LOCAL governments having too much financial power under a federal system do not sit well with onshore and offshore investors, as this might allow states to increase taxes at will and spend their funds in risky ways, Philippine business groups said.
In a position paper, business groups warned investments might be at risk if regional states are permitted to reform their fiscal regime on their own. They said draft proposals from the House of Representatives and the consultative committee (Con-com) reviewing the 1987 Constitution leave many provisions of the division of financial powers open to dispute by future leaders.
“First, investors are unsure if the proposed states will have the power to increase taxes, and, if so, which states would use such power, affecting corporate bottom lines. Investors are unsure if states will have added responsibility for collection and, if so, which states will perform poorly, thereby, affecting the delivery of infrastructure and other services,” the groups said.
“Second, investors are unsure as to how much new spending power the local governments will exercise, and then whether the local governments will use this power wisely or in risky ways,” they added. As for this, they recommend that federal states be mandated to practice strict spending and budget deficit constraints, similar to how new European Union member-states committed to implement.
The position paper was signed by the Financial Executives Institute of the Philippines, Makati Business Club, Management Association of the Philippines and the Philippine Chamber of Commerce and Industry. It was also signed by the Semiconductor and Electronics Industries of the Philippines Foundation Inc. and Cebu Business Club.
Equalizing budgets
The business groups also cautioned against drastically equalizing the budget allocation for regions should the country shift to a federal system. “Third, investors are also concerned about a planned equalization fund, which is meant to transfer undefined amounts during a transition period from more economically strong states to weaker ones,” they said.
They argued that only a handful of federal regions have the capacity to independently maintain strong production and trade that will support their population.
Those that do not have the capacity to sustain a stable economic backbone, the business groups said, will most likely see firms closing operations. “One or both of these factors could force big and small businesses to shut down, thereby triggering higher unemployment and making our people’s economic burden heavier, sparking a downward spiral in the overall quality of life of our people,” they explained.
“This could also compel the national government to bail out several, if not many, of the proposed federal regions and states, resulting in a bleak scenario for the national government and the economy. We are concerned that the likelihood that these economically detrimental scenarios could, in fact, materialize, thereby, triggering a significant decline in investments and a reversal of the strong economic profile achieved painstakingly by the country in the past years,” the business groups added.
It is, therefore, the advice of the business groups that the national government design and roll out a program with the objective of expanding the capabilities of local governments and their officials. They said some reforms can be done immediately by amending the Local Government Code and enacting new laws and administrative measures, instead of waiting for the new constitution to be completed.
They also raised the need to look into political families with a strong grip on dozens of provinces—one of the toughest criticisms against the shift to a federal system. The business groups said the creation of regional states will “escalate and intensify” political dynasties’ competition for control and patronage.
If this be the case, they concluded the expected benefits from a decentralized system will easily be thrown out the window.
“We are concerned that well-entrenched political bosses and dynasties will strongly resist any plan to consolidate provinces into federal regions. Therefore, either the proposed new federal regions will duplicate many of the provincial agencies and operations, thereby, resulting in higher government costs and turf wars, or the new federal regions will be weak and unable to deliver on the promised benefits of a shift to a federal system,” the business groups argued.
They also find alarming the lack of participation from the Departments of Finance and of Budget and Management and the National Economic and Development Authority. They pointed out the economic team has a crucial role in the transition to a federal system, as they need to study its implications on the size of the national budget and the additional costs of creating new bureaucracies.
The statement was issued at a time the Con-com is inching closer to filing the draft constitution for the President’s review. The panel wants to give the President at least a couple of weeks to go about the proposed changes in the highest law of the land before his third State of the Nation Address.
With Beatrice Laforga and Gillian Villanueva