The fiscal cost of shifting to a federal structure

by Gerardo P. Sicat (The Philippine Star) – Aug 22, 2018

The draft federal constitution of the ConCom (Constitutional Committee) submitted to the Congress for adoption has huge budgetary implications on government operations which may likely cause a fiscal crisis.

Cost of government rises. The costs of government will go up. The draft constitution proposes to create 16 new federated regions, plus two special autonomous regions (the Bangsamoro and Cordillera regions). These new governments will be vested with identical functions.

A total of 18 new governmental structures would each have their executive, legislative and judicial branches. The new governments are additional to the existing local governments.

The NEDA estimates that the fiscal costs of implementing the new governmental structure will be P130 billion. If such costs were added to the current assumptions about government outlays and estimates of future revenues, it could ramp up the estimates of the government deficit to 6.7 percent of GDP. This more than doubles the presumed macroeconomic limit of three percent that economic managers want to keep.

I do not have details of how the estimates were reached. I do not know if any proposed budgetary benefits are estimated from any possible downsizing of the national government expenditure outlays under a federal system.

However, such numbers would appear to be reasonable, if we consider the budgetary costs of the Bangsamoro experiment. According to figures that Sen. Miguel Zubiri (of Mindanao) gave, the Bangsamoro government would need up to P70 billion.

If that is so, and the new federated regions are seeking budget parity, could we be headed then for fiscal disaster? At least we must know if we are really being carried to a proposition that the nation cannot afford and should reject.

The proposed Philippine federal structure. No government today functions like the ideal formulation proposed by Adam Smith, which suggests that government provide mainly national defense, public order, and public works.

The functions of government under the proposed, long text of the draft constitution go far beyond those important functions. Those who hanker for minimum government and greater economic freedom for the individual will not find it in this constitution.

This is the result of the natural evolution of government functions.

In an ideal federal structure, most of the functions of the government are devolved toward the regional and local governments. But the functions of the government today are so much broader.

Consider this quote about the role of the national government in Article XII, sec. 1 of the draft:

(a) Defense…; (b) Foreign affairs; (c) International trade; (d) Citizenship, immigration and naturalization; (e) Monetary policy and federal fiscal policy, banking, currency; (f) Elections; (g) Inter-regional infrastructure and public utilities, including telecommunications and broadband networks; (h) Federal crimes and justice system; (i) Civil, family, property, and commercial laws…; (j) Customs and tariffs; (k) Postal service; (l) Intellectual property; (m) Regulation and licensing of professions; (n) Law and order; (o) Prosecution of graft and corruption cases; (p) Competition and competition regulation bodies; (q) Promotion and protection of human rights; (r) National socio-economic planning; (s) Science and technology; (t) Social security benefits; (u) Time regulation, standards of weights and measures.

These functions are somewhat comprehensive and their institutions are already provided for in the national government. Many of these functions invoke large programs.

It would be understandable then that the budgetary demands in supporting the functions of the national government would continue to require a growing budget, too.

There might be room for paring down the national budgetary requirements of the national government. However, reducing the requirements of large departments and institutions would likely encounter resistance.

Untenable fiscal demands and efficiency losses. Dividing the country into eighteen different regional parts and providing for a uniform basis for governmental structure, presumably with standardized salaries and parallel bureaucratic structures simply multiplies the cost of the government.

There is likely to be no productivity gains from the split. The geographic division of the country, with the exception of the Bangsamoro region, has little basis in history. The Cordilleras are already partitioned into separate provinces with local communities tied up culturally. Their main strength could be uplifted by their linkages to the lowlands of Northern Luzon and the support of the whole Luzon island.

We should be reminded that the federal regions were groupings to improve administrative governance and interaction between the central government and provincial and local governments. They were not established to provide the seed for independent government structures.

Alternative to the federal idea of 18 states. The strong demand for federalism emanates principally from the desire of those in Mindanao to have local autonomy.

With the complications of the Bangsamoro demand for autonomy, the federalism idea took great root. From the viewpoint of finding a practical solution to the Bangsamoro demand, the federalism model has been advanced to remove the uncertainty of a constitutional challenge.

It makes more sense to develop a four-state federal union under this circumstance. Mindanao’s desire for greater autonomy is met. Mindanao is viable by itself as a major agricultural region with sufficient industrial and commercial potentials.

The Visayas has always been a dynamic part of the country. The major island economies have had a long period of historical interaction and some island groups are strong economies by themselves, especially Cebu, Panay, and Negros.

Luzon, of course, is the nation’s major economic powerhouse. Where Mindanao and the Visayas would be much more aggressive in developing their regional economies, the long experience of Luzon in industry and commerce provides a contrast. The home of industrial protectionism in the country has been Luzon.

Each one of these groupings of nations are economically viable on their own. Their reorganization into federal states will likely produce a highly efficient, low-cost imposition on the nation’s continuous growth.

In fact, competition among the federated regions is likely in economic fields. Yet synergistic complementarity among the localities in each of the regions will also be promoted. Their associated fiscal costs of governance will likely produce greater efficiency and productivity for the nation as a result.

Otherwise, if that is not acceptable, the preferred route for the nation would be to remain a unitary state along with the Bangsamoro regional state.

(All we need is to improve economic policies to promote growth and to address the restrictive economic policies imbedded in the constitution!)