One of the cornerstone legislation of the Aquino administration is the 1991 Local Government Code. It promises to enable local government units to chart their own economic and political destiny by being less reliant on the national government for financial support. This paper seeks to explain the theoretical basis of the code from the fiscal policy viewpoint. It will also bring forth several theoretical issues arising from the devolution of fiscal powers. It is hoped that a deeper understanding of the economic rationale behind fiscal autonomy of the local public sector will result in a better appreciation of the advantages and disadvantages of more self-reliant local government units.