National Debt and Federalism

ONE GOOD question raised about federalism is on how to deal with the country’s national debt when we become federal. Records of the Philippine Statistics Authority (PSA) reveal an improvement in the country’s performance debt payments over time.

Gross National Debt was recorded at 5.6 Trillion pesos in 2013, ballooned to 7.3 trillion by 2018, and current April 2019 figures at 7.8 trillion. The country’s external debt-to- GDP ratio recorded at 23.8 %, 19.1%, and 20% respectively for the years 2013, 2018, and 2019.

Although the country’s national debt increased yet the debt-servicing over similar years also improved; indication of a better capacity to pay debt. The country can reign in debt payments because of relevant and useful spending that hit the critical bottom of target investments, through the Build, Build, Build Program, a Keynesian spending model that buoys the economy to generate income on the one hand, and create a competitive, productive environment on the other.

As the country implements infrastructure strategy to catch up with the growing global demand for connectivity, little by little, we see how the infrastructures change the domestic game of development. Ordinary people participate from this government spending. The reported increments in the GDP and growth of government agencies are complemented by the decrease in the self-rated hunger and poverty surveys of the Social Weather Station (SWS).

With the foregoing stream of positive change, people might ask if the federalism can sustain or event accelerate the social welfare and infrastructure growth. And if I may go back, who will pay the country’s debt if we become federal?

The current state of national growth and social welfare all points that given the right mindset and framework of governance, this country becomes better, notwithstanding its highly-celebrated political discourses. It is the right mindset and the appropriate system of government. The right mindset is meaningful change, and the right system of government is federal setup.

Now, who pays the national debt in federal setup? The national debt, given the nature of engagement, is a concern of the Federal government. Debt payment is one of the concerns of the federal government. However, it is not a burden to all.

Only those federated regions which benefit from the debt through infrastructure, social or institutional development will be asked to pay through revenue or excise taxes that will be collected by the federal government. For example, if debt-spending is on education, then those who benefit from the education voucher will pay higher income taxes upon employment than those who did not benefit from the support.

As an approach, this is Lindahl equilibrium; the payment done by those who benefit is consistent with the value they get from the social good provided, through borrowing. Therefore, those who benefit much should pay more; those who did not benefit must not be asked to pay.

During transition to federal republic, the government can pursue two modes to address the national debt. First, it may ask for a moratorium equivalent to the expected period when the new federal government can fully function. The second is debt by absolution where all debts that did not contribute to improvement because of inappropriate spending, mismatches with community demands, or that, the money was lost and corrupted. Still, the government has to pay.

The fact that a new federal government replaces that old, expensive and slow-moving unitary government also means that the attendant systems and its hybrid are abandoned, along with it, the money which funded it. A careful study though need be required to measure impact on the relationship of the new Philippine Federal Republic to the international community.

There still are a lot of things to discuss about federalism. But what is important is that the country is ripe to become one. The way to do this is the constant exchange of views, questions, and answers, for a continued education and learning. After all, federalism is an idea that is totally opposed to the constant assuage of poverty, hunger and insurgency.

And I strongly still believe that this country will become federal within the term of President Rodrigo R. Duterte, and when I say this, I mean, ensuring the most basic: ratification of the Federal Constitution within his term.