Finance Secretary Carlos G. Dominguez III, the head of the Duterte administration’s economic team, on Friday said the draft federal charter would widen the budget deficit, downgrade the country’s credit ratings, and may lead to job losses and fewer funds for the administration’s infrastructure program.
While he and the economic team were not against federalism, Dominguez said in a statement that the “ambiguous and unclear” fiscal provisions of the draft federal constitution should first be addressed.
“We welcome a discussion on the draft so that it is clear and unambiguous. We do not want the revenue assignment and the expenditure assignment to be misunderstood, as what happened in the recent case involving the internal revenue allotment of the local government units,” Dominguez said.
Repercussions
For Dominguez, “the possible repercussions could result in dire, irreversible economic consequences.”
If the fiscal provisions in the draft charter were to be implemented, “the federal government would incur a deficit of 6.7 percent, which may result to a credit rating downgrade for the Philippines,” and, subsequently, higher interest rates, Dominguez warned.
“To avoid this negative economic consequence and maintain the current deficit target of 3 percent, the federal government will have to cut its expenditure program by P560 billion. This means the national government may have to lay off 95 percent of its employees or reduce the funds for the ‘Build, Build, Build’ program by 70 percent, or a combination of both,” according to Dominguez.
The government plans to roll out 75 “game-changing” flagship projects alongside spending up to P9 trillion on infrastructure until 2022 under its “Build, Build, Build” program.
Credit ratings
At the Senate finance committee hearing on the proposed 2019 national budget last Wednesday, Dominguez said the Philippines’ investment-grade credit ratings, which makes it cheaper for the country to borrow money, may “go to hell” while interest rates could rise by up to 6 percent under the “very confusing” fiscal provisions of the draft federal constitution.
Credit ratings are a measure of a government’s creditworthiness. As the stability of state finances is also related to a country’s performance, credit scores serve as a proxy grade for the economy.
Improved ratings would allow the government to demand lower rates when it borrows from lenders, which could translate to lower interest rates for consumers and businesses borrowing from banks using government-issued debt paper as benchmarks for their loans.
The Philippines enjoys investment-grade credit ratings from the top three debt watchers, namely Moody’s Investors Service, Fitch Ratings and S&P Global Rating
Powers
“The draft constitution also enumerates the exclusive powers of the federal government and the federated regions but is silent on the funding source for the exercise of these powers,” Dominguez added.
“As we pointed out earlier, we never stated that we are against federalism. Rather, with respect to the fiscal provisions of the proposed constitution, there are ambiguous provisions on revenue assignment and there are no provisions on expenditure assignment. There are, likewise, principles on revenue sharing that do not appear to be well-studied,” he said.
Source
For instance, Dominguez cited that “although the draft constitution provides for an equalization fund, which shall not be less than 3 percent of the annual General Appropriations Act, it does not state whether this will be taken from the share of the federal government or of the federated regions.”
He also noted that “the recently enacted Bangsamoro Organic Law provides for a 5-percent block grant” but “it is not clear from whose share this will come from.”
“Given these ambiguities, it is our duty and responsibility to point these out and engage in a healthy, level-headed discussion, especially when the possible repercussions could result in dire, irreversible economic consequences. We believe that these should be set out clearly so that they adhere to the principle that ‘funds follow function and ‘funds follow the program,’” according to Dominguez.