Finance Secretary Carlos Dominguez III on Tuesday warned that the Supreme Court’s ruling which increased the revenue share of local government units will affect the government’s fiscal position.
“We should communicate that this issue is not a simple matter. Both Fitch and Moody’s have put a red flag as warning regarding this Supreme Court ruling. They are fully aware of the [ruling’s] possible risks,” Dominguez said.
The Supreme Court early this month voted 10-3 to increase the coverage of the internal revenue allotment due to local government units to include all national taxes. This would mean an effective increase in IRA funds for local government units, which include tax collections of other agencies apart from the Bureau of Internal Revenue.
The Supreme Court has yet to release the full text of its decision.
Global debt watchdogs Fitch Ratings and Moody’s Investor Service flagged the ruling as a possible challenge to the Philippines’ public finance management program.
Dominguez said the intended beneficiaries of the ruling should be made aware that the issue “is not a simple matter” and thus, should be implemented with due care to ensure that the government would maintain its strong fiscal position.
Initial estimates showed that the national government’s IRA arrearages could reach P1 trillion to P1.5 trillion if the decision was retroactively implemented, Dominguez said in an earlier interview.
This was based on the general statement issued by the Supreme Court that the “just share” of LGUs should be computed and sourced from all national taxes and not just from the national internal revenue taxes.
Dominguez said the Development Budget Coordination Committee “would have to deliberate” on this issue. Other members of the DBCC aside from Dominguez are Budget Secretary Benjamin Diokno, Economic Planning Secretary Ernesto Pernia, Bangko Sentral ng Pilipinas Governor Nestor Espenilla Jr. and Executive Secretary Salvador Medialdea.
Dominguez said while both credit rating agencies remained bullish on the country’s high growth prospects over the medium term, they both mentioned the SC ruling as a possible challenge to effective public finance management.
Fitch Ratings announced on July 17 that it affirmed the Philippines’ investment-grade rating at ‘BBB’ with a stable outlook, citing the country’s strong macroeconomic performance, growth in investments and private consumption.
“We expect domestic demand to maintain a strong growth of 6.8 percent in both 2019 and 2020, which would maintain the Philippines’ place among the fastest-growing economies in the Asia-Pacific region,” Fitch said in a statement.
Responding to the latest rating decision by Fitch, Dominguez has said: “This is another recognition of the bold economic policy of the Duterte administration to fix the flawed tax system for the first time in over 20 years, and at the same time provide a steady revenue stream for its ‘Build, Build, Build’ infrastructure development initiative as well as for social programs that would accelerate poverty reduction and grow the middle class.”
Fitch said that it “expects central government revenue to improve to 16.2 percent of GDP in 2018 and 16.7 percent in 2019 from 15.6 percent in 2017.”
“The revenue improvement should help preserve fiscal stability as government expenditure increases under the planned public-investment programme, which aims to raise the government’s capital expenditure to 7.3 percent of GDP by 2022 from 6.1 percent in 2018,” it said.
“We, therefore, expect the budget deficit to stabilize at around 3 percent of GDP in 2019 and 2020 and gross general government debt to decline to around 35.4 percent of GDP in 2020 from 35.9 percent of GDP in 2018,” Fitch said.
The rating agency, however, noted “the impact on the Philippines’ fiscal balances of a recent Supreme Court ruling requiring increased transfers from the central to local government units remains unclear given the uncertainty over the precise timing and content of the ruling.”
Fitch said that “based on our preliminary assessment, the ruling could put upward pressure on the general government debt ratio, as well as creating challenges for effective public-finance management.”
