Resource Allocation Schemes

In last Thursday's article, we started off with some of the basics of resource allocation as practiced in official budgeting, may it be national or local, or in any subdivision of the government. There are two ways, primarily, in slicing and distributing the pie of resources - sectoral (meaning in terms of the different sectors of development), or spatial (that which is anchored on area, location, and jurisdiction). Sectors might refer to infrastructure, health, agriculture, etc.; space means by region, province, city, down the line.

One can readily see the seeming impossibility of using both criteria in the allocation of budget and there has to be some pre-agreed formula in how the two can be used simultaneously. As we stated last Thursday, the present set-up is sectoral first, then a spatial formula maybe performed. The underlying principle of this scheme is the fact that we are one country, with one development direction, and that national development is first and foremost, propelled mainly by sectoral contribution.  Thus, sectoral priorities come first.

Sectoral, then spatial, that is the order of execution. Theoretically, the reverse may also be done - spatial distribution first, then allocated by sector at the sub-national level. For example, the national government may simply decree that the national budget shall be divided by region, by province, or even by city/municipality, and let each decide on the priorities. This is rare, I haven't seen a state which does this, even the federal ones, which logically should have done this.  The unity and primacy of a country always comes first.

The inability of the spatial, then sectoral scheme, to address national interests, becomes evident ones we simulate it. If we divide the pie by area, each area would then have their own (primarily local) sectoral priorities in subdividing the pie. We can only see what the national priorities would be if we add up the sectoral shares in each "region," say, the total of all infrastructure, or health, or agriculture. And the resultant national distribution would definitely not have the priorities that the country wants in the first place.

But the sectoral, then spatial, way would have its own demerits, too, mostly in recognizing local priorities. Since the pie is divided nationwide by sector, then cascaded into the local areas by each sector, the resultant sectoral make-up at the sub-national levels may not depict what the "region" wants.  Somehow, a way of harmonizing the diverging national and sub-national interests has to be instituted.    

The only way to set this is by a pre-defined formula. Actually, though many may not have realized it, in the Philippine setting nowadays, this is already done by dividing the pie first into two, then allocating one portion by sector, then by area, and the other portion by area, then by sector. This is with respect to the total internal revenue of the country (basically the taxes). In general, 40 percent of it is given to the local government (allocated by area through a formula stipulated in the Local Government Code), and the 60 percent remains with the national government which becomes the main source of the national budget.

As we described last week, the national budget, which include 60 percent of the total internal revenue, is crafted and allocated by sector, following the priorities set by the national development plan and the development agenda of the administration. The different areas will receive the budget allocation as these are set by the state. But 40 percent of the tax revenues are given directly to the local government units, who will now allocate their IRA shares patterned after their local agenda. Note that the national government has no say in how the LGUs use their shares, except as maybe provided by the Local Government Code. How the former do their budgeting is another story (in a separate column).

How the government slice the national pie is done by econometrics (that branch of economics which employs mathematics and statistics to define economics input-output models), of course tempered by historical, cultural, and even political realities. For the country to grow faster, and the people to have better quality of life, the setting of sectoral priorities is very, very crucial, and should not be clouded by interdepartmental rifts in getting bigger slices of the pie. And the way to rationalize this is to project everything as a percentage of GDP, evaluate all as such and compare the ratios with those of other countries, especially those who developed ahead.  (to be continued).