ECON 198

April 4, 2019

Recall from last meeting

IV used: IRA
Requirements for IV
1. IV not correlated with LGU spending
2. My income is not related to the amount of IRA of other LGUs other than the effect of
income through their own spending

Lecture 15
Part 2

QUESTION # 1
Is increased spending welfare improving?
In PH
1. Devolved funds (health)
a. Additional spending responsibilities
b. Expect increase in health spending
2. Increased share (IRA)
a. We would expect increased spending because they have more money

INCREASE SPENDING NOT EQUAL TO INCREASE IN WELFARE

Why?
● Inflation
● wasting/spending on useless things

Selected country experiences: preference matching

PHOTO

1. General public services- overhead expenses (Office of the Mayor etc)

2. Economic services- roads etc
3. Social service- education, social welfare, health
4. Debt servicing
5. Others

Fiscal decentralization services

Greater matching: public commision and public need

Depth of PH fiscal decentralization

PHOTO
If decentralization is effective
● Greater power to raise revenues
● Ratio of locally sourced revenue increase (EDR)
● Increase in EDDR is more than the increase in RDR

LGU spending in 1985-1994 %GNP

PHOTO
Note:
general public service are just overhead expense, means that no real service is provided yet
Spending just to maintain the organizations that provide the services

LGU spending in 1985-1994 %of own budget

PHOTO
Note: social service were already declining before decentralization

Actual spending in 1993​ (year 2 of decentralization)

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If we preserve the amount of spending allocated in 1991

Example: Suppose 150M a year later (required spending to preserve the expenditure before
decentralization)
● Account for inflation (100M+50M inflation)
● You spend for the same services

10411.5 actual spending

11085 supposed spending
They spent less than the supposed!

Total social services regress against per capita HDI

PHOTO
D1=1 9net resource transfer greater than 0
Enough money to finance the devolved services

Note that education is not a devolved function

Decrease spending cannot blame the LGUs

HDI
Physically, mentally, and financially capable
Lesser capability means that government has to spend more (expect positive spending)
Increased spending may not be optimal
PHOTO

Graph left

HD before decentralization
Prices are subsidized budget all from NG
Shared by all taxpayers

HD after decentralization
Shift in budget line because of block grant

They are constrained to provide the same HD even after decentralization

Example: they cannot reduce doctors, hospitals

Increase in spending is not optimal anymore

Per capita total health expenditures

PHOTO

QUESTION # 2
Convergence or divergence?

Puro slides na lang this part HAHA