(GMA News) The World Bank on Thursday warned of fiscal risks that the Philippine government might encounter as it moved to implement a Supreme Court ruling widening the base of local governments’ share in all national taxes collected.

In its Philippine Economic Update report, the World Bank said “the government faces a significant risk that the transition process could lead to a large gap in service delivery, as a lack of coordination between the national and local government and weak implementation capacity could delay the transition towards increased decentralization.”

“Underspending by local governments may worsen, as many local governments do not have the capacity to absorb a significant increase in revenues,” the WB said.

In a virtual launch of the report, World Bank economist Kevin Cruz said addressing weaknesses in planning and coordination is a first step towards managing the transition and improving decentralization.

“The national government should clearly define re-devolved functions and communicate these clearly to both national government agencies and local government units,” Cruz said.

“The authorities need to ensure that the development goals of the national government and local governments are well-aligned, and that service delivery gaps are minimized, particularly during this unprecedented crisis. This will require the national government and local government units to review the division of labor between national government agencies and local government units in re-devolving functions, while keeping fiscal and absorptive capacity in mind,” he added.

The World Bank noted that as a result of the Mandanas Ruling by the Supreme Court in 2018 the internal revenue allotment of LGus are programmed to increase by 55% in the 2022 budget, reaching P1.08 trillion or 4.8% of the country’s gross domestic product (GDP) compared to 3.5% of GDP in 2021.

To implement the ruling, President Rodrigo Duterte issued Executive Order 138 which establishes a Committee on Devolution (ComDev).

Under Duterte’s EO 38, ComDev will propose to Congress the Growth Equity Fund (GEF) “to address issues on marginalization, unequal development, high poverty incidence and disparities in net fiscal capacities of LGUs.”

The so-called Mandanas ruling expands the LGUs’ internal revenue allotment share to all national taxes including those collected by the Bureau of Customs.

The Supreme Court ruling favoring increased share of taxes for LGUs stemmed from the petition filed by then Batangas Representative Hermilando Mandanas.