MODULE 1

Lesson 1: Role and Scope of Public Finance

“The reason why most people never reach their goals, is that
they don’t define them. Winners can tell you where they are
going; what they plan to do along the way and who will be
sharing the adventure with them”
==Dennis Waitley==

Lesson I: THE ROLE AND SCOPE OF PUBLIC FINANCE

A. Introduction

Public Finance, from national to local governments, is a vital aspect; it is considered the
lifeblood for the conduct of government programs, projects and activities. The construction of
roads and bridges, communication and power facilities both for home and industrial uses,
educational and health services, peace and order and fire protection are traditional fields of
activity which the government is expected to engage in. However, to enable the government to
engage in these different activities, it has to raise revenue mainly through the imposition of
taxes. Thus, this wide and ever growing influence of government in economic activities has
naturally brought about much attention to the field of public finance.

OBJECTIVES:
At the end of the lesson, the students should be able to:

• Determine the nature, role, scope and function of public finance in the economy. • Show
understanding about how public finance affects the operations of the government. • Discuss
the function of fiscal policy in the Philippines
• Define Public Finance
• Differentiate Public and Private Finance

B. What is Public Fiscal Administration?

With the emergence of the field of public administration, much interest has been directed
towards the political administrative and management aspects of formulating, implementing and
evaluating fiscal policy, hence, the term public fiscal administration.

Public Fiscal Administration= refers to the formulation, implementation and evaluation of

policies and decisions on taxation and revenue administration; resource allocation, budgeting
and public borrowing and debt management; and accounting and auditing.

As a system, it includes the environment, structures, systems processes and personalities

involved in formulating, implementing and evaluating fiscal policy.

Fiscal Policy = refers to the mix of policies and taxation, expenditures and borrowings for the
achievement of government objectives.

☞ To better understand, watch the attached link below about 1) The Basics of Fiscal
Policy, 2) COVID-19 Relevant Fiscal Policies under the Duterte
Administration
☞ https://www.youtube.com/watch?v=CZPgBZUS4YE
☞ https://www.youtube.com/watch?v=G8uad2Dy34Q
C. What is Public Finance?

1. Public Finance. It simply means collecting and spending of government’s funds. It

covers the whole gamut of fiscal administration including tax collection,
expenditures of government funds, preparation of the annual government
budget, securing foreign and domestic loans and the floating of bonds.
(by Abletez, J.P. and R.B. Chua, “Local Finance and Budgeting”)
 2. Public Finance. It is the study of facts, principles, techniques and effects of obtaining
and spending funds and managing public debts.
(by Schaultz & Barris, “American Public Finance”)

3. Public Finance. It is that part of economics that deals with the revenue and
expenditure patterns of the government and their effects on the economy. (by
Romualdez, et al., “Philippines Public Finance”)

4. Public Finance. It is concerned with the utilization of the combined use of public
expenditure, taxation and public debt so as to achieve economic objectives: (by
Sicat, “Economics”)

a) Reduction of the Wild Swings of the Business Cycle. This means that
during expansion, the government should spend less and tax more,
however, in times or recession, the government should spend more and
tax less.

b) Stable Growth of Income. This could be attained through increased

employment and equitable distribution of income/wealth.

D. Why do we study Public Finance?

The presence of a political body that governs a given economy requires a study of public
finance, because the government, throughout its existence, will have to raise revenues and
spend them, both of which, can substantially affect the economy.

☞ To better understand, watch the attached video and follow link below.
☞ https://www.youtube.com/watch?v=woEbFctsejo
E. Private versus Public Finance: The basic goal in both the private and public economy is the
same, that is, the satisfaction of human wants. They are both engaged in the
production, distribution and consumption of goods and services. However, they have
several major points of distinction.

1. Difference between Private and Public Finance. Here, public finance deals with
public wants while private finance relates to private wants.

Private wants = are those wants that can be satisfied through the mechanism of
the market because their enjoyment or satisfaction can be made subject to price
payments. Here, the Exclusion Principle is applied.

Exclusion Principle = holds that a person is exempted from the satisfaction or

enjoyment of a particular commodity or service if he can’t afford or is not willing
to pay the designated price to the seller.

Public Wants = are those wants that cannot be satisfied through the mechanisms
of the market because their enjoyment by an individual consumer is independent
of his payment of contribution. Therefore, one is not excluded from the
satisfaction of a public want even if he does not pay for it.

2. Financial Means Available

 Private Finance = the private economy can avail itself with the necessary funds
needed to undertake its operations through the issuance of marketable securities
(such as bonds or stocks) or it can utilize its income or others assets.

Public Finance = the public economy can avail itself with the necessary funds
needed to undertake its resources through:

a) taxation
b) printing of money
c) public borrowing
d) sale of public assets & services
3. Budgetary Procedure

Private Economy = the private economy starts the preparation of the budget
from the income side, that is, it determines first its possible income and
additional resources before determining its individual expenditure items.

Public Economy = the public sector or the government sector starts the
preparation of the budget from the expenditure side, that is, it determines first
its expenditure needs before it looks around for possible ways of financing those
expenditures.

Budgeting = the process of bringing together estimates of anticipated revenues

and proposed expenditures implying the schedule of activities to be undertaken
and the means of financing those activities.
 ☞ To better understand public and private finance, watch follow the link below. And
read the additional supplementary reading material.
☞ https://www.youtube.com/watch?v=NJY6P7t-yD0
☞ http://rapodar.ac.in/pdf/elearn/private%20and%20public%20finance.pdf ☞
http://www.differencebetween.net/business/finance-business-2/difference
between-public-finance-and-private-finance/
F. An Overview of the Fiscal Functions:
1. The Allocation Function = refers to the provision of public or collective goods. These
are goods or services that are socially desirable but which ordinary business firms
cannot be expected to provide in desirable amounts.

2. The Distribution Function = refers to the correction of perceived injustices in the

distribution of wealth in society. This means taking from the well-to-do and
improving the conditions of the less-to-do.

3. The Stabilization Function = this involves the combat against unemployment and
inflation, and provision for increases in the standard of living for the citizenry.
G. The Changing Role of Government in the Economy: An economy that works under a basically
free enterprise system generally to attain the following objectives.

1. To strengthen economic freedom = to provide the framework within which

consumers’ choice is respected, competition is maintained, and where can free
markets operate.

2. To promote over-all economic efficiency = the government should have the capacity
in a balance and responsive production with the supply of each of government
services should conform to same principles of least cost and allocative efficiency
as does private production.

3. To promote economic growth = refers to the improvement of standards of living

through an increased per capita real income. It implies the enhancement of the
economy’s capacity to produce goods and services needed by the general public.

4. To promote economic stability = the maintenance of and acceptable rate of economic

growth and without generating substantial involuntary unemployment and
upward-downward movements in the general price level.

5. To improve economic security = the fundamental result in the attainment of the

above-mentioned objectives.

CONGRATULATIONS FOR FINISHING THE FIRST MODULE

NOW YOU CAN PROCEED TO THE SECOND MODULE

End of Module 1

REFERENCES

Briones, Leonor M., Philippine Public Fiscal Administration, (Volume I and II) 2nd ed., Mandaluyong City,
Philippines: Fiscal Administration Foundation, Inc., 2006.

Tendero, Avelino P., Theory & Practice of Public Administration in the Philippines, 2nd ed. Fiscal
Administration Foundation, Inc. (FAFI) 2008.