The implementation of the Mandanas-Garcia ruling may likely drag down the country’s economic recovery due to less efficient spending by local government units (LGUs), the Department of Finance (DOF) warned.
Finance Secretary Carlos G. Dominguez III said Tuesday, Nov. 30, that the economy, as measured by gross domestic product (GDP), may grow three percent lower once the Supreme Court (SC) ruling is implemented beginning in 2022.
“Based on our estimates, the implementation of the Supreme Court’s 2018 ruling will yield lower economic growth because local governments spend less efficiently,” Dominguez said in a statement.
To recall, the High Tribunal had ruled in 2018 that the LGUs’ “just share” of revenues includes all national government taxes, and not limited only to Bureau of Internal Revenue collections.
The SC decision effectively raised the base for computing LGU’s share or National Tax Allotment (NTA)—formerly known as the Internal Revenue Allotment (IRA)—on national government taxes.
But Dominguez, the government’s chief economic manager, flagged the LGUs’ weak spending efficiency, defined as the share of productive spending to total expenditures.
Productive spending is expenditure that goes back to the economy, generates multiplier effects, creates jobs, stimulates demand and improves the quality of life.
“Higher LGU allocation will be subject to a lower spending efficiency,” the DOF said. “NG [national government] spending is more than two times as efficient as that of local governments in general.”
The SC decision stemmed from the case filed by then-Governors Hermilando Mandanas of Batangas and Enrique Garcia of Bataan.
Aside from the Mandanas-Garcia ruling, Dominguez also pointed out the COVID 19-induced crisis as another risk that will have a long-term economic scarring effect on the country.
As a result of the pandemic, the national government incurred hefty tax revenue losses amounting to P785.64 billion or 4.4 percent of GDP in 2020, according to initial DOF estimates.
Before COVID-19 struck at the onset of last year, tax revenues were expected to increase by 16.2 percent in 2020.
Foregone revenues are expected to be even larger in the coming years as the impact of the Corporate Recovery and Tax Incentives for Enterprises (CREATE) and Financial Institutions Strategic Transfer (FIST), which are both crucial to a quick economic recovery, take effect.
From 2021 to 2024, revenue losses are projected to reach around P1 trillion on average every year because of tax revenue losses from the pandemic and the foregone revenues from CREATE and FIST.
COVID-19 related loans for the pandemic response and budgetary support to finance the deficit have also translated into increased financing costs for the government.
The total financial cost of COVID-19 related loans now amount to $28.91 billion or P1.47 trillion.
The outstanding balance or the principal value of the loans is $22.58 billion or P1.15 trillion, while the projected amount of interest payments until maturity is $6.32 billion or P320.85 billion. These loans will mature between 2024 and 2060.
“Tax revenue losses from the pandemic-induced economic slump, the rise in debt to fund our COVID-19 response, the looming revenue impact of our economic recovery measures, and lower spending efficiency as a result of the Supreme Court decision to expand the share of LGUs from the NTA must be adequately addressed by the next administration’s economic team,” Dominguez added.