Unmanageable Public Deficit as a Factor in the Adjustment of IRA

The only situation which the Local Government Code of 1991 recognizes as sufficient authority for the President to make adjustment in the internal revenue allotment (IRA) of local government units (LGUs) from 40 % to not less than 30 % is “in the event that the national government incurs an UNMANAGEABLE PUBLIC SECTOR DEFICIT.”

This is however subject to such safeguards as the REQUIRED RECOMMENDATIONS of the Secretary of Finance (DOF), the Secretary of the Interior and Local Government (DILG), and the Secretary of Budget and Management (DBM); and PRIOR CONSULTATION with the heads of the Houses of Congress, and the respective President of the League of Provinces, League of Cities, League of Municipalities and Liga ng mga Barangay.

But the reduction of the IRA shall be made only after effecting a corresponding reduction of the national government expenditures including cash and non-cash budgetary aids to government-owned and/or controlled corporations (GOCCs), government financial institutions (GFIs), the abolished Oil Stabilization Fund (OSF), and the Bangko Sentral ng Pilipinas (BSP). [Art. 379 of the IRR of the Code]

But what constitutes an “unmanageable public sector deficit” is not defined in the Code or pertinent laws.

The term “budget deficit” means a shortfall of revenues against disbursement. The term “public sector” would refer to the national government itself, plus the major GOCCs, the GFIs, all the LGUs, the BSP, and the social security institutions. Hence, the sum of the deficit of all these different units within the public sector is what would be referred as the “public sector deficit.” In the case of LGUs, a deficit hardly incur since their yearly budget depends upon available resources.

As there has always been a yearly public sector deficit in the government, when does it become “unmanageable”?

There could be no simple answer. But fiscal authorities prepare annually a “Consolidated Public Sector Deficit Program” which contains the government’s revenue and expenditure projections for the year. If the estimated target for the consolidated public sector deficit for a given period is unduly exceeded without immediate prospects of reducing it to reasonable levels through more efficient expenditure allocation and intensified revenue generation efforts, then such a situation may be considered as “unmanageable” and may justify the reduction of the IRA.
So far the government has allayed fears that the country is on the brink of a financial crisis as it assured that it is exerting best efforts to bring down the widening budget deficit and the ballooning debt problem to more manageable levels.

At the same time, the Development and Budget Coordinating Committee (DBCC) which groups the government’s economic managers said the Philippines is “technically not yet in a fiscal crisis situation.”

“A fiscal crisis as defined by international financial institutions, such as credit rating and multilateral agencies, is being in a state of default, and having a deficit that can no longer be financed due to limited access to the capital markets. (Cont p. 4)

(Cont. from p.3)
The Philippines is obviously far from this definition said DOF Secretary Amatong. On the contrary, the country has never defaulted on its loans. It continues to pay its creditors on time, and it has raised enough international bonds this year to meet its financing requirements for 2004.

As a matter of fact, the national government through DOF recently issued a 350 Million worth of Eurobonds, which was oversubscribed in the international market. This would provide the Philippines access to international credit windows.

BSP Governor Amado Tetangco also maintained that “technically” the Philippines was not yet in a fiscal crisis because it has not defaulted on payments, not lost access to the international debt market, and not accumulated a budget deficit of “unmanageable” proportions. (LPP-PDU 30 August 2004)