Public Economics: Introduction to Taxation PDF

PUBLIC ECONOMICS INCOME AS A BASIS OF TAXATION INTRODUCTION TO TAXATION Taxation based on an individual or entity’s income earned during a specific period,...

PUBLIC ECONOMICS INCOME AS A BASIS OF TAXATION INTRODUCTION TO TAXATION Taxation based on an individual or entity’s income earned during a specific period, typically a year. Income includes wages, salaries, business profits, interest, dividends, LECTURE 3: INTRO TO TAXATION and rental income. According to Untian (2002), “Taxation is the Governments calculate taxes owed based on a inherent power by which the sovereign state taxpayer's income, applying different rates imposes financial burden upon persons and depending on tax brackets. property. It is a way of raising revenues in order For example, higher earners might pay a larger to finance the necessary expenses of the percentage of their income under a progressive government” tax system. PRINCIPLES OF TAXATION CONSUMPTION AS A BASIS OF TAXATION Efficiency: the tax system should not be Taxation based on the spending or distortionary; if possible, it should be used to consumption of goods and services rather than enhance economic efficiency. income. It focuses on what individuals or Administrative Simplicity: the tax system entities spend rather than what they earn. should have low costs of administration and Taxes are levied on transactions when goods compliance. and services are purchased. Flexibility: the tax system should allow easy Common forms include sales taxes, valueadded adaptation to changed circumstances. taxes (VAT), and excise taxes. Political Responsibility: the tax system should LIFETIME INCOME AS A BASIS OF TAXATION be transparent. Fairness: the tax system should be, and should Taxation based on an individual's total earnings be seen to be, fair—treating those in similar accumulated over their lifetime, rather than on circumstances similarly, and imposing higher annual income or consumption. This concept taxes on those who can better bear the burden looks at long-term wealth generation rather of taxation. than short-term measures. Wealth Taxes: Taxes on the total value of an FAIRNESS individual's assets, which often reflect 1. Horizontal Equity - A tax system is said to be accumulated lifetime income. horizontally equitable if individuals who are the Estate or Inheritance Taxes: Taxes levied on the same in all relevant respects are treated the transfer of wealth upon an individual’s death. same. SUMMARY 2. Vertical Equity - the principle of vertical equity states that some individuals are in a position to pay higher taxes than others, and that these individuals should do so. THERE ARE THREE PROBLEMS OF FAIRNESS 1) DETERMINING who, in principle, should pay at the higher rate; CRITICISMS OF INCOME-BASED TAXATION 2) IMPLEMENTING this principle—that is, writing tax rules corresponding to this principle; and 1. Complexity and Administrative Burden: Income tax systems often involve intricate 3) DECIDING, if someone is in a position to pay the rules, numerous deductions, exemptions, and higher rate, how much more that individual credits. This complexity leads to higher should pay than others. administrative costs for both the government and taxpayers.  2. Incentive to Evasion and Avoidance: High Healthcare systems like hospitals and income taxes, particularly progressive ones, clinics. create an incentive for individuals and Military and national defense. corporations to evade or avoid paying taxes. Public safety, including police and fire 3. Regressive Effect on Lower-Income Groups: services. While income taxes are intended to be Indirect services like market progressive (higher earners pay more), in regulation, maintaining law and order, practice, they can disproportionately affect and the justice system also rely on lower-income groups when combined with these revenues. other taxes (like payroll taxes or value-added 2. Redistribution - Taxation helps address tax. economic inequality by redistributing wealth 4. Distortion of Economic Behavior: Income taxes from the richer sections of society to the can distort economic behavior by discouraging poorer ones. This is achieved through: work, saving, and investment. Progressive taxation (Higher-income groups are 5. Economic Inequality and Income Distribution: taxed at a higher rate than lower-income Despite progressive tax rates, income tax groups) and Welfare programs funded by taxes systems often fail to address the broader issue (such as education grants, healthcare of wealth inequality, as they focus only on subsidies, and food assistance) taxable income and not on total wealth. 3. Repricing - Taxes are used as a tool to GENERAL FRAMEWORK OF TAXATION discourage certain behaviors or address external costs that certain products or activities Pareto Efficient Taxation: tax structures such impose on society. This is known as repricing. that, given the revenue raised, no one can be made better off without making someone else Example: Taxes on harmful goods such as worse off. Choice among Pareto efficient tax tobacco, alcohol, and sugary drinks (sometimes structures depends on values, reflected in the called sin taxes). social welfare function. 4. Representation - The principle of “No taxation Utilitarian Social Welfare Function: Chooses without representation” highlights those taxes the Pareto efficient tax structure that are tied to the democratic right to hold maximizes the sum of utilities of individuals; governments accountable. Taxation establishes marginal loss of utility per dollar of revenue a relationship of accountability between the raised must be the same for all individuals. government and its citizens. Citizens contribute Rawlsian Social Welfare Function: chooses the taxes and, in return, expect the government to Pareto efficient tax structure that maximizes use these funds efficiently and equitably and the utility of the worst-off individual. provide representation in policymaking and governance. THE OTHER IMPORTANT PURPOSES ARE ALSO STATED IN THE FOLLOWING: Increase in effectiveness and productivity of the nation; PURPOSES OF TAXATION Increase in the quantum of revenue collection; Improvement in services of the government; 1. Revenue - The main function of taxation is to Improve employment at all industry verticals; generate funds for the government. These Induction of modern technology into the funds are used to finance essential public system; services and infrastructure such as: Rationalization of terms and condition of the Roads, bridges, and transportation economic system; and networks. Rationalization of employment terms and Schools and educational programs. conditions.   Actual incidence is the party who actually CLASSIFICATION OF TAXES bears the burden of the tax. These are individuals who is made worse off by the tax. They are the one who experience a price change because of the tax. SHIFTING OF TAXES  Forward Shifting is the transfer of the burden of a tax from the seller, who is legally obligated to pay it, to a buyer. Personal tax is levied on individual’s wages, salaries, and other types of income;  Backward Shifting is the transfer of the Property tax is paid in owning a property either burden of a tax from the buyer, who is by individual or other legal entity like legally obligated to pay it, to a seller corporation. Excise tax is the tax on the production, sale, or TAX INCIDENCE IN COMPETITIVE MARKETS consumption of a commodity in a country. Direct tax is imposed to individuals and corporations; 1. Effect of tax at the level of a firm (the effect of a commodity tax on supply) Indirect tax is set on a variety of goods and services; Specific tax is a fixed amount of tax placed on a particular product. It also referred to as per unit tax that depends on the quantity sold and not on the product’s price. Ad Valorem tax is an excise tax that is based on the selling price of the good. ROLE OF ECONOMIST IN TAXATION  The tax burden is the true economic weight of tax.  It is the difference between the individual’s real income before and after-tax deduction.  It is always in the inquiry of what is the incidence of tax? Who actually pays, in the sense that real income is lowered? LECTURE 4: TAX INCIDENCE  The study of tax incidence attempts to determine who in the economy bears the final “burden” of taxation.  Tax incidence is the division/distribution of the burden of a tax between the buyer and the seller Tax incidence can be a statutory or actual incidence.  A statutory incidence is the party that is legally responsible for paying the tax.  2. IMPACT ON MARKET EQUILIBRIUM The effects of a tax can be viewed as either a downward shift in the demand curve or an upward shift in the supply curve At equilibrium condition before the taxes, Qo is the 3. AD VALOREM VS SPECIFIC TAXES bottles of beer produced at the equilibrium price of P 1.00 each. Assuming that the tax on each producer is 10 cents per bottle of beer, the supply curve shifts to the left causing the price increase. Despite that the tax was nominally imposed on producers, consumers are forced to pay portion of the increased cost by increasing the price. ALTERNATE VIEWS OF A TAX If producers pay the tax: In competitive markets, an ad valorem tax (a tax that is a fixed percentage of the price) and a specific tax (a tax Producers might increase the price of beer to cover that is a fixed amount per unit purchased) that raise the some of the tax. For example, they could charge same revenue have the same effect on output. consumers $1.05 for a bottle of beer. Out of that $1.05, producers keep $0.95 after paying TAX INCIDENCE IN COMPETITIVE MARKETS the government 10 cents in tax. CONTINUATION The incidence of a tax describes who actually bears If consumers pay the tax: the tax. It makes no difference whether a commodity tax is levied on producers or consumers. Producers might set the price of beer at $0.95 (since they’re not responsible for the tax). In a competitive market, the incidences of an ad valorem tax and an equivalent specific tax are identical Consumers then pay $0.95 to the producers, plus the 10-cent tax directly to the government, for a total cost In competitive markets, incidence depends on the of $1.05 elasticity of demand and supply.  A commodity tax is not borne at all by consumers if the demand curve is perfectly elastic, or by producers if the supply curve is perfectly elastic. It is borne completely by consumers if the demand curve is perfectly inelastic, or by producers if the supply curve is perfectly inelastic. 4. EFFECT OF ELASTICITY a. Elasticity of supply and demand: tax borne by consumers TAXING A MONOPOLY b. Elasticity of supply and demand: tax borne by producers  TAX INCIDENCE When it comes to taxes, who ends up paying most of the cost doesn’t depend on what the government or lawmakers say. Instead, it depends on: 1. Demand and supply curves: Demand curve: Shows how much people want a product at different prices. If people need the product and have no alternatives, they’ll bear more of the tax burden. Supply curve: Shows how much sellers are willing to produce at different prices. If it’s expensive or difficult to produce more, sellers might pass the tax onto buyers TAX INCIDENCE IN MONOPOLICIES In monopolies or imperfectly competitive markets, When it comes to taxes, who ends up paying most of tax incidence depends on the shape of the demand and the cost doesn’t depend on what the government or supply curves; there may be more than 100 percent lawmakers say. Instead, it depends on: shifting. In a monopoly, with constant marginal cost, and with 2. Market type: constant elasticity demand curves, there will always be Competitive market: The tax burden is more than 100 percent shifting of specific commodity shared based on how sensitive buyers and taxes. With linear demand curves, price rises by half the sellers are to price changes (elasticity). tax. Monopoly: The monopolist often shifts the tax to buyers because there are few TAX INCIDENCE IN OLIGOPOLICIES alternatives. Oligopoly: Tax burden depends on how they In an oligopoly, such as the airline market and the balance competition with pricing rental car market, every producer interacts strategically with every other producer. If one producer changes its prices or output, the other producers may also change OTHER FACTORS AFFECTING TAX INCIDENCE their prices or outputs, but these responses may be hard to predict. Partial equilibrium analysis of tax incidence There is no widely accepted theory of firm behavior Partial equilibrium models only examine the in oligopoly, so it is impossible to make any definite predictions about the incidence of taxation in this case. market in which the tax is imposed, and ignores other markets. Some economists believe that oligopolists are not  Most appropriate when the taxed likely to raise the prices they charge consumers when commodity is small relative to the taxes change. Each oligopolist may believe that if it economy as a whole. raises its price, other firms will steal its market share.  Tax incidence depends on the elasticities of demand and supply An opposite conclusion follows if each oligopolist (Elasticity provides a measure of an expects that its competitors will match its price economy agent’s ability to ‘escape’ the increase after a tax is imposed. In this case, all will raise tax) their prices and thereby shift the burden of the tax to Incidence also depends on how prices are consumers. determined: Industry structure matters and Short-run vs. long run responses GENERAL EQUILIBIRUM ANALYSIS OF TAX INCIDENCE  In the real world, a system of taxes affects many markets and results in resource flows among many sectors of the economy. General or multi-market analysis of excess LECTURE 5: COST AND BENEFIT burden is important in getting a realistic picture ANALYSIS of the impact of taxes on resource use. Provides insight to help us reduce the OVERVIEW efficiency loss from taxes. A systematic process for assessing, calculating Given the complex interrelated nature of and comparing the advantages (benefits) and markets, the effect of a tax in any one market disadvantages (costs) of an activity. This affects related markets with possible feedback includes those costs and benefits that cannot effects in the market initially taxed. be quantified in monetary terms but are For example, a tax on the consumption of nonetheless valued by society, for example electric power, in addition to affecting the price those relating to the environment, safety and of electricity, affects the demand for various nature. electrical appliances, and for natural gas for It is the most popular and appropriate method of cooking and heating. apprising projects from the national standpoint The shifts in demand affects the prices of of view. those substitutes and complements It helps planning authority in making correct investment decisions to achieve optimum resource allocation by maximizing the OTHER FACTORS AFFECTING TAX INCIDENCE difference between the present value of benefits and cost of a project. Time span: short run versus long run Demand and supply curves are likely to be STEPS IN CBA more elastic in the long run than in the short 1. DETERMINE THE OBJECTIVES OF THE CBA. run. -Clarify the questions the analysis seeks to answer. What decision does it seek to inform? Open versus closed economy Supply curves of factors are more elastic in an 2. IDENTIFY THE COSTS AND BENEFITS. open economy. -Clarify the potential impact of the activity and the type of costs and benefits it would generate. Mix of policy changes 3. VALUE THE COSTS ANDBENEFITS Differential tax analysis: one tax is substituted -Express (as far as possible) the value of benefits for another, keeping revenue constant. and costs in monetary terms. Balanced budget analysis: expenditure is 4. AGGREGATE THECOSTSANDBENEFITS changed as tax revenues change. -Sum costs and benefits over time Balanced growth analysis: a mix of policies which leaves capital accumulation unaffected 5. PERFORM SENSITIVITY ANALYSIS -Assess the importance of major uncertainties associated with the analysis and activity. OTHER DEFINITION OF TERMS 6. CONSIDER DISTRIBUTIONAL IMPACTS -Consider who will incur the costs and benefits and The Tax Incidence is who bears the burden of what impact this might have on the activity. a tax. 7. PREPARE RECOMMENDATIONS The Expenditure Incidence is who receives the benefits of a government program. COMPONENTS OF COST AND BENEFITS The Budget Incidence is the net analysis of a program’s tax and expenditure incidence. IDENTIFYING DIRECT COST: The basic The Differential Tax Incidence is the change guidelines in identifying project cost is the in the tax incidence that results from definition of cost itself, or those activities that substituting one equal yield tax for another. involve use of real resources.  If the project has a NPV < 0, then it fails to return benefits greater than the value of the COST ITEMS ARE USUALLY TWO TYPES: resources used 1. CAPITAL COST (CO)- Land and other BENEFIT COST RATIO (BCR) resources that have current alternative uses, design, installation work, equipment, BCR is computed as the PV of Benefits divided engineering and administrative cost during by the present value of Costs. construction, etc. Discounted benefits and discounted costs are calculated and summed separately, then 2. MAINTAINANCE AND OPERATING COST divided (MOOE)- Energy and fuel, labor, raw materials and supplies, depletion of nr, etc. BCR FORMULA: IDENTIFYING DIRECT BENEFITS: The key in identifying items of benefits is the form of project outputs. 1. Financial Analysis: Benefits often come from the sales of the project output. 2. Economic Analysis: The benefits constitute DECISION CRITERIA: an increase in the economy’s real If the project has a BCR > 1, then it is worth resources through increase in output, considering on its economic merits. savings in resource use, change (+-) in externalities. If the project has a BCR < 1, then it fails to return benefits larger than its costs. NET PRESENT VALUE (NPV) Net Present Value is the current value of all net benefits associated with a project/investment. Net benefit is simply the sum of the total discounted benefits minus the sum of the total discounted costs. NPV FORMULA: DECISION CRITERIA: If the project has a NPV > 0, then it is worth considering on its economic merits.  LECTURE 6: FISCAL MANAGEMENT IN A NUTSHELL Government needs to collect sufficient revenues and ensure the sustainability of its borrowings and debts in order to have enough resources for development spending. On the other hand, each peso must be spent properly and with maximum impact. In the past, persistent fiscal deficits and an DEFINITION OF TERMS: unmanageable debt stock constrained the ability of the government to invest adequately on socio-economic services:  Revenues had eroded to become among the lowest in Southeast Asia due, among others, to leakages in collection systems and revenue-eroding laws.  A heavy debt burden—with interest payments reaching a peak of 36.9 percent of revenues Moving forward, the new administration should not only protect the healthy fiscal situation but also hasten public spending: Consider pushing for a package of tax reform measures that reduces the tax burdens on individual taxpayers; compensates for revenue losses through other reform measures; and gives additional teeth to tax administrators. Further strengthen the capacity of the government to ensure the long-term sustainability of government finances and debts; and guard against fiscal risks. Improve the pace of public spending by strengthening the agencies’ capacity to absorb more resources—i.e., the ability to plan, design, procure, implement, and monitor and evaluate programs and projects. WHAT IS FISCAL MANAGEMENT? Fiscal management refers to the process of planning, directing, and controlling the monetary resources of a government or organization. It aims to maintain financial records and procedures that provide protection for resources while ensuring efficiency. FISCAL MANAGEMENT GOALS The procurement of the GoP shall be governed by To maintain fiscal records and procedures that these principles: provides protection for the resources as well as Transparency in the procurement process and in records which generate economy, the implementation of procurement contracts effectiveness and efficiency of the operation through wide dissemination of bid that relate to the budget of the agency. opportunities and participation of pertinent To improve the way agency operates by properly non-government organizations. planning, recording and performing Competitiveness by extending equal opportunity procedures that relate to the budget. to enable private contracting parties who are This involves a variety of tools, including budget eligible and qualified to participate in spreadsheets, accounting, and guides outlining competitive bidding. procedures for an agency. Streamlined procurement process that will uniformly apply to all government AREAS OF FISCAL MANAGEMENT procurement. The procurement process shall be simple and made adaptable to advances in Procurement of Funds- it is the process of finding modern technology in order to ensure an and acquiring goods, services or works from an effective and efficient method external source System of accountability where both the public Allocation of funds- the process of fair officials directly or indirectly involved in the distribution of funds assigned to a particular procurement process as well as in the item implementation of procurement contracts and Monitoring their use in the interest of the private parties that deal with GoP are, accountability- to be responsible for their when warranted by circumstances, actions and decisions, and having the investigated and held liable for their actions obligation to report about it anytime relative thereto. Producing financial reports for the relevant Public monitoring of the procurement process stakeholders- refers to an openness with and the implementation of awarded contracts regards to financial matters with the end in view of guaranteeing that these contracts are awarded pursuant to the CHARACTERISTICS OF FISCAL MANAGEMENT provisions of the Act and this IRR, and that all POOR FISCAL MANAGEMENT- indicated by a lack these contracts are performed strictly of record-keeping and unnecessary or according to specifications. unplanned expenditures that can cause a department to go over budget or fail to meet GOVERNMENT STRATEGIES TO IMPROVE FISCAL its objectives. MANAGEMENT GOOD FISCAL MANAGEMENT- involves recording Sustain existing participatory governance all fiscal transactions in checks and balances initiatives such as the Citizen Participatory system that reduces mistakes or omissions that Audit might lead to surprise budget overages. Enhance the income and asset declaration system of public officials by improving the system of GOVERNMENT PROCUREMENT REFORM ACT filing and analyzing Statements of Assets, (R.A.) 9184, otherwise known as the Liabilities, and Net Worth (SALN) "Government Procurement Reform Act," for Complete the Budget and Treasury Management the purpose of prescribing the necessary rules System and the Single Treasury Account and regulations for the modernization, Intensify LGU fiscal monitoring and performance standardization, and regulation of the evaluation through standardized reporting procurement activities of the Government of tools and metrics the Philippines (GoP). Formulate and implement expenditure management reforms that will improve government agency budget utilization and  address underspending (i.e. streamlining the projects and activities of the various release of funds, development of integrated government departments and agencies. and user-friendly financial management systems) WHAT IS THE FINANCING PROGRAM? The financing program includes the projected Legistlative Measures: revenues from both existing and new Comprehensive Tax Reform Program- seeks to measures, the planned borrowings to finance create a simpler, fairer, and more efficient tax budgetary transactions and the payment of system. debt principal failing due. Budget Reform Act- aims to strengthen the institutions, mechanisms and processes WHAT IS THE NATIONAL GOVERNMENT BUDGET? involved in budget preparation, authorization, The National Government budget refers to execution and accountability. the totality of the budgets of various E-governance Bill- aims to boost the utilization of departments of the national government information and communication technology in including the NG support to Local Government transforming government processes, Units (LGUs) and Government Owned and operations, and service delivery. Controlled Corporations (GOCCs). It is what the Freedom of Information Bill- seeks to put this in national government plans to spend for its motion by mandating transparency in the acts, programs and projects, and the sources of decisions, data, and transactions of every what it projects to have as funds, either from government agency. revenues or from borrowings with which to finance such expenditures. WHAT IS A FUND? The word "fund" in government has taken several ON WHAT IS THE NATIONAL GOVERNMENT meanings or connotations. It is sometimes BUDGET SPENT? used to refer an appropriation which is a The national budget is allocated for the legislative authorization to spend or an implementation of various government allotment which is an authorization by the programs and projects, the operation of Department of Budget and Management government offices, payment of salaries of (DBM) to obligate, or as actual cash available. government employees, and payment of public debts. These expenditures are classified by expense class, sector and implementing unit of WHAT BASIS LAW GOVERNS THE USE OF government. GOVERNMENT FUNDS? The following provision of the Philippines Constitution sets the basic rule for the use of WHY DOES THE GOVERNMENT PREPARE A NEW government funds: BUDGET EVERY YEAR? "Art. VI, Sec. 29. No money shall be paid by the The preparation of the government's budget Treasury except in pursuance of an every year is in accordance with the provision appropriation made by law." of the Constitution which requires the President to submit a budget of expenditure The aforementioned provision of the Constitution and sources of financing within 30 days from also establishes the need for all government the opening of every regular session of entities to undergo the budgeting process to Congress. secure funds for use in carrying out their mandated functions, programs and activities. The yearly preparation of the budget is also in consonance with the principle which requires all government spendings to be justified anew WHAT IS THE EXPENDITURE PROGRAM? each year. This principle ensures that The expenditure program is that portion of the government entities continuously evaluate and national budget that refers to the current review the allocation of resources to operating expenditures and capital outlays necessary for the operation of the programs,  project/activities for cost efficiency and Commonwealth Act 186 and RA 660, for the effectiveness. retirement and insurance premiums of The preparation of the government's budget government employees, PD 1177 and every year is in accordance with the provision Executive Order 292, for net lending to of the Constitution which requires the government corporations, and PD 1234, for President to submit a budget of expenditure various special accounts and funds. and sources of financing within 30 days from the opening of every regular session of ARE ALL APPROPRIATIONS SUPPORTED BY Congress. RESOURCES AND ALLOCABLE DURING THE The yearly preparation of the budget is also in BUDGET YEAR? consonance with the principle which requires No, only programmed appropriations are all government spendings to be justified anew supported by corresponding resources, that is, each year. This principle ensures that they already have definite funding sources and government entities continuously evaluate and are readily implementable. review the allocation of resources to Unprogrammed appropriations are not yet project/activities for cost efficiency and supported by corresponding resources and are effectiveness. nevertheless included by Congress in the General Appropriations Act. WHAT ARE THE SOURCES OF APPROPRIATIONS These are called standby appropriations which THAT MAKE UP THE ANNUAL BUDGET? authorize additional agency expenditures for The sources of appropriations of the annual priority programs and projects in excess of the budget are: 1) new general appropriations original budget only but only when revenue legislated by Congress for every budget year collections exceed the resource targets under the General Appropriations Act (GAA); assumed in the budget or when additional and 2) existing appropriations previously foreign project loan proceeds are realized. authorized by Congress. Under the Constitution, Article VI, Section 29, no money WHAT IS BALANCED BUDGET? WHAT HAPPENS can be withdrawn from the Treasury except in WHEN THE BUDGET IS NOT BALANCED? pursuance of an appropriation made by law. In the context of government budgeting, a budget is said to be balanced when revenues match WHAT ARE THE EXISTING AND CONTINUING expenditures or disbursements. When APPROPRIATIONS? expenditures exceed revenues, the Existing or continuing appropriations are those government incurs a deficit which may result in which have been previously enacted by the following situations: Congress and which continue to remain valid as The government borrows money either from an appropriation authority for the expenditure foreign sources or from the domestic capital of public funds. There are two types of existing market which increases the debt stock of the appropriations :1) continuing and 2) automatic NG and its debt servicing requirements; The government borrows money from the WHAT ARE THE EXISTING AND CONTINUING Bangko Sentral ng Pilipinas; or, APPROPRIATIONS? The government withdraws funds from its cash Automatic appropriations refer to appropriations balances in the Treasury programmed annually or for some other period prescribed by law, by virtue of WHY IS SURPLUS BUDGETING NECESSARY? outstanding legislation which does now The surplus budget policy is important to require periodic action by Congress. encourage economic growth. The less the Falling under this category are expenditures government borrow from the public, the lesser authorized under Presidential Decree (PD) the pressure on interest and inflation rates and 1967, RA 4860 and RA 245, as amended, for the the more funds are made available in the servicing of domestic and foreign debts, financial market. Such funds may be used by  businessmen to build factories, hire workers, (1) to carry on all government activities under a buy equipment and open more employment comprehensive fiscal plan developed, opportunities. By keeping more funds in the authorized and executed in accordance with hands of the private sector rather than the Constitution, prevailing statutes and the competing for credit, the government helps principles of sound public management; and make financing available for families who want (2) to provide for the periodic review and to own homes, buy cars, or support their disclosure of the budgetary status of the children's education. The government also Government in such detail so that persons needs to generate a budget surplus to repay entrusted by law with the responsibility as well the huge debt it has accumulated over the as the enlightened citizenry can determine the years. The reduction of the national budget adequacy of the budget actions taken, debt will correspondingly lessen government's authorized or proposed, as well as the true requirements for interest and principal financial position of the Government. payments. This becomes important particularly during periods of rising interest WHAT IS GOVERNMENT BUDGETING rates and unstable exchange rates.  Government budgeting is the allocation of public funds to attain the economic and social goals of the country. It also entails LECTURE 7: BUDGETING PROCESSES the management of government expenditures to create the most impact ORIGIN OF BUDGET SYSTEM from the production and delivery of goods  The term “budget” originated from the Middle and services. English word bouget that had derived from the Latin word bulga (which means bag or purse) WHY IS GOVERNMENT BUDGETING IMPORTANT?  Government budgeting is important  In the Philippine setting, Commonwealth Act because it enables the government to plan (CA) No. 246 (Budget Act) defined “budget” as and manage its financial resources to the financial program of the National support the implementation of various Government for a designated fiscal year, programs and projects that best promote consisting of the statements of estimated the development of the country. Through receipts and expenditures for the fiscal year for the budget, the government can prioritize which it was intended to be effective based on and put into action its plans, programs and the results of operations during the preceding policies within the constraints of its fiscal years financial capability.  The term was given a different meaning under WHAT ARE THE 4 BUDGETING PROCESS? Republic Act No. 992 (Revised Budget Act) by  Budgeting for the national government describing the budget as the delineation of the involves four (4) distinct phases: budget services and products, or benefits that would preparation, budget legislation or accrue to the public together with the authorization, budget execution or estimated unit cost of each type of service, implementation and budget accountability. product or benefit. For a forthright definition, budget should simply be identified as the A. BUDGET PREPARATION financial plan of the Government, or “the  The budget preparation phase starts with master plan of government” the Development Budget Coordination Committee (DBCC). It is headed by the Philippine Budget System is presently guided by DBM Secretary and its members are the two principal objectives that are vital to the Secretary of Finance, the NEDA Director- development of a progressive democratic General, and the Bangko Sentral Governor, government: with the Office of the President for general oversight.  The budget preparation phase is NEP, especially those in line with the commenced through the issuance of a National Government development plan. Budget Call by the DBM. The Budget Call The Staffing Summary provides the contains budget parameters earlier set by staffing complement of each department the Development Budget Coordination and agency, including the number of Committee (DBCC) as well as policy positions and amounts allocated. guidelines and procedures to aid government agencies in the preparation  The NEP and BESF are thereafter presented and submission of their budget proposals. by the DBM and the DBCC to the President and the Cabinet for further refinements or  The Budget Call is of two kinds, namely: (1) reprioritization. Once the NEP and the BESF a National Budget Call, which is addressed are approved by the President and the to all agencies, including state universities Cabinet, the DBM prepares the budget and colleges; and (2) a Corporate Budget documents for submission to Congress. Call, which is addressed to all government- owned and-controlled corporations  The budget documents consist of: (1) the (GOCCs) and government financial President’s Budget Message, through institutions (GFIs). which the President explains the policy framework and budget priorities; (2) the BESF, mandated by Section 22, Article VII  Following the issuance of the Budget Call, of the Constitution, which contains the various departments and agencies submit macroeconomic assumptions, public their respective Agency Budget Proposals sector context, breakdown of the to the DBM. To boost citizen participation, expenditures and funding sources for the the current administration has tasked the fiscal year and the two previous years; and various departments and agencies to (3) the NEP. partner with civil society organizations and other citizen-stakeholders in the Public or government expenditures are generally preparation of the Agency Budget classified into two categories: Proposals, which proposals are then presented before a technical panel of the  Capital expenditures or outlays are the DBM in scheduled budget hearings expenses whose usefulness lasts for more wherein the various departments and than one year, and which add to the assets agencies are given the opportunity to of the Government, including investments defend their budget proposals. DBM in the capital of government-owned or bureaus thereafter review the Agency controlled corporations and their Budget Proposals and come up with subsidiaries. recommendations for the Executive Review Board, comprised by the DBM  Current operating expenditures are the Secretary and the DBM’s senior officials. purchases of goods and services in current consumption the benefit of which does not  The DBM next consolidates the extend beyond the fiscal year. The two recommended agency budgets into the components of current expenditures are National Expenditure Program (NEP) and a those for personal services, and those for Budget of Expenditures and Sources of maintenance and other operating Financing (BESF). The NEP provides the expenses details of spending for each department Public expenditures are also broadly grouped and agency by program, activity or project according to their functions into: (PAP), and is submitted in the form of a proposed GAA. The Details of Selected (1) economic development expenditures (i.e., Programs and Projects is the more expenditures on agriculture and natural detailed disaggregation of key PAPs in the resources, transportation and  communications, commerce and industry, and the revenues of its subjects in the form of other economic development efforts) taxes. (2) social services or social development expenditures (i.e., government outlay on In the Philippines, public revenues are generally education, public health and Medicare, labor derived from the following sources, to wit: and welfare and others); (1) tax revenues (i.e., compulsory contributions to (3) general government or general public services finance government activities); expenditures (i.e., expenditures for the (2) capital revenues (i.e., proceeds from sales of general government, legislative services, the fixed capital assets or scrap thereof and public administration of justice, and for pensions and domain, and gains on such sales like sale of gratuities); public lands, buildings and other structures, (4) national defense expenditures (i.e., sub- equipment, and other properties recorded as divided into national security expenditures and fixed assets); expenditures for the maintenance of peace (3) grants (i.e., voluntary contributions and aids and order); and given to the Government for its operation on (5) public debt specific purposes in the form of money and/or materials, and do not require any monetary  Public expenditures may further be commitment on the part of the recipient); classified according to the nature of funds, (4) extraordinary income (i.e., repayment of loans i.e., general fund, special fund or bond and advances made by government fund. corporations and local governments and the receipts and shares in income of the Bangko  On the other hand, public revenues Sentral ng Pilipinas, and other receipts); and complement public expenditures and (5) public borrowings (i.e., proceeds of repayable cover all income or receipts of the obligations generally with interest from government treasury used to support domestic and foreign creditors of the government expenditures. Government in general, including the National Government and its political subdivisions)  Classical economist Adam Smith categorized public revenues based on two principal sources, stating: “The revenue which must defray…the necessary expenses of government may be drawn either, first from some fund which peculiarly belongs to the sovereign or commonwealth, and which is independent of the revenue of the people, or, secondly, from the revenue of the people.”  Adam Smith’s classification relied on the two aspects of the nature of the State: first, the State as a juristic person with an artificial personality, and, second, the State as a sovereign or entity possessing supreme power. Under the first aspect, the State could hold property and engage in trade, thereby deriving what is called its quasi-private income or revenues, and which “peculiarly belonged to the sovereign.” Under the second aspect, the State could collect by imposing charges on B. BUDGET LEGISLATION implementation of certain items in the GAA,  The Budget Legislation Phase covers the which are then specified in the President’s Veto period commencing from the time Congress Message. Unlike other legislation, the receives the President’s Budget, which is President may effect a “line item veto” of inclusive of the NEP and the BESF, up to the specific provisions of the GAB. President’s approval of the GAA. This phase is also known as the Budget Authorization Phase,  If, by the end of any fiscal year, the Congress and involves the significant participation of the shall have failed to pass the GAB for the Legislative through its deliberations. ensuing fiscal year, the GAA for the preceding fiscal year shall be deemed re-enacted and  Initially, the President’s Budget is assigned to shall remain in force and effect until the GAB is the House of Representatives’ Appropriations passed by the Congress. Committee on First Reading. The Appropriations Committee and its various Sub- C. BUDGET EXECUTION Committees schedule and conduct budget  The Budget Execution Phase marks the hearings to examine the PAPs of the start of budget implementation, primarily departments and agencies. Thereafter, the overseen by the DBM. The DBM sets House of Representatives drafts the General guidelines for fund release, develops an Appropriations Bill (GAB). Allotment and Cash Release Program, releases allotments, and issues  The GAB is sponsored, presented and disbursement authorities. defended by the House of Representatives’ Appropriations Committee and Sub-  Prior to implementation, government Committees in plenary session. As with other agencies submit Budget Execution laws, the GAB is approved on Third Reading Documents (BED) to the DBM. These before the House of Representatives’ version is documents outline their operational plans, transmitted to the Senate. including physical and financial plans, monthly cash programs, estimated  After transmission, the Senate conducts its monthly income, and pending obligations. own committee hearings on the GAB. To Based on these documents, the DBM expedite proceedings, the Senate may conduct prepares an Allotment Release Program its committee hearings simultaneously with (ARP) and a Cash Release Program (CRP). the House of Representatives’ deliberations. The ARP sets limits for allotments issued, The Senate’s Finance Committee and its Sub- while the CRP determines monthly, Committees may submit the proposed quarterly, and annual disbursement levels. amendments to the GAB to the plenary of the Senate only after the House of Representatives has formally transmitted its version to the  Allotments, which authorize agencies to Senate. The Senate version of the GAB is incur obligations, are issued by the DBM. likewise approved on Third Reading. They are released through a comprehensive Agency Budget Matrix  The House of Representatives and the Senate (ABM) or individually through a Special then constitute a panel each to sit in the Allotment Release Order (SARO). Armed Bicameral Conference Committee for the with either the ABM or SARO, agencies can purpose of discussing and harmonizing the initiate obligations necessary for their PAP conflicting provisions of their versions of the implementation, including personnel GAB. The “harmonized” version of the GAB is hiring, contracts for goods and services, next presented to the President for approval and utility usage.  Budget legislation ends when the President  To facilitate the settlement of obligations, signs the GAA into law. Prior to this, the the DBM issues disbursement authorities. President may veto or set conditions for Cash allocation is typically managed  through the Modified Disbursement Scheme, where disbursements are channeled through government servicing banks. The Notice of Cash Allocation (NCA) authorizes cash withdrawals from these banks, based on agencies submitted Monthly Cash Programs. The DBM can also issue a Non-Cash Availment Authority (NCAA) for non-cash disbursements or a Cash Disbursement Ceiling (CDC) for departments with overseas operations, allowing them to use income from their foreign posts for operational needs. Actual disbursement, facilitated through government servicing banks, marks the conclusion of the Budget Execution Phase. D. BUDGET ACCOUNTABILITY  Accountability is a significant phase of the budget cycle because it ensures that the government funds have been effectively and efficiently utilized to achieve the State’s socio-economic goals. It also allows the DBM to assess the performance of agencies during the fiscal year for the purpose of implementing reforms and establishing new policies.  An agency’s accountability may be examined and evaluated through: (1) performance targets and outcomes; (2) budget accountability reports; (3) review of agency performance; and (4) audit conducted by the Commission on Audit (COA).