PUBLIC FISCAL

ADMINISTRATION
(Module-10)

Submitted by:
JOHN CARLO G. SORO
UPHSD Batch 3
Module 10- Fiscal Administration

A. What is Public Fiscal Administration?

B. Lingering Issues in Fiscal Administration and Development

Reported by: John Carlo G. Soro

Introduction

Meaning ,Concept and Development of Public Finance Public finance, according to the traditional

definition of the subject, is that branch of Economics which deals with, the income and

expenditure of a government. In the words of Adam Smith: "The investment into the nature and

principles of state expenditure and state revenue is called public finance". The earlier economists

were perfectly justified in giving this definition of the science of public finance because the

functions of the public authorities in those days were simply to raise revenue by imposing taxes

for covering the cost of administration and defense. The scope of the science of public finance

now-a-days has widened too much. It is due to the fact that modern states have to perform

multifarious functions to promote the welfare of its citizens. In addition to maintaining law and

order within the country and provision of security from external aggression, it has to perform

many economic and commercial functions. Due to the increased activities of the state, there has

taken place a vast increase in the expenditure of the public authorities. The sources of revenue

have also increased. Taxes are levied not for raising the revenue alone but are used as an

important instrument of economic policy. Public finance now includes the study of financial

administration and control as well. We, therefore, agree with Professor Bastable when he defines

public finance as that: "Branch of economics which deals with income and expenditure of public

authorities or the state and their mutual relation as also with the financial administration and
control the term public authorities includes ail bodies which help in carrying on the

administration of the state".

WHAT IS PUBLIC FISCAL ADMINISTRATION?

PUBLIC

GOVERNMENT SECTOR

PEOPLE WHOM THE GOVERNMENT SERVE

FISCAL POLICY

is the means by which a government adjusts its spending levels and

tax rates to monitor and influence a nation's economy. It is the sister

strategy to monetary policy through which a central bank influences a

nation's money supply

ADMINISTRATION

refers to the process of running an organization, office or business. This includes

creating rules & regulations, making decisions, management of operations,

creating organization of staff/employees/people to direct activities towards

achieving a common goal or objective

2 TYPES OF FISCAL POLICY

Expansionary fiscal policies include measures such as reducing tax rates, increasing direct

payments to consumers via tax refunds and increase government spending in order to increase

economic activity when the economic activity via the private sector slows down. These policies

contribute to an increase in aggregate demand and hence increasing aggregate supply leading to

increased production and hence increased economic output. This policy are mainly used to

maintain economic activity or boost it during a downturn.

Contractionary fiscal policies on the other hand are used to slow down an economy by measures

such as increasing taxes and decreasing government spending. One main reason to use this type

of policy is to control inflation. This is also known as "cooling down" an economy as rapid

economic growth induces higher inflation rates that could ultimately curtail economic activity in

the long run. Contractionary policies reduce the aggregate demand and hence reducing the

aggregate supply and in turn reducing production and hence reducing economic output.

ADVANTAGES AND DISADVANTAGES OF FISCAL POLICY

• Unemployment Reduction – When unemployment is high, the government can employ

an expansionary fiscal policy. This involves increasing spending or purchases and lowering

taxes. Tax cuts, for example, can mean people have more disposable income, which

should lead to increased demand for goods and services. To meet the growing demand,
 the private sector will increase production, creating more job opportunities in the

process.

• Budget Deficit Reduction - A country has a budget deficit when its expenditures exceeds

revenue. Since the economic effects of this deficit include increased public debt, the

country can pursue contraction in its fiscal policy. It will, therefore, reduce public

spending and increase tax rates to raise more revenue and ultimately lower the budget

deficit.

• Economic Growth Increase - The various fiscal measures a country employs facilitate

expansion of the national economy. For example, when the government reduces tax

rates, businesses and individuals will have a greater incentive to invest and steer the

economy forward. To boost the U.S. economy during the Great Recession in 2008, for

DISADVANTAGES

• Conflict of Objectives -- When the government uses a mix of expansionary and

contractionary fiscal policy, a conflict of objectives can occur. If the national government

wants to raise more money to increase its spending and stimulate economic growth, it

can issue bonds to the public. Since government bonds offer a range of benefits to buyers,

individuals and businesses will buy them heavily. According to the Michigan Institute of
 Technology, the private sector consequently will have little money left to invest. With

reduced investment activity, the economy can slow down.

• Inflexibility - There are usually delays in the implementation of fiscal policy, because

some proposed measures may have to go through legislative processes. A good

demonstration of implementation delays is illustrated by the Great Recession. According

to the National Bureau of Economic Research, it began in December 2007, and the

country was only able to enact the Economic Stimulus Act in February 2008. Even when

the government increases its spending, it takes some time before the money trickles

down to people's pockets.

Issue: While it is up to the LGU to exercise their political will to increase their own revenues,

The concerned National Government Agencies should still provide the necessary policy guidance,

technical assistance, and financial incentives to the LGUs .This requires coordination among the

concerned government agencies as mandated by the LGC, so that the LGUs can be properly

guided and not confuse by different reporting systems and guidelines on what they can and

cannot do in terms of resource mobilization.

Proposed Action: The DOF, through the BLGF and in coordination with the DILG and Local

Government Academy could develop and implement effective capacity building activities that

will help LGUs improve their ability to mobilize financial resources from internal and external

resources . The training and capacity building programs should cover the following areas: revenue

generation , financial management , financing options and municipal enterprise management.

Some other Issues:

1. We have some of the highest income tax rates in the region.

Principle of taxation: High income taxes could discourage firms from producing more

goods or employees from working more hours. Hence, a good tax system makes sure

that income tax rates are not too high so as to discourage economic activity.

The problem: The Philippine tax system currently has some of the highest income tax

rates in this region. Compared to our major ASEAN counterparts, our corporate income
 tax is the highest at 30%, a rate that "turns off" foreign investors who prefer to do

business in our low-tax neighbors.

2. Too many goods and services are not being taxed.

Principle of taxation: A good way to reduce high tax rates is to expand the tax base, or

the set of goods and services which are taxed. The same (or even a larger) tax revenue

can be collected as before by imposing a lower tax rate on as many goods and services

as possible.

The problem: In the Philippines, too many goods and services are exempted from taxes.

For instance, our value-added tax (VAT) law has 59 lines of exemptions – more

compared with the VAT laws of our neighbors. The plethora of exemptions partly

explains the relatively low tax revenues we get. If only fewer goods were exempted – or

if only the exemptions were limited to essential goods like raw food and medicines –

then the government could boost its revenues.

3. Too many people are evading the tax system.

Principle of taxation: Another way to widen the tax base (in order to reduce tax rates) is to tax

as many people as possible. But the more people can get away with not paying their taxes (or

otherwise hide their income), the more difficult it will be to reduce tax rates.

The problem: Too many Filipinos can get away with not paying taxes. Obviously, there are the

tax evaders who are nearly impossible to catch and prosecute given our overly strict bank
secrecy law. In addition, "compensation earners" or those who earn salaries or wages, end up

paying more in taxes than the self-employed and the professionals (who have some ability to

hide part of their incomes). As a result, from 2010 to 2013, compensation earners earned 60%

of total incomes in the country but paid as much as 80% of all taxes.