Part 3: Public Borrowings PDF

# Part 3: PUBLIC BORROWINGS ## A. Introduction This topic deals with the Philippine government borrowings and/or debts and on management of debts. ### OBJECTIVES: At the end of the lesson, the students should be able to: - Recognize Government debts - Categorize the Major revenue agencies of the...

# Part 3: PUBLIC BORROWINGS ## A. Introduction This topic deals with the Philippine government borrowings and/or debts and on management of debts. ### OBJECTIVES: At the end of the lesson, the students should be able to: - Recognize Government debts - Categorize the Major revenue agencies of the Philippines ### Semantics: - **Public Borrowings** = cover the proceeds of repayable obligations generally with interest from domestic and foreign creditors of the government and its political subdivisions. This is resorted to for financing deficits to balance the budget and for compensating for fluctuations in the economy. Borrowing changes the pattern of purchasing power between the lender and the borrower: the lender forgoes purchasing power now for the promise of repayment later, the borrower receives purchasing power now and makes repayment later. - **Public Debt** = includes the direct borrowing of the national government whether domestic or foreign source; indebtedness of all local governments and government agencies which are controlled operationally by political bodies and which derive appropriations from the Congress; and government corporations which are guaranteed by the national government, domestic or foreign. - **Public Debt** = simply, refers to loans raised by governments. If taxation finance is unavailable to fund government expenditure, a government seeks debt finance. ## B. Origins of Public Borrowing: 1. **Mercantilist Period** - European economies between 1500 and 1750 are considered mercantilists. This is the era of merchant capital, dependent on connections between social and productive systems. **Adam Smith**, he is one of the greatest critics of mercantilism. He was strong in emphasizing the disadvantages of borrowing and expostulated on the advantages of balanced budget during the years of capitalism. 2. **Keynesian Theory of Deficit Financing** - It was during the time of John Maynard Keynes that the idea of public borrowing was introduced during the Great Depression, mainly as a compensatory tool in times of economic stability. He advocated the concept of deficit financing and borrowing which gave theoretical justification for the need to borrow. 3. **Development of Finance** – This was predicted on Foreign Borrowing. The expenditure demands of development are expensive and urgent. The only immediate option recommended by experts is borrowing, specifically foreign borrowing. Here, Musgrave point out that in development finance, foreign borrowing is preferable. ## C. Appropriate Debt Policy: Do not issue debt for a maturity longer than the financed project's useful life. If the debt life exceeds useful life, the project's true annual cost has been understated and people will continue to pay for the project after the project is gone. If the useful life exceeds the debt period, the annual cost has been overstated and people will receive benefits without payment. ## D. Classification of Public Debts: Public debts are classified into various types according to their characteristics. When the public debt literature is analyzed, it is classified into three main groups according to maturity, resources, and voluntariness ### 1. According to Maturity: - **Short-term public debts (floating debts)** - refer to debts up to 1 year. In short-term borrowing, treasury bills and treasury guaranteed bond are used. - **Medium-term public debts** - refer to debts ranging from 1 to 5 years - **Long-term public debts** - refers to debts more than 5 years. The instrument of long-term borrowing is the government bond. These debts are provided from the capital markets and have a higher interest rate than the interest rate of short-term borrowing. Long-term debts are classified as redeemable debts and irredeemable debts. ### 2. According to Sources: - **Internal borrowing/debt** - refers to a country's borrowing from own national resources. This borrowing has no effect on increasing or decreasing national income. It is a debt refers to public loans floated within a country. - **External borrowing/debt** - refers to the resources provided from a foreign country that is repaid with principal and interest at the end of a certain period. External debt has an increasing effect on national income when it is taken and vice versa has a decreasing effect on national income when it is paid. Refers to a country's obligations to foreign governments, foreign nationals or international institutions. ### As to Voluntary Basis: - **Voluntary debts** - refer the debts that are lent to the state by its own will and desire. - **Obligatory/Compulsory debts** - refer to the debts which are lent by forcing to take the bonds issued by the government. These debts are applied in times of war, natural disaster, or economic crises. - Others: Productive & Unproductive Debt, Redeemable & Irredeemable Debt, Funded & Unfunded Debt For you to better understand the discussion, watch the following short video clips. 1. [https://www.youtube.com/watch?v=QQVOcIvXcn4](https://www.youtube.com/watch?v=QQVOcIvXcn4) – Understanding Public Debt 2. [https://www.youtube.com/watch?v=WzRsyYV8l6s](https://www.youtube.com/watch?v=WzRsyYV8l6s) - Distinction between National Debt and External Debt ## E. Role of Public Debt: 1. Smoothing out tax rates 2. Macroeconomic Stabilization 3. Financing war or other emergency expenditure 4. Meeting a part of current expenditure for developing human capital or increasing productivity 5. Remunerative capital formation by government for lending and for equity investments. 6. Filling saving-investment gap ## F. Reasons of Public Debts: 1. To bridge the gap between government revenues and its expanding expenditure requirements 2. These are devoted to development projects; and 3. To finance the foreign exchange cost of projects, thus, conserving the foreign exchange reserves of the country. ## G. Stages of Public Debts: 1. Borrowing funds 2. Spending the borrowed funds 3. Raising revenues for repaying the borrowed funds 4. Actual debt payment ## H. Limitations of Public Debts: 1. **Statutory Limits** - refer to the establishment of borrowing ceilings by statute which stems from the beliefs that a country cannot borrow an amount beyond its capacity to repay. 2. **Normal Limit** - it is dictated by the needs of the economy. The magnitude of the debt varies in relations to the needs of fulfilling certain defined goals = stabilization, distribution and allocation. ## I. Effects of Public Debts: Borrowing has an important place among the public revenues, so its political, economic, and social impacts have great importance. The political effects of public borrowing are handled within the framework of political business cycle theory. 1. **The effect of public debt on the general level of prices:** It is true that borrowing will create a deflationary effect only when it is considered as a bond sale. Because the private sector uses its own resources for buying public bonds, therefore, the private demand and the total demand are decreasing. However, the state purchases goods and services with the resources that are collected from the sale of bonds or bills; thus, the total demand increases due to public demand. This situation causes inflation by increasing the general level of prices as a result of the operation of various mechanisms. 2. **The effect of public debt on income distribution:** The effect of public debt on income distribution depends on which income groups burden with debt costs and depends on which income groups are the obtained debt sources transferred to. This effect usually occurs during the principal and interest repayments. If the principal and interest payments related to public debt are paid by taxes collected from the middle- to low-income groups, then there is a transfer of resources from the middle- and low-income groups to the high-income group. On the other hand, the external borrowing will affect the income distribution for next generation due to the debt burden adversely (such as the reduction of public expenditures and excessive tax payment). 3. **The effect of public debts on savings volume and investments:** As long as the government canalizes to investing the savings that are collected by the way of internal borrowing, national income will increase, and personal income and personal savings tendency will increase. When debt is used to finance public expenditure, its real cost to society is the sacrifice in private sector production. 4. **The effect of public debts on economic development:** if the funds provided through borrowing for economic development can be canalized to infrastructure investments (such as dams, roads, ports, mining, agriculture), they increase the new investments through multiplier effect. As a result, national income and employment increase; and accordingly economic development is ensured. ## Semantics: - **Public Debt Management** = The system by which the government administers the proceeds of its loan and how will it handle the payment of its debts or obligations. The national debt is ought to be managed so as to make a maximum contribution to public welfare. - **Public Debt Management** = It is the process of establishing and executing a strategy for managing the government's debt in order to: a) raise the required amount of funding, b) achieve its risk and cost objectives, c) meet any other sovereign debt management goals the government may have set. For you to better understand the discussion, watch the following short video clips. 1. [https://www.youtube.com/watch?v=0pSq_FrzuRI&t=132s](https://www.youtube.com/watch?v=0pSq_FrzuRI&t=132s) - Philippine Debt Management Post Pandemic ## J. The Major Revenue Agencies: 1. **The Department of Finance (DOF).** This is the principal fiscal & administrative arm of the government. It is responsible for the judicious and effective management of the government's tax programs and borrowings to achieve national development goals. It is headed by a secretary who is a member of the Cabinet. The Secretary is appointed by the President subject to confirmation by the Commission of Appointments. He is assisted by five (5) Undersecretaries and five (5) Asst. Secretaries. ### Operating Bureaus: - Bureau of Internal Revenue - Bureau of Customs - Bureau of Treasury - Sec. & Exchange Com. 2. **The Bureau of Internal Revenue (BIR).** This is the premier agency in charge of all matters pertaining to internal national taxation. It is headed by a commissioner who is assisted by two (2) Deputy Commissioners. It is under the executive supervision of the Dept of Finance. To aid its supervision over collection of national taxes, the BIR maintains regional offices headed by a Regional Director. ### Taxes Collected by the BIR: - income tax - estate & gift taxes - excise tax - taxes on business - documentary stamp tax - mining taxes 3. **The Bureau of Customs (BOC).** This is the second major revenue-collection agency of the national government, which is placed under the supervision of the Dept. of Finance. The BOC is heated by a commissioner. Its operations consist of revenue collection, law enforcement and public service. - Issues entrance & exit clearance of vessels and aircraft engaged in foreign trade; - Regulates the processing of all articles imported into or exported out of the country; - Oversees warehousing operation, cargo transfer operations, postal clearance operations & customs police operations; - Imposes tariff duties on all articles imported from any foreign country. **CONGRATULATIONS FOR FINISHING THE FIRST MODULE** **NOW YOU CAN PROCEED TO THE SECOND MODULE** **End of Module 4** ## 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.