Crux

Money is at the crux of the federalism question. It is its end-all and be-all.

The whole idea of creating sub-national entities revolves around these contrived political units retaining a larger share of revenue collections. This is the opium that attracts political support for the federalists. But they would not want to talk about it.

In the present unitary arrangement, national government get first crack at the revenues. Expenditure is prioritized: the automatic allocation for debt servicing, funding for education and defense, economic investments especially for strategic infrastructure, etc.

Because the law enables automatic allocation for debt service, we were able to rebuild our fiscal position. The assurance enables us to access financing to keep government running. It brought us credit risk upgrades that brought down the cost of money we need to borrow from time to time. It allowed us to transition from the crippling debt crisis that hit us during the late eighties.

We enjoy the strong growth position we now have because national government enjoys predictable revenue flows. Without that, the nation would have remained in the fiscal hell we used to be in during the time we were derisively called “The Sick Man of Asia.”

It is precisely the strong fiscal position of the national government that federalism threatens to upend.

By giving the sub-national units first crack at the revenue flows and giving the national government only leftovers, the proposed arrangement will lead to fiscal meltdown. Our budget deficit will shoot through the ceiling and our credit ratings will fall through the floor.

This will be a national disaster of unspeakable proportion.

When the erstwhile Soviet Union broke up in the early nineties, all the “republics” simply walked away from the federal arrangement. Russia was left holding the bag of national debt. The country would have slid into utter bankruptcy were it not for the discovery of huge oil and gas deposits in its vast land.

Facing the specter of looming bankruptcy, Russia rapidly privatized state enterprises and built up large conglomerates to exploit the country’s resources. This hurried process, unfortunately, produced a class of oligarchs that now effectively wield power through the autocratic Putin regime.

The impact on the national government’s fiscal position is only one aspect of the problem. None of the existing proposals for federalism spells out a clear plan for producing equity among the disparate regions. Without such a plan, the poor regions will be poorer and the rich regions richer.

In Germany, the federal arrangement provides for a complex system of cross-subsidies that enables a leveling of incomes across the component sub-national entities. Bavaria, the wealthiest region, ends up subsidizing most of the rest. While the Bavarians chaff at this, the country’s Basic Law provides for it.

The revenue question ought to be at the center of any proposal for federalism. But it is not.

I have raised this question many times in this space. When I served at the 2005 Consultative Commission for Charter Change, I spent days at the rostrum begging for answers. None came.

I cast my vote against the federalism proposal.

Unwarranted

The Bangsamoro Organic Act signed recently provides for a P50 billion “block grant” for the autonomous region to get it started. That will not be the last of the subsidies to be offered to what is, after all, the poorest part of the country.

Should we suddenly shift to a federal arrangement in the near term, the initial cost is now conservatively estimated at P120 billion. That is just to build the physical and political infrastructure to realize the shift. It does not yet include the operating costs for regional governments in most of the regions that do not have the revenues to pay for these themselves.

On top of this, we can only divine the impact of such a shift on our credit ratings and on investor sentiment.

Weeks ago, Economic Planning Secretary Ernesto Pernia concluded a shift to a federal arrangement will likely wreak havoc on our economy, just as it is on the cusp of emergence. This week, before a Senate panel, Finance Secretary Carlos Dominguez confessed to being confused about what the draft constitution prepared by the Duterte-appointed Consultative Committee (ConCom) was thinking as regards the fiscal issues.

There is nothing in the draft that gives us a clue as to what will happen to the national government’s fiscal position. In its present form, Dominguez said he would “absolutely” vote against the federalism proposal.

Last July 3, the Supreme Court granted a petition that claims that local governments should get an IRA share computed to include all taxes and not just internal revenue collections. That implies a payout of about P200 billion more for IRA, putting the national government in an unsustainable fiscal position.

An annoyed member of the ConCom has asked President Duterte to fire both Pernia and Dominguez for what they said. That is an imperious, impertinent and unwarranted demand. Should experts be penalized for rendering an expert opinion?

By way of analogy, should we penalize a doctor for making a correct diagnosis?

Besides, it was the task of the ConCom to provide a clear design for the federal arrangement they propose. That design should have answered the revenue (and subsidy) questions squarely. These are questions that cannot be postponed to after the shift to federalism.

But the ConCom failed to answer the most disturbing questions about the consequences of federalism on our fiscal position and on the existing inequality between the regions.