The Department of Finance (DOF) warns of slower economic growth and spending efficiency once the Supreme Court’s (SC) Mandanas ruling is implemented by next year.
This follows after the DOF said it is reviewing the “viability of pursuing a fiscal consolidation plan that will minimize whatever long-term economic scarring may occur as a result of the COVID 19-induced crisis and the budgetary implication of the Supreme Court’s 2018 ruling that expands the share of local government units (LGUs) on national government taxes.”
“Based on our estimates, the implementation of the Supreme Court’s 2018 ruling will yield lower economic growth because local governments spend less efficiently,” Finance Secretary Carlos Dominguez III said.
Spending efficiency is defined as the share of productive spending to total spending, where productive spending refers to spending expenditure that goes back to the economy, generates multiplier effects, creates jobs, stimulates demand and improves the quality of life.
Dominguez said DOF estimates show that implementing the High Tribunal’s 2018 decision will yield 3 percent lower economic growth, because the higher LGU allocation will be subject to a lower spending efficiency.
The national government spending is more than 2 times as efficient as that of local governments in general, he added.
In 2018, the SC ruled that LGUs’ “just share” of tax revenues includes all national government taxes, instead of the practice of being limited only to Bureau of Internal Revenue collections.
The ruling stemmed from the case filed by then-governors Hermilando Mandanas of Batangas and Enrique Garcia of Bataan, and significantly increased the base for computing the National Tax Allotment (NTA), from which the annual allocation for local governments is based.
The NTA is formerly known as the Internal Revenue Allotment of LGUs.
Dominguez meanwhile said on top of the potential lower spending efficiency in the local level, the government of the incoming administration also has to address the foregone revenue resulting from the pandemic’s effects as well as the government tax incentives extended to perk up the economy.
“Tax revenue losses from the pandemic-induced economic slump, the rise in debt to fund our COVID-19 response, the looming revenue impact of our economic recovery measures, and lower spending efficiency as a result of the Supreme Court decision to expand the share of LGUs from the NTA must be adequately addressed by the next administration’s economic team,” Dominguez said.
As a result of the pandemic, the national government incurred hefty tax revenue losses amounting to P785.64 billion or 4.4 percent of gross domestic product in 2020, according to initial DOF estimates.
Before COVID-19 struck at the onset of last year, tax revenues were expected to increase by 16.2 percent in 2020.
“Foregone revenues are expected to be even larger in the coming years as the impact of the Corporate Recovery and Tax Incentives for Enterprises (CREATE) and Financial Institutions Strategic Transfer (FIST) — which are both crucial to a quick economic recovery — take effect,” Dominguez said.
From 2021 to 2024, revenue losses are projected to reach around P1 trillion on average every year because of tax revenue losses from the pandemic and the foregone revenues from CREATE and FIST.
COVID-19 related loans for the pandemic response and budgetary support to finance the deficit have also translated into increased financing costs for the government, noted Dominguez.
The total financial cost of COVID-19 related loans now amount to $28.91 billion or P1.47 trillion.
The outstanding balance or the principal value of the loans is $22.58 billion or P1.15 trillion, while the projected amount of interest payments until maturity is $6.32 billion or P320.85 billion. These loans will mature between 2024 and 2060.
