MPCB - CHAPTER 4

• Fiscal policy utilizes government spending and taxation to influence the economy.
• Fiscal policy involves the use of the government's finances to achieve macroeconomic goals.

Fiscal Policy Examples

• Tax Reform for Acceleration and Inclusion (TRAIN LAW 10963) lowers Personal Income Tax (PIT) for all taxpayers except the wealthy.
• The Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act aims to enhance the Philippines' competitiveness in ASEAN by reducing corporate income taxes to 25% or 20% for small, medium, and micro enterprises.
• Government uses spending and taxation to influence economic conditions
• Monetary Policy uses interest and money supply to influence economic conditions

Types of Fiscal Policy

• Expansionary fiscal policy lowers tax rates or increases spending to increase aggregate demand
• Contractionary fiscal policy involves cutting government spending or raising taxes

Fiscal Policy Functions

• Allocation function involves how resources are distributed between private and public goods.
• Distribution function aims to reduce income and wealth inequalities through progressive taxation and social welfare programs.
• Stabilization function is used to balance unemployment and inflation.
• Stagflation occurs when unemployment and inflation exist simultaneously.
• Fiscal policy is needed for stabilization, because full employment and price level stability do not come about automatically in a market economy.

Fiscal Politics

• Public expenditure is expenditure made by the State, social security administrations, local authorities and the administrations to maintain government operations and provide services for the benefit of society as a whole.

Classifications of Philippine Public Expenditures

• National Government refers exclusively to the central government machinery.
• Local Government refers to political subdivisions structured into provinces and independent cities, component cities, municipalities, and barangays.
• Current Operating Expenditures include the purchase of goods and services for current consumption within the fiscal year.
• Personal Services include salaries and wages, social security contributions, and overtime pay.
• Maintenance and Other Operating Expenses (MOOE) include travel expenses, procurement of supplies, water and electricity services, and rent.
• Capital Expenditures refer to outlays for the acquisition of goods and services providing benefits beyond the fiscal year, increasing government assets and investments in GOCCs and their subsidiaries.

Classification of Taxes in the Philippines

• National taxes are collected nationwide by the Bureau of Internal Revenue (BIR), such as donor's tax and excise tax.
• Local taxes are collected by local government units (LGUs), such as business taxes and barangay fees.
• Special taxes are imposed on specific transactions or purchases, such as travel tax and charges on forest products.

Taxation

• Taxation is when a taxing authority levies a financial obligation on its citizens or residents.

Types of Taxes in the Philippines

• Income Taxes are imposed on individuals
• Corporate Taxes are imposed on the net income or profit of businesses.
• Payroll Taxes are deducted from an employee’s income.
• Capital Gain Taxes are imposed on profit earned from the sale or exchange of capital assets like real estate, stocks, or jewelry.
• Property Taxes are imposed on tangible property, such as land and buildings.
• Ability to Pay principle suggests taxes should be levied based on an individual’s financial capacity.
• Benefits Received principle suggests that taxes should be based on the benefits an individual receives from public services.

Reasons for Foreign Borrowing

• Infrastructure Development
• Budget Deficit Financing

Government Borrows to Domestic

• Government borrows to domestic to lessen the impact of currency fluctuations on the national government debt.

Negative Effects of Expansionary Fiscal Policy

• Inflation
• Increase in interest rate

Negative Effects of Contractionary Fiscal Policy

• Unemployment
• Economic Stagnation
• Social Welfare Impact

Limitations of Fiscal Policy

• Policy Lags refer to the timing of the fiscal measures.
• Recognition Lag is the time it takes for an economic shock to be recognized and for action to be deemed necessary.
• Administrative Lag is the delay between the decision to take action and the action itself.
• Operational Lag is the time elapsed between a change in policy and its impact on the economy.
• Crowding Out occurs when increased government spending leads to a reduction in private sector investment due to higher interest rates.

Sectors

• NGA
• Local Government Units (LGU)
• GFI (provide income generating services)
• GOCC (provide income generating services)