Senators set scrutiny of federalism’s economic impact

THE Senate is determined to conduct further scrutiny of the proposed federal government’s economic impact after four senior Cabinet officials urged caution against hastily passing any measure to fast-track the shift to federalism during the Duterte administration.

Sen. Sherwin T. Gatchalian, chairman of the Senate Committee on Economc Affairs, said at the weekend the panel is poised to conduct hearings to “take an in-depth look into the potential impact” the proposed shift to federalism would have on the Philippine economy.

Gatchalian earlier filed Senate Resolution 823, authorizing the committee to open an inquiry into the economic effects a shift to a federal system of government would bring, “including the economic risks and opportunities, impact on regional economic growth, additional fiscal costs of the shift to federalism, effects on investments due to emerging issues on the imposition of additional taxes, administration of incentives, and repercussions on ease of doing business in the country.”

He cited the divergence of opinion between, on one hand, government economic managers and other experts voicing concern that the country is “not yet ready for a change in the system of government” and, on the other hand, Malacañan Palace officials insisting the federal shift would have “no adverse effect on the economy.”

Gatchalian recalled Socioeconomic Planning Secretary Ernesto M. Pernia’s warning that “at this point, the regions in the country are not ready for federalism, that the momentum of infrastructure improvement in the regions is going to be disrupted, and that the shift to federalism would entail immense expenditures, which may increase the fiscal deficit to GDP [gross domestic product] ratio.”

At the same time, the senator noted, members of academe such as University of Asia and the Pacific senior economists Victor Abola and Bernardo Villegas also fretted the country might experience hyperinflation as it shifts to federalism.

“Moody’s Investors Service has similarly opined that the shift to federalism, accompanied by the ‘prospective changes to governance frameworks, could have negative implications for public finances’ and could be a risk for the country’s institutional and fiscal profile,” he added.

Gatchalian quoted business groups, including the Philippine Chamber of Commerce and Industry, Makati Business Club, Management Association of the Philippines, Financial Executives Institute of the Philippines, Semiconductor and Electronics Industries of the Philippines Foundation Inc., and Cebu Business Club, also worrying that the proposed federal shift may spawn uncertainty among investors.

Senate President Vicente C. Sotto III over the weekend allayed concerns that Congress is poised to railroad approval of initial funding to pave the way for a federal transition before Congress adjourns sessions anew late this week.

“Not likely [malabo],” Sotto III said.

“They have not even considered the cost of new parliaments per region, Supreme Courts per region, etc, etc, etc,” the Senate leader told the BusinessMirror.

Also at the weekend, Senate President Pro tempore Ralph G. Recto took up the cudgels for Duterte’s economic managers, saying they are “integral and indispensable to the national conversation on federalism.”

In a statement issued on Sunday,
Recto reminded: “You don’t shut them out of the discussions; you bring them in—because the cost of federalism is front and center of the issue.”

The senator added: “Before we communicate what federalism is, can we not first calculate what its cost will be?”

Every proposal “has a cost,” Recto stressed, adding: Scratch the surface of every provision of a bill, and there is a price tag underneath. We are often told the benefits of a project but not the price,” Recto said, even as he admitted that while he himself does not often see eye to eye with the views of the economic managers on many issues, “I listen to them, value their views, and appreciate where they’re coming from. Because at the end of the day, it is they who will raise the revenues in implementing proposals we politicians love to sponsor.”

Recto noted, for instance, that in the case of Finance Secretary Carlos G. Dominguez III, “he must raise P10 billion a day to finance the operations, the programs of this government. And collecting this P10 billion daily quota from the people is a thankless job.”

Last week at least four senior Cabinet members cited the need to go slow in pursuing the federal shift unless substantive issues, especially about the fiscal impact—simultaneous with the difficult tax reforms and an ambitious infrastructure buildup—on the economy is resolved.

Dominguez, facing senators in a committee hearing, clarified he was not totally opposing federalism as it is, but could not endorse the federal road map in its present form, based on the draft shown to him, citing its “adverse impact on fiscal space.”

Other ranking Cabinet officials who separately conveyed reservations over the federalism plan as proposed were:  Neda Director General Pernia, Budget Secretary Benjamin E. Diokno and Defense Secretary Delfin N. Lorenzana, who suggested that the government needs to conduct comprehensive public information drive to let the people know what federalism is all about.

Dominguez told senators the country’s positive credit rating may be put at risk if its proponents fail to address the fiscal issues related to the proposed shift to federalism, warning that rushing the transition to a federal setup without addressing fiscal issues may end in a large deficit and imperil country’s credit rating resulting in higher interest rates.

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Butch Fernandez is BusinessMirror’s senior political reporter based at the Senate. He has covered Malacanang (3 presidencies), the Office of the Vice President, the Senate, local governments and defense since 1984.

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