Macroeconomic Challenges:

1
Macroeconomic Challenges

• An LGU Perspective

2
Macroeconomic Policy - Fiscal

• Easing of fiscal space and achieving
  sustainable revenue and spending path to support
  physical and human capital investments and
  provide basic social services.

3
Easing of Fiscal Space

• LGUs contribute to the easing of fiscal space by
  reducing dependence on national government fiscal
  transfers and other assistance thereby allowing
  NG to use these resources to address the deficit.
• As an additional benefit, by relying less on NG
  for their funding requirements, LGUs become more
  fiscally autonomous fulfilling the spirit and
  intent of the Local Government Code of 1991.

4
Easing of Fiscal Space

• LGUs can be less dependent on NG by improving
  their own-source revenue generation which include
  tax and other fees and charges and non-tax
  sources.
• Tax sources include Real Property Taxation (RPT)
  and Business Taxes, which are the largest sources
  of own-source revenues, and non-tax sources such
  as income from Economic Enterprises.

5
Easing of Fiscal Space

• LGUs can also explore other sources of financing
  such as bank credits and non-credit sources such
  as the issuance of debt (e.g., LGU bonds), BOT,
  Joint Venture partnerships with the private
  sector and/or other LGUs, and ODA grants.

6
Policy Gaps

• In 2008, estimated local-own source revenues of
  local government as a share of total LGU regular
  revenue was 33.4, higher than Thailand (10.9)
  and Vietnam (5).
• However, tax revenues accounted for only 23.5
  which fell marginally from the 2006 figure of
  25.
• A major reason for this is that the Local
  Government Code seriously limits the power of the
  LGUs to set local taxes.

7
Policy Gaps

• First, the Code fixes the tax rate of some of the
  taxes assigned to LGUs.
• These include the Special Education Fund (SEF),
  the Real Property Tax, and the Community Tax.
• Second, while LGUs have some discretion in
  setting tax rates in the case of other local
  taxes, the Code sets ceilings (or floors) on the
  tax rates that LGUs may impose, which in some
  cases appears to be low (or high) given current
  realities such as inflation.

8
Policy Gaps

• Third, the Code mandates that tax rates can only
  be adjusted once every 5 years and by no more
  than 10.
• This provision is particularly restrictive in the
  case of taxes such as the professional tax whose
  rates are specified in nominal peso terms.
• LGU tax administration is constrained because of
  low staff professional qualifications and
  inadequate automation of core tasks.

9
Policy Gaps

• On the matter of credit financing, LGUs complain
  that that the concessionality of ODA-financed
  subloans are not brought down to them.
• Many LGUs have poor capacities to prepare and
  operate projects that would be suitable for ODA
  and other commercial financing.
• The policy and legal environment restrict LGUs
  from exploring other sources of financing. For
  example, LGUs cannot open depository accounts in
  private banks and LGUs cannot legally form
  corporations with other LGUs or private entities.
  

10
Recent Developments

• A draft bill amending Book II of the Local
  Government Code of 1991 (Taxation) has been
  endorsed by the LGU Leagues and the DILG to the
  Congress.
• Studies have been completed on LGU Access to ODA
  financing and credit financing.
• Executive Order 809 has been issued allowing
  first tier LGUs to borrow from multilateral
  financing institutions with a sovereign
  guarantee.
• A study on improving LGU exercise of their
  corporate powers has been completed.

11
Some Policy Recommendations

• Conduct an advocacy campaign to the Congress for
  the passage of the Book II amendments of the
  Local Government Code of 1991.
• Review the pricing and terms under which ODA is
  provided to GFIs.
• Develop a more transparent system for determining
  who should benefit from the concessionality
  embedded in ODA.
• Continue to build capacity among LGUs for tax
  administration and the preparation and management
  of credit and debt financed projects.

12
Some Policy Recommendations

• Draft and implement policy issuances that would
  clarify and encourage joint venture arrangement
  among LGUs and between LGUs and the private
  sector entities.
• Study marked-based measures to reinvigorate LGU
  bond floatation.
• Review the implementation of Executive Order 809
  in order to effect pilot testing in the near
  future.
• Review the policy for selectively allowing LGUs
  to open depository accounts in private banks.

13
Achieving sustainable revenue and spending path

• LGUs support the national effort for a
  sustainable revenue and spending path by ensuring
  that the same is emulated at the local level.
• This is achieved through well-rationalized,
  prudent, efficient and harmonized planning,
  budget preparation, revenue generation and
  expenditure management.

14
Policy Gaps

• Although revenue management and budget reporting
  have been improved, linking these to planning an
  to each other is still weak for many LGUs. The
  integrity of local budgeting is distorted by poor
  revenue estimates during budget formulation.
• Budget formulation and execution, planning and
  revenue generation at the local level is not
  linked to performance outcomes.
• There is also a lack of performance measures that
  adequately track Public Financial Management
  (PFM) at the local level.

15
Policy Gaps

• These is a lack of incentive systems for good PFM
  performance.
• There is a lack of sanctions for poor performance
  in local administration.
• Some sources of revenues such as the Special
  Education Fund are not effectively utilized due
  to a restrictive interpretation of existing law
  on its use.

16
Recent Developments

• A study has been completed on improving the use
  of the Special Education Fund and a draft
  issuance based on the studys recommendations is
  being circulated.
• Studies have been completed on issues related to
  personal expenditures and the management of
  surpluses and deficits in LGUs.
• The Performance Challenge Fund (PCF) has been
  pilot tested in 2010 and will be fully
  implemented in 2011 with a initial fund of P500
  million.
• The ICC approved the Performance-Based Incentive
  Policy in 2010 which will lead the way for the
  Performance-Based Grant System.

17
Recent Developments

• The Executive has approved a national PFM
  roadmap.
• In support of JMC 2007-1, technical assistance
  has been provided and continues to be provided to
  the BLGF for the improvement of the Statement of
  Receipts and Expenditures.
• In support of JMC 2007-1, technical assistance on
  local planning has been provided to both the DILG
  and the NEDA for planning at all LGU levels.
• In support of JMC 2007-1, technical assistance
  for key areas of the DBMs UBOM have and
  continues to be provided.

18
Recent Developments

• Technical assistance is being provided for the
  finalization of the implementation of the
  Competency Certification for Local Treasurers.
• A law has been passed requiring assessors to pass
  a professional licencing examination.

19
Policy Recommendations

• Implement the Competency Certification System for
  Local Treasurer in order to professionalize the
  service.
• Implement plan-budget linkage by providing
  financial incentives in the form of loan, loans
  and grants, and grants for achievement of budget
  targets and outcomes.
• Encourage good performance in PFM by providing a
  performance-grant that scales up performance.
• Review the PFM Roadmap for gaps in assistance not
  currently provided or in the pipeline.

20
THANK YOU

• Raymund C. Fabre
• ADB TA 7451