Public Finance Management and Budgeting

March 6, 2021

PUBLIC FINANCIAL MANAGEMENT (PFM)

It is a system of rules, procedures and practices for government to manage public finances. It
deals with all aspects of resource mobilization and expenditure management in the government.

1. Government’s Role in the Market System

1.a. Overview of the Market System

Ideal free market system conditions do not always exist
BUT… it serves as a conceptual framework to understand market behavior

2. Market Failure and Government Intervention

Market’s Failure refers to : inability

1. To operate efficiently
2. To deal with macroeconomic problems
3. To provide goods that are necessary for collective consumption called public goods
4. To regulate itself

Richard Musgrave : Theory of Public Finance

Govts’ essential functions during market failures:
1. Allocation of resources;
2. Distribution of goods and services;
3. Stabilization of economy
4. Regulation – subsumed in Allocation.

Market’s inefficiency refers to the existence of :

a. Monopoly/Oligopoly - Regulation
 b. Externality- Regulation
-Spillover or third party effect; unpriced cost or benefit that an indl or firm produces to a
third party; it leads to inefficiency of allocation of resources
To address externalities- direct nego/bargaining/taxation/allocative policy thru regulation/
balance between regu and taxation
c. Imperfect Information -regu/legislation
d. Incomplete Markets- regu /distru/ legislation
e. Income Equality- regu distri/legisltion
f. Emerging Issues – Changing conditions- regu/ innovations

Macroeconomic problems refer to ;

a. Unemployment-improvement in GNP and GDP/ rule of thumb approach
-intervention: allocation /distribution

b. Inflation -increase in price level; inverse relationship w price level

Intervention;allocation/regulation

To address unemployment and inflation…

The government should implement an effective FISCAL POLICY

1. Tax Policy -
2. Expenditure Policy-

3 Sources of Financing/ Government Spending

1. Taxes 2. Borrowings 3. Printing money

Expansionary Policy :
When we decrease the taxes and Increase in expenditures (budget deficit)

Contractionary Policy :
When we increase in taxes and decrease in expenditures (budget surplus)
Monetary policy is administered by the Bangko Sentral ng Pilipinas (BSP).
It has three (3) principal instruments:
1. Reserve requirement 2. Discount rate 3. Open market operation

Increase reserve requirement -- Decreases banks’ ability to extend credit---- Decreases

money in circulation--- Decreases inflation
Decrease reserve requirement--- Increases banks’ ability to extend credit --- Increases
money in circulation --- Increases inflation

Monetary Policy and Government Budget

The effect of monetary policy to the government budget is indirect.
Combination Fiscal and Monetary Policies The government may use proper policy mix of
fiscal and monetary policies depending on severity of the problem as well as the
relationship of the government and the monetary board (BSP).

Balance of Payment (BoP) Disequilibrium All economic transactions between households, firms,
and government agencies in a country against the rest of the world during a given period of time
Imbalances in current and capital accounts

Taxation System

“The rule of taxation shall be uniform and equitable. The Congress shall evolve a
progressive system of taxation.
(Article VI, Section 28, paragraph 1, Philippine Constitution)

Desirable Characteristics of a Taxation System

1. Efficiency- The system produces maximum revenue without imposing deadweight
loss (excess burden) on the taxpayers. (lowered tax payments)
2. Equity Function of fairness - Relative distribution of resources among individuals
and groups according to some criteria for justice and fairness

Kinds of Tax Equity

a. Horizontal Equity A tax system treats individuals with equal incomes equally.

b. Vertical Equity A tax system treats individuals with unequal incomes differently.

How to Measure Vertical Equity?

a. Ability to Pay Principle Those who have more ability to pay should pay more.
Related to “compensation principle”

b. Benefit Principle One must pay in proportion to the benefit received.

3. Flexibility
a. Ability to expand tax base
b. Ability to raise taxes
c. Ability to find new sources of revenue
d. Must have substantial degree of stability

3. Simplicity
a. Laws and guidelines are easy to understand b. Easy enforceability with
economical costs c. Transparency d. Convenience in timing and manner of
collection.

4. Feasibility
a. Must be supported by stakeholders
b. Must undergo the consultation process with stakeholders (information and
engagement)
c. Government must earn the trust of the public.
- Strengthening accountability
- Instituting reforms
- Ensuring equity and fairness
d. Covers information security

Standard Methods of Tax Collection

1. According to Tax Base
a. Income b. Consumption c. Wealth Standard Methods of Tax Collection

2. According to Tax Responsibility

a. Direct Tax b. Indirect Tax
 2. According to Rate Structure :
a. Progressive – rates increase as income increases
b. Regressive – rates decrease as income increases
c. Proportional – rate remains the same regardless of income

Basic Philippine Laws and Regulations on Taxation

1. Philippine Constitution
2. RA 8424 – The National Internal Revenue Law
3. RA 7160 – The Local Government Code of 1991
4. Tax Treaties
5. Revenue Regulations, Revenue Memorandum Orders, Revenue Memorandum Rulings,
Revenue Memorandum Circulars, Revenue Memorandum Rulings, and BIR Rulings

Local Government Taxation System

The Constitution provides for local government taxation. (Article X, Section 5) (Article X,
Section 6)
The Local Government Code provides that all local government units are granted general tax
powers, as well as other revenue-raising powers like the imposition of service fees and charges,
in addition to those specifically granted to each of the local government units.
Local Taxes Commonly Imposed in the Philippines
• Basic Real Property Tax – tax on the value of real properties
• Tax on business of printing and publication
• Franchise Tax
• Sand, gravel and other quarry resources tax – tax on the fair market value of ordinary stones,
sand gravel, earth and other quarry resources extracted from public lands or public waters within
the province.
• Professional tax – tax imposed on professionals such as lawyers, doctors, etc.
• Amusement tax – tax imposed on cinemas, theaters, concert halls, circuses and amusement
venues
• Annual fixed tax for delivery trucks and vans
• Local Business Tax – tax imposed by municipalities on businesses within their jurisdiction
• Barangay tax – tax imposed on stores or retailers based on thresholds
• Community Tax – tax imposed on individuals and corporations within an LGU’s jurisdiction

National Internal Revenue Taxes:

(a) Income tax;
(b) Estate and donor's taxes;
(c) Value-added tax;
(d) Other percentage taxes;
(e) Excise taxes;
(f) Documentary stamp taxes; and (g) Such other taxes as are or hereafter may be imposed and
collected by the Bureau of Internal Revenue. (Section 21, Title 1, National Internal Revenue
Code)
Who are the taxpayers in the Philippines?
• Filipino citizens living in the Philippines and earning income from sources within and outside
the country
• Overseas Filipino Workers, Filipino immigrants, and other nonresident citizens with income
from sources within the Philippines
• Resident and nonresident foreigners earning income from sources within the Philippines
• Domestic corporations earning income from sources within and outside the Philippines •
Foreign corporations with income from sources within the Philippines

ALLOTMENT OF INTERNAL REVENUE

National internal revenue collected shall accrue to the National Treasury and shall be available
for the general purposes of the government, except for the amounts set apart by way of allotment
as provided under the Local Government Code of 1991.
50% of national taxes collected in excess of the increase in collections for the immediately
preceding year shall be distributed as follows: 20% - City of municipality where such taxes are
collected 80% - National Government
SHARES OF LOCAL GOVERNMENT UNITS IN THE PROCEEDS FROM THE
DEVELOPMENT AND UTILIZATION OF NATIONAL WEALTH
1. Amount of share of LGUs – Aside from IRA, 40% of the gross collection from excise taxes
on mineral products, royalties related to utilization and development of the national wealth
within their territorial jurisdiction.
2. Share of the LGUs from GOCC
Some Special Taxes Imposed in the Philippines
• Motor Vehicle User’s Charge (MVUC) – an annual fee charged on every application for
vehicle registration
• Travel Tax – an airport fee imposed on Filipino citizens, foreign residents, and nonresident
foreigners (more than 1 year stay) who are leaving the Philippines
• Head Tax – imposed on foreigners staying in the Philippines for at least 60 days, with
permanent residency and applying for re-entry permit – paid to Immigration Officer
• Charges on forest products – tax on the privilege of exploiting the Philippine’s forest resources
• Energy consumption tax – imposed on electric power consumption over 650kWh of each
residential customer

Besides revenue from taxation , Government can source financing from Borrowings :

National Government Debt - Borrowings refer to funds obtained from repayable sources, such
as loans secured by the government from financial institutions and other sources, both domestic
and foreign, to finance various development projects and/or budget support.
Borrowings can be : Domestic Borrowings Foreign Borrowings
Why does the government borrow? The government borrows for any of the following reasons:
• to finance national government deficits; • to obtain foreign exchange; • to secure financing at
more favorable terms than the opportunity cost of revenues; • to take advantage of benefits
attached to the funds, e.g. technology; and, • to balance the timing of resources with the project
gestation and repayment of benefit

Other Sources of Financing

1. Capital Inflows - private and official inward flows of money to the country in the form of
investments, grants and loans.

2. Commodity Grants- donations / contributions / gifts in kind received by agencies which

are subsequently monetized.

3. Commodity Loans - These are foreign loans in the form of goods received which are
subsequently monetized to finance programs and projects of implementing agencies.
 4. Constructive Cash Receipts- A funding source corresponding to proceeds from foreign
loans / grants in the form of goods and services for which no cash is remitted to the
National Treasury.

5. Dividends- These are the declaration by GOCCs and remittance of their annual net
earnings as cash, stock or property dividends to the national government, at rates
prescribed by law.

6. Equity- These are national government investments in the authorized capital stock of
GOCCs.

7. Extraordinary Income- These are collections derived from the repayment of loans and
advances made by the government as well as from other non-recurring sources.

8. Extraordinary Receipts These are income which do not regularly accrue to the
government, the collection, for which is indefinite or does not depend entirely on the
authority of the government.

9. Grants These are all non-repayable transfers received from other levels of government, or
from private individuals, or institutions, foreign or domestic, including reparations and
gifts given for particular projects or programs or for general budget support.

10. Official Development Assistance (ODA) T-his refers to the financial and non-financial
grants and concessional loans to developing countries provided by bilateral and
multilateral institutions, including state and local governments or their executive
agencies.

What are the government's current efforts to improve tax collections?

The Comprehensive Tax Reform Program (CTRP), the new tax measure has three principal
components, namely: a) income tax reform; b) excise tax reform; and c) fiscal incentives reform