The Relationship Between IRA and Local Government Expenditures: Evidence From a Cross-Section of Philippine Cities

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Intergovernmental fiscal transfer (IFT) is one of the ways in which local government units (LGUs) source their funds. In the Philippines, the most common IFT is a lump-sum grant called the Internal Revenue Allotment (IRA). Empirical studies show that the unconditional lumpsum grant is the IFT type that stimulates spending the least. Using data from Philippine cities, this paper finds evidence that total city government expenditures is positively associated with IRA. A one peso increase in IRA is associated with an almost unitary peso increase in city government expenditures. This estimate is much higher than the result of most similar empirical studies using data from other countries. Moreover, this relationship varies according to the capacity of the local government to generate its own funds. IRA has a smaller marginal effect on local government spending for LGUs with more locally sourced revenues. Furthermore, not all components of local government spending are affected by the IRA. Results also suggest that different income sources have different marginal effects on spending.