond their control. The study shows that the allocation formula of the internal revenue allotment, both under the previous and the existing laws, tended to worsen the disparities in the fiscal gaps of local governments. The current law appears to be more inequitable. The same is true of the distribution of grants to local governments. The study also shows that central government transfers neither stimulate nor substitute for local government revenue efforts. The failure of central government transfers to promote these objectives is attributed not only to their design, but also to other aspects of central-local government relations, such as the constraints on local taxation and budgeting, and the highly fragmented local government system. Show more