FISCAL POLICY AND

ADMINISTRATION
ASSIGNED TOPICS
• Economic Theory as Basis of Public Policy
• Politics and Fiscal Administration

Reporter:
RAMOS, C.A.G.
MPA – I
References:
• A History of Economic Theory and Method
Robert Ekelund Jr. et.al, 1997

• The Great Political Thinkers Vol. 2

Michael Curtis, 1981

• Philippine Public Fiscal Administration Vol. 1

Leonor M. Briones, 1996

• Readings on Economics

• Various Open Source

ECONOMIC THEORY AS BASIS OF
PUBLIC POLICY
Introduction
• The development of public finance institutions merely reflects the
development of organized society, particularly the STATE.
• Functions of the state have been changing with the development of society.
• Stages of development: primitive societies, slave states, feudal systems,
capitalist, and socialist systems.
Ancient Finance: The Slave Societies
• The idea of financing public goals and
activities is as old as the organization
of public authority.
• Logically, the beginnings of public
finance started from the creation of
the state.
• The STATE is comprised of: the
government, the people, territory, and
sovereignty.
• Public finance was supposed to
preserve the state and promote the
goals of society.
Ancient Finance: The Slave Societies

Expenditures
• As the state was undergoing its initial
stage of formation under the slave
empires, it was subjected to constant
aggression within and from outside.
• Ancient public finance was, therefore,
characterized by enormous public
expenditures for defense and
aggression.
• Roads, canals, irrigation systems,
pyramids and fortifications were
considered public concerns to be
financed from public resources.
Ancient Finance: The Slave Societies

Revenues
• The slave state‟s revenues were
ordinarily limited to: lootings and
tributes from conquered peoples, war
chests, fines, and direct taxes
imposed on non-citizens of the State
or on conquered people.
• The most common sources of
revenue were from the ruler‟s domain
and tributes from conquered
provinces.
• Ancient Greece did not levy taxes on
its citizens without the latter‟s
consent.
Ancient Finance: The Slave Societies
Budgeting
• Budgeting was exercised because of
the need to allocate public revenues
for specific purposes.
Borrowings
• Public borrowings were unheard of,
although there was already a form of
money lending.
• Ancient state did not borrow money
but only solicited gifts or levied limited
taxes.
Auditing
• Ancient audit primarily concerned with
the maintenance and inspection of
financial records
Medieval Public Finance (395 A.D. – 1500)

• The development of medieval public finance closely followed the changes

in the political structure of the state during the Middle Ages.
• The shifts in the form of government were very gradual.
• The institutions of political authority and their economic, social and cultural
ramifications were not only diverse but overlapping.
• The complexities of state governance greatly transformed the finance
institutions in terms of form and application.
Medieval Public Finance (395 A.D. – 1500)
Feudalism
• The system of economic relationship
based upon land tenure, among the
king, the lord, and the vassals.
• Due to rising expenditures for
defense, aggravated by prodigal
spending, the King was forced to
grants lands in return for immediate
revenues (aids or contributions).
• The serfs cultivated the lord‟s lands,
served in his army and courts,
contributed aids in money or services
on special occasion, gave a part of
their produce, and paid taxes.
Medieval Public Finance (395 A.D. – 1500)
 Justified the diminution of the central
government‟s revenue and expenditure
powers.
 The King should live upon the income of
the royal domain in ordinary times.
 Only in times of great emergencies such
as war, he argued, should the King may
levy taxes which should be moderate
and just.
 Concept of Value: “Just Price” is
associated with utility or usefulness of
the commodity. One could charge a high
SAINT THOMAS AQUINAS price either because he had improved
(1225 – 1274) the commodity in some way or he
Lazio, Italy
incurred additional cost for transport.
Medieval Public Finance (395 A.D. – 1500)
Feudalism
• Due to the weakening of central
authority and its limited ability to
finance its public functions, public
concerns became the de facto
responsibilities of the feudal lords.
• Government functions and inevitably
public finance were parochialized.
• The feudal lord became an important
and active fiscal manager.
• Land-based taxes were common
forms of feudal revenue.
Medieval Public Finance (395 A.D. – 1500)
Feudalism
• Public borrowings were personal
transaction between the monarch and
the lender.
• Absence of central accounting system
and record-keeping.
• The feudal mode of taxation was
transported by European countries to
their colonies.
• The feudal period can rightly be
credited with the development of one
major public finance institution:
TAXATION, which emerged as the
major source of public revenue.
The Rise of Central Government (1300 – 1500)

The broadened revenue system and tax powers of central

governments followed in the wake of the intensification of the fight for control
over the public purse between the monarchy on one side and the
representative bodies and the people on the other.
The Rise of Central Government (1300 – 1500)
• The taxes introduced during post-
feudal era were very numerous.
• English central government
introduced the poll tax.
• In post-feudal English history, almost
every conceivable article of
consumption was taxed through
either customs duties or excises
• The net income tax was introduced
for the first time in England in 1798
and became an integral part of
British revenue system.
• The development of the constitutional framework within which the
strengthening of the nation-state was to be pursued, was another post-
feudal factor which influenced public finance.
The Rise of Central Government (1300 – 1500)
• The Magna Carta 1215 compelled the
English King to grant civil and political
liberties including the right to be consulted
on matters of revenue collection. (Principle
of National Consent)
• English King granted the Bill of Rights in
1689 which provided the concurrence of
popular consent through representative
bodies.
• The French Revolution in 1789 eliminated most of the existing taxes under
the feudal system.
• Napoleon instituted an adequate and efficient national financial system.
• The development of constitutional and stable governments eliminated the
uncertainty of loan repayments.
• Commercial trade produced a money and credit economy.
Beginnings of Capitalism (15th Century)

• From the 15th century onwards, the feudal system was gradually shattered
by a rising tide of individualism.
• Factories were established to provide goods for increasing populations.
• Commercial trade increased with the establishment of colonies.
• Increased wealth accompanied by accelerated demand for goods and
services expanded the domestic markets.
Mercantilism (16th, 17th , and 18th century)
• Refers to those policies especially
protectionist and monetary.
• To enrich a great nation by trade and
manufactures than by the improvement
and cultivation of land.
• Evolved with the emergence of national
states and the rise of central
governments, the acceleration of
economic enterprise, and the increase
in colonial ventures.
• Mercantilist sought government intervention in order to protect and
promote their business interests.
• Mercantilist policies: promotion of trade, and protection of home industries.
Mercantilism (16th, 17th , and 18th century)
• The use of money facilitated the collection
of tax; gave rise to money economy.
• Revenue administration in colonies;
monopoly; trade promotion; high custom
fees and charges to foreign ships; high
tariffs and low export rates.
• Establishment of large bureaucracies and
civil service.
• Public expenditure expanded enormously because of wide-ranging
mercantilist concerns of the government, the expansion of national
government and bureaucracies.
• A huge part of the state budget was commonly allocated for capital
infusion, subsidies, and public works.
 Mercantilism (16th, 17th , and 18th century)

• Increased France‟s colonial holdings.

• Called for the enrichment of country
though commerce.
• By his firm maintenance of the corporation
system, each industry remained in the
hands of certain privileged bourgeois

JEAN-BAPTISTE COLBERT
(1619 – 1683)
Minister of Finance, France
Cameralism
• Like mercantilism, cameralism was concerned with how to make the state
wealthy and powerful. However, cameralists were more partial to the
development of a nation‟s internal resources through efficient
administration and control of economic activities.
• Cameralists, like Von Justi and Sonnefels, advocated the use of public
finance instituions like Taxation to direct the economy towards prosperity.

Physiocracy
• Concerned with taxation and its stability and uncertainty.
• Physiocrats like Francis Quesnay and Jacques Turgot held that agriculture
alone produced a surplus which formed the basis for taxation.
• All existing taxes should be abolished and a single direct tax on the land-
rent income accruing from agricultural cultivation be instituted.
CAPITALISM

• An economic and political system in which a country's trade and industry

are controlled by private owners for profit, rather than by the state.
• Capitalism gradually builds up with the decline of feudalism and was
accelerated by the industrial revolution.
• From government intervention to laissez faire policy; from feudal lord to
capitalist; from land-based transactions to industrial relationships.
• Philosophy of Free Enterprise – government interference in the economy
should be at the minimum.
ADAM SMITH (1723 – 1790)
• Considered as the father of economics.
• According to Smith, Capitalism or free enterprise is the
“ideal” political and economic system.
• Laissez-Faire policy: minimum governmental interference
in the economic affairs of the individuals and society.
• The economic man model: man is motivated by self-
interest.
• He alludes to „the invisible hand‟ in his contemplation of the rich; namely
that they are compelled, not by law but by a moral imperative to distribute
onto the poor the necessities of life – presumably wages and/or goods
• Specialization: division of labor will result to increased productivity.
• Principles to observe in taxation: equity, certainty, convenience, and
economy.
• He advised against deficit spending and large scale borrowing.
DAVID RICARDO (1772 – 1823)
• Labor theory of value: the value of a commodity.
• The iron law of wages: wage should be determined by
free market conditions.
• Theory of comparative advantage of trade: Free Trade
• Ricardian theory on Rent: He defined rent as "the
difference between the produce obtained by the
employment of two equal quantities of capital and labor."
• Wages and profit are inversely related: an increase in profit came at the
expense of a reduction of wages.
THOMAS ROBERT MALTHUS (1766 – 1834)
• The principles of population: Malthus wrote that in a
period of resource abundance, a population could
double in 25 years. However, the margin of abundance
could not be sustained as population grew, leading to
checks on population growth.
• Population growth was the primary cause of
subsistence level wages for laborers.
• Preventive checks: positive and negative
• Limited birthrates could ensure high standard of living
for all while increasing economic stability.
JOHN STUART MILL (1806 – 1873)
• Utilitarianism: "The greatest amount of good for the
greatest number of people“
• In contrast to Jeremy Bentham, “Nature has placed
mankind under the governance of two sovereign
masters, pain and pleasure.”
• According to J.S. Mill, “the greatest happiness
principle, holds that actions are right in proportion as
they tend to promote happiness, wrong as they tend to
produce the reverse of happiness.”
• A Laissez-Faire advocate, and contributed mainly on his correlation of the
functions of the state to public expenditures (government action = added
expense.)
• “the business of life is better performed when those who have an
immediate interest in it are left to take their own course, uncontrolled either
by the mandate of law or the meddling of any public functionary.”
ALFRED MARSHALL (1842 – 1924)
• The duty of economics is to improve material
conditions, but such improvement would occur only in
connection with social and political forces.
• Identified the problems of protectionism.
• Marshall‟s theory of demand: supply cannot be
changed and market value depends mainly on
demand.
• Developed the standard supply and demand graph.
KARL MARX (1818 – 1883)
• Communism – a direct challenge to Capitalism.
• Recognized the exploitation of the unorganized
working class.
• Problems of Capitalism:
-Work is alienated: work should be the greatest
source of joy, your contribution to existence.
-Modern work is insecure, laborers are abandoned.
-Primitive accumulation: Workers paid little while
the capitalists get rich.
-Capitalism is characterized by series of crisis (i.e.
recession, stocks crash, financial crisis, etc.)
• The solution – Communism: redistribution of
wealth.
• Communism – the government owns the things
that are used to make and transport products
and that there is no privately owned property.
??????????????????????????????????
20TH CENTURY AND BEYOND
JOHN MAYNARD KEYNES (1883 – 1946)
• Occupied a middle course between Smith‟s Capitalism
and Marx‟s Communism.
• Keynes developed the concept of fiscal policy as a tool
for correcting imbalances in the economy.
• His concept of aggressive economics and
macroeconomics, and his terminologies – fiscal policy,
monetary policy, deficit financing, compensatory
financing – are now part and parcel of public finance
vocabulary.
• According to Keynes's theory of fiscal stimulus, an injection of government
spending eventually leads to added business activity and even more
spending.
• The multiplier effect: If the demand is low, the government should intervene
by creating demand.
• He justified huge amount borrowing to finance public works as beneficial to
the economy, after all in the long run we will all die.
JOHN MAYNARD KEYNES (1883 – 1946)
According to Keynes‟ theory of
income and unemployment: “In the
short period, level of national
income and so of employment is
determined by aggregate demand
and aggregate supply in the
country. The equilibrium of national
income occurs where aggregate
demand equals to aggregate
supply. This equilibrium is also
called effective demand point.
MILTON FRIEDMAN (1912 - 2006)
• Monetarism: stable economic growth can be assured
only by control of the rate of increase of the money
supply to match the capacity for growth of real
productivity.
• Monetarism is based on The Quantity Theory of
Money
• Objective of the theory: to establish the demand for
money, besides finding out whether the demand
function is stable or not.
• Found that velocity fluctuates but the function of
velocity is largely stable.
1. Continue and maintain current macroeconomic policies,
including fiscal, monetary, and trade policies.
2. Institute progressive tax reform and more effective tax
collection, indexing taxes to inflation. A tax reform package
will be submitted to Congress by September 2016.
3. Increase competitiveness and the ease of doing business. This effort will draw
upon successful models used to attract business to local cities (e.g., Davao) and
pursue the relaxation of the Constitutional restrictions on foreign ownership, except as
regards land ownership, in order to attract foreign direct investment.
4. Accelerate annual infrastructure spending to account for 5% of GDP, with Public-
Private Partnerships playing a key role.
5. Promote rural and value chain development toward increasing agricultural and rural
enterprise productivity and rural tourism.
6. Ensure security of land tenure to encourage investments,
and address bottlenecks in land management and titling
agencies.
7. Invest in human capital development, including health
and education systems, and match skills and training to
meet the demand
8. Promote science, technology, and the creative arts to enhance innovation and
creative capacity towards self-sustaining, inclusive development.
9. Improve social protection programs, including the government‟s Conditional Cash
Transfer program, to protect the poor against instability and economic shocks.
10. Strengthen implementation of the Responsible Parenthood and Reproductive
Health Law to enable especially poor couples to make informed choices on financial
and family planning.
POLITICAL AND FISCAL
ADMINISTRATION
• The formulation and execution of fiscal policies have to contend with the
role politics plays in the process.
• The relationship between fiscal administration and politics is a dynamic
interchange of effects and causes.
• Fiscal administration is done within a political system.
• For developing countries embarking on a development process, the term
“general welfare” essentially means the welfare of the avowed beneficiaries
of development, the poor.
Relationship between politics and fiscal administration
We can understand the relationship if look at the system:
1. The Process (political or non-political)
a. Voting – under the theory of representative democracy, the
individual expresses his preferences through his vote.
b. Vote Maximization – political action is rational such that both
politicians and individual voters act in their own self-interest.
2. The Interest Groups (formal or informal)
a. The Formal Actors: Voters, Politicians, and Bureaucrats
b. The Informal Actors: Foreign interest groups, domestic interest
groups
3. The Ideology
The politics of developing countries is never complete without
reference to the fact that their political systems invariably tend to be
authoritarian.
In conclusion…
• Ideally , the process of interaction between politics and fiscal
administration should result in development fiscal decisions.
• Fiscal policies and statements should reflect individual preferences over
goods and services before the size of the budget is determined.
• While the budget is the essential fiscal end, it is not sufficient for
developing countries.
• Fiscal administration must be related to the development process itself,
as well as politics.
• Even if the political process of fiscal administration is theoretically
“democratic”, decisions are actually the result of negotiation, bargaining,
and compromise.
• In developing countries, the politically powerful are usually in the minority.
On the other hand, the politically weak normally belong to the majority.
END OF PRESENTATION