If implemented next year, the shift to federalism will cost the government an additional P253.5 billion, the state planning agency National Economic and Development Authority (Neda) said.

In its presentation before the Economic Development Cluster on Wednesday, Neda said the proposed federal charter will lead to “inevitable disruptions to the economy’s growth momentum and progress in infrastructure improvement efforts.”

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Among those present during the presentation were Finance Secretary Carlos G. Dominguez III and Socioeconomic Planning Secretary Ernesto M. Pernia.

In an interview after the presentation, Neda Undersecretary Rosemarie Edillon told reporters that the projected additional expenses for the federalism shift will bring about “fiscal pressures” and will strain the budget deficit cap.

Two scenarios

Under two scenarios using the draft federal charter, the incremental cost of federalism would be a minimum of P156.6 billion and a maximum of P253.5 billion on average.

Edillon explained that the first scenario considered a “one-is-to-one” split of expenditures by the federal government and the federated regions.

The second scenario, meanwhile, considered the possibility that the federated regions will already collect some of the revenues previously collected by the national government and no longer remit it to the federal government.

Based on these scenarios, in the first year of implementation of the federal system, an additional P10 billion would be spent on building new offices for each of the 18 federated regions, Edillon said.

“First years of transition will require additional capital outlay to fund construction or expansion of administrative buildings to house the federated regional governments, besides additional vehicles and various equipment,” Neda said in the presentation.

As such, the first year of implementing a federal form of government will cost an additional of between P166.6 billion and P253.5 billion.

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The incremental costs will cover personnel services, maintenance, and other operating expenses, as well as the equalization fund equivalent to not less than three percent of the yearly national budget.

Under the draft charter, the equalization fund would be allocated for each of the federated regions, based on how much a region needs.

The bigger amount would be granted to regions that need larger support to become economically and financially sustainable, as assessed by a Federal Intergovernmental Commission.

Edillon said the additional expenses will be equivalent to 2.8-3.4 percent of the country’s Gross Domestic Product (GDP).

This will be on top of the 3-percent of GDP budget-deficit cap earlier programmed by the government in the medium term.

Computation on splitting the expenditures

According to Neda’s report, “estimates show that the split in the spending between the federal government and federated regions is not 50:50, but 60:40.”

Neda’s estimation “did not include subsidy, tax expenditures, interest payments, net lending, financial expense and capital outlay,” it explained.

If the said expenditures were included, the split in spending would be 80:20, with the bigger share to be shouldered by the federal government, Neda said.

As such, there will be mismatch not only in funds but also in spending, the report said.

Neda warned that a mismatch in funds as well as spending “will impede the delivery of goods and services under jurisdictions,” especially for the federal government.

As such, the proposed charter would lead to “unquantifiable economic costs,” Neda said.

“Repercussions and externalities include impact on foreign direct investment and international trade, [and] reaction of credit rating agencies to fiscal deficit and debt effects,” it said.

Also, Neda said that the “confusing” use of the terms “federal government,” “government,” “state,” “federal republic,” “Philippine economic system,” as well as “federal law” needed to be clarified.

In general, Neda said it was “difficult to ascertain whether or not a federal structure will work in the Philippines.”

As such, the agency recommended a 15-year transition roadmap in the report it submitted to the Constitutional Review Committee.

For Neda, “whether or not the structure of government will be changed, a forward-looking strategy is to strengthen the capacities of the bureaucracy at both the regional and local levels to take on central office functions.”

For these reasons, Neda recommended the conduct of an immediate comprehensive review of the 1987 Constitution as well as the Local Government Code and the Administrative Code; strengthening the Regional Development Councils, and relocating the country’s capital outside of the National Capital Region.

Neda said NCR should be decongested while reducing the NCR-centricity of economic growth. /vvp

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