THE shift to a federal form of government may lead to a deficit in the first year of its implementation, estimated at P1.2 trillion, and this may require trimming the federal government’s expenditure program by P560 billion to keep within the target deficit of 3 percent, the Department of Finance (DOF) has pointed out.
DOF Undersecretary Gil S. Beltran told financial reporters on Monday that the deficit of the government would bloat to around P1.2 trillion since carrying out the draft Charter change in order to transition to federalism entails additional expenditures for the government.
“That’s right, that’s additional P1.2-trillion deficit if we follow what we think they [Consultative Committee] are talking about,” Beltran said.
The P1.2 trillion translates to a 6.7-percent deficit to gross domestic product (GDP) ratio.
Beltran explained that provisions under the draft federal constitution entail additional allotments to federal regions which can go up to P744.9 billion, based on the formula of the 50:50 revenue-sharing scheme, with capital transfers reaching P251.1 billion, resulting in around P1 trillion.
The proposed equalization fund would need about P131 billion and taxes transferred to the federal regions would reach around P168 billion. The Bangsamoro block grant as well as the Cordillera block grant are each estimated to need around P100 billion, as well.
The government’s deficit target for this year is at 3 percent or P523.6 billion, moving to a 3.2-percent deficit target come 2019 or P624.3 billion, and back to a 3-percent deficit come 2020 up to 2022.
“If you add all of those, it will be about P560 billion. Which would be taken out of the federal government [and] would mean we would be cutting federal government expenditures, that’s you know the P560 billion it’s about 95 percent of the personnel services…,” he added.
Finance Secretary Carlos G. Dominguez III earlier said that based on the fiscal provisions of the draft federal Charter, the federal government would incur a deficit of 6.7 percent, which may result in a credit-rating downgrade for the Philippines, which currently enjoys an investment-grade rating. According to the finance chief, to avoid this negative economic consequence and maintain the current deficit target of 3 percent, “the federal government will have to cut its expenditure program by P560 billion.”
“This means the national government may have to lay off 95 percent of its employees, or reduce the funds for the ‘Build, Build, Build’ program by 70 percent, or a combination of both,” Dominguez said.
He again pointed out that the draft federal constitution contains ambiguous provisions on the allocation of expenditures for the would-be federated government and its federated regions, which underscore the urgency of opening more discussions on this proposed document crafted by the Consultative Committee tasked to review the 1987 Constitution.
Dominguez made it clear that while the economic team is not against federalism, it has the responsibility to point out the ambiguous and unclear provisions in the proposed draft Charter, “especially when the possible repercussions could result in dire, irreversible economic consequences.”
He pointed out that while the draft Charter contains provisions on the taxation powers of the Federal Government and the Federated Region and a provision on revenue assignment in which the Federated Regions shall be given a 50-percent share in income, excise, value-added taxes and customs duties, “there is no provision on expenditure assignment.”
Citing an example, Dominguez said that although the draft constitution provides for an Equalization Fund, which shall not be less than 3 percent of the annual General Appropriations Act, it does not state whether this will be taken from the share of the Federal Government or of the Federated Regions.
The Equalization Fund refers to the allocation for the federated regions that would be distributed based on the needs of each region, with priority given to those that require greater support to achieve financial and economic sustainability as determined by a “Federal Intergovernmental Commission.”