Lesson 3 Fiscal Administration

THE FUNCTIONS OF GOVERNMENT AND THE ROLES OF FISCAL

POLICY

Human resource, general public services, defence, public order and safety, education,
health, social protection, culture and religion, housing and community amenities,
environment protection, etc. are what government does. In the heart of all these tasks
is the management of financial and fiscal affairs. On the basis of avail- able resources,
government decides to do or not to do public services and provide public
goods. Effective public fiscal administration crosses the borders of politics, ideology,
and economics. In the words of one political philosopher: the best government is
that which governs best.

The primary reason for the existence of government is to provide people with valuable
services which the private sector is unable or not willing to provide.
Many different organizations – private businesses, non-profit organizations,
and governmental agencies- provide the goods and services that we use every day,
including those necessary for life itself and those that make life more enjoyable.

ECONOMIC FUNCTIONS of GOVERNMENTS

The Philippine public sector operates in a mixed system. Financing is not only
its operations but also in the allocation of resources, the distribution of income, and the
level of economic activity.

Richard and Peggy Musgrave identified three economic functions of government:

a. allocation
b. distribution
c. stabilization

ALLOCATION FUNCTION

In a free enterprise system, the economy is a private market economy. However, there
are instances where the markets fail to provide the needed goods or the appropriate
amounts of goods or services as it is impossible for private business to do so and earn
a profit. Thus, a situation exists for the public sector to allocate resources through the
governmental process.

Public goods: goods and services that are available to all people at no extra cost. Th
ey are “non-excludable‘ and “non-rival‘.

a. Nonrival - a person‘s consumption of a good or service does not reduce the a

mount available for consumption by others.
b. Nonexcludability– when a good or serviceis provided, others are not pre- vent
ed from enjoying/benefiting from it.

A public good should not be interchanged with phrases such as ‗good for the pub- li
c", „public interest" or „publicly-produced goods". Public goods may be naturally
available. They may be produced by private individuals and firms, by non-state
collective action, or they may not be produced at all.
Examples of absolutely public goods include national defense, law enforcement, sec
urity and police protection, judicial system, clean air, streetlights, flood control dams.
Education and health services are examples of quasi-public (merit) goods that the
market does not provide enough of. The government helps in the provision of these
services.

DISTRIBUTION FUNCTION

The government should provide relief to the poor, dependent, handicapped,

and unemployed. Welfare, Social Security and Medicare programs are examples of
pro- grams that support the needy and incapacitated. Other means of redistribution
are price support programs like farm subsidy and low interest loans to students
based on their family incomes. In the Philippines, these governmental activities are
those required by the DSWD, Study Now Pay Later Program of the DepEd and state
universities and colleges.

STABILIZATION FUNCTION

It is the major responsibility of the government to provide an economic environment

that assures open market competition, economic growth, price stability, full
employment, and national development. Government may stabilize the economy
through reduced fluctuations in income and employment and controlled movements in
the general price level.

DEVELOPMENT FUNCTION

The government plays a critical role in the development process of any country.
Its overarching economic goal is to increase the common weal, that is, the
prosperity of the community for the benefit of all. This goal is closely related to a
government ‘s other social and environmental goals. These include improving the skills
of the people, closing the gaps in health, education, employment, housing and
protecting and enhancing the environment.

Economic Growth and Economic Development

Economic growth refers to sustained increase in a country's output of goods and ser
vices, or more precisely product per capita over a long period of time. It does not
necessarily mean an increase in the volume of all goods and services. It is an overall
increase in total physical production. It also does not mean a uniform in- crease in the
volume of all goods and services. Output is generally measured in terms of gross
national product (GNP).

The term economic development is far more comprehensive. It means economic gro
wth along with desired changes in the distribution of national income and
other technical and institutional changes. It implies progressive changes in the
socio- economic structure of a country. It is economic growth accompanied by
increase in real per capita income, reduction in inequalities of income and in the
number of poor people and generating institutional changes and development of
technology that affect growth.
 Michael Todaro sees three objectives of development:

a. Producing more life sustaining necessities such as food shelter& health

care and broadening their distribution
b. Raising standards of living and individual self esteem
c. Expanding economic and social choice and reducing fear.

The United Nations has developed a widely accepted set of indices to measure
development against a mix of composite indicators:

UN's Human Development Index (HDI) measures a country's average

achievements in three basic dimensions of human development: life
expectancy, educational attainment and adjusted real income ($PPP per
person).

Developed versus Developing Economies

Countries are generally categorized into less developed, and more developed.
The less developed countries are called ‘underdeveloped ‘or ‘developing ‘counties.

In the latest World Bank list of economies (January 2011), it classifies countries into
four income groups according to gross national income (GNI) per capita.
The groups are: (a) low income, $995 or less;(b) lower middle income, $996–
3,945; (c) upper middle income, $3,946–12,195; and (d) high income, $12,196 or
more.

Geographic classifications and data reported for geographic regions are for
low- income and middle-income economies sometimes referred to as
developing economies.

The United Nation list countries as either develop or ‘developing‘. The designations
"developed" and "developing" are only for statistical convenience. This does not
express the stage reached by a country or area in the development process.

The International Monetary Fund (IMF) classifications are: (a) per capita income level,
(b) export diversification, and (c) degree of integration into the global financial system.

Characteristics of Developing COUNTRIES:

Common characteristics of developing economies are:

a. Low level of income and consumption
b. Poor quality of life
c. High unemployment and poverty
d. Main occupation is Agriculture High rate of population growth
e. A large number of people are below the poverty line .

The main characteristics of developed economies are:

a. High level of income and consumption
b. Better quality of life
 c. Advanced technology and industry
d. Basic needs of all people are met e. Low rate of population growth

FISCAL INSTRUMENTS

In Public Fiscal Administration there are two main instruments used by governments:
fiscal policy and monetary policy.

Fiscal policy refers to the mix of policies on revenues, expenditure of money, bor- ro
wing, budgeting, accounting and auditing adopted by the government to achieve its
objective. It keeps on changing to suit the position of the economy and its needs.

The monetary policy is exclusively for banks and the circulation of money in an effi- c
ient way. This may change based on the demand and supply of the money and
af- fects the rate of interest on loans. Monetary policy is implemented by a central bank,
while fiscal policy decisions are set by the national government. Monetary and fiscal
policies are used to impact the performance of the economy.

FISCAL INSTRUMENTS of ALLOCATION FUNCTION

The budget process is the vehicle by which allocation policy decisions are established.
The budget finances the operation of national departments and agencies as- signed
the task of providing social welfare services, health care, roads, highways and bridges,
peace and security, national Defense and other public services. The budget may be
used to encourage the production of private goods by the private sector.

FISCAL INSTRUMENTS of DISTRIBUTION FUNCTION

The distribution of income and wealth can be influenced by government and

made more equitable through tax-transfer scheme. This includes progressive taxation
of high income with a subsidy to low-income individuals.

FISCAL INSTRUMENTS of STABILIZATION FUNCTION

The government promotes economic growth and stability (increasing the GDP, fighting
inflation and unemployment) through changes in its fiscal and monetary policies. The
government can use a mix of expenditures and tax policies to affect the level of
aggregate demand. It can raise expenditures or reduce taxes if aggregate demand is
to be expanded, and vice versa if demand is to be contracted. The monetary policies
signify the use of interest rates, money supply, reserve requirements, etc.

FISCAL INSTRUMENTS of DEVELOPMENT FUNCTION

The government must maintain a sustainable fiscal policy. This includes a deficit that
is manageable in the short term, and the associated public debt it creates being
serviceable. The economic function of government is not merely to maintain a stable
macro environment; its primary responsibility to its citizens is to foster the general
welfare.
Activity:

1. Get hold of a recent newspaper. Classify each of the headlines that illustrate the
economic functions of government.

2. In a mixed market economy like that of the Philippines, both markets and govern
ment decisions play important roles. What roles should the government play in the
economy? Take a personal stand on the role of government in the economy. Which
position makes the most sense? Why?

3. Based on the World Bank classification of economies, what is the classification of

the Philippines? What are the characteristics of the Philippine economy to be
classified as such?