IRA and Local Fiscal Governance in the Philippines

Abstract

AbstractBeyond the revenue implications, how does the unconditional nature of intergovernmental transfers affect local fiscal governance? Specifically, does local government reliance on automatic central government subsidy inform local government spending behavior? Drawing on local budgeting and election-related data from 1992 to 2016, this chapter argues that the unconditional nature of the internal revenue allotment (IRA) creates at least two undesirable features that have come to characterize fiscal governance in the Philippines. First, the internal revenue allotments that are received automatically, creates a disincentive for local governments to generate their own sources of revenue. This conjecture is not new and has long been raised in a number of anecdotal accounts. Second, subsidiary governments which are more reliant on central government subsidy also tend to spend less on social and economic services, creating a vicious cycle of dependency and underdevelopment. Evidence from our panel estimates suggests that locally generated income tends to be smaller in cities and provinces that are more reliant on IRA as an income source. This effect is more pronounced in provinces. Beyond fiscal efforts, however, we also found that local governments’ overreliance on transfers can also negatively impact welfare spending. Up to a certain level, IRA improves expenditures for public welfare in provinces. Beyond this threshold, IRA decreases welfare spending, casting doubt on fiscal transfers as a vector of local development.KeywordsFiscal decentralizationInternal revenue allotment (IRA)Local governmentMetropolitan ManilaPhilippines