Republic of the Philippines

Bangsamoro Autonomous Region in Muslim Mindanao

LANAO CENTRAL COLLEGE INC.
Awar St., East Basak Malutlut, Marawi City

Reporter : FAIDAH O. PALAWAN

Course : PA 109 (Public Fiscal Administration)

Theories on Government Spending

Public Spending- is one of the instruments of modern fiscal policy employed by government to prevent or mitigate
economic fluctuations

Basic Premises of Public Spending Policies

a. Fiscal policy and public spending is the production depends upon the total effective demand for goods
and services currently produced.

b. The primary goal of government spending is to raise aggregate consumption. Due to the higher level of
government spending, income of consumers will expand, and consequently consumption expenditure will rise.

c. This is so because when we view the economy as an integral whole, income and expenditure are exactly
one and same thing;

The concept of pump priming

-it refers to the injection of government funds into the income stream in sufficient quantities and under proper
circumstances in order to reverse the trend of anticipations and to generate recovery

- this emergency tool is a temporary device to restore the balance in the economic system during the cyclical
downturn, after which the system is expected to operate under its own power, this implies that the multiplier effect
will come into play and the accelerator will reinforce the increases in income, consumption and investment.

Different stages in pump priming process

Budget Program for Stability and Full employment

a. Annually Balanced Budget

-this principle calls for a budget that maintains an exact balance between expenditures and revenue each year.

b. Swedish Budget or the Cyclically- Balanced Budget Policy

- This advocated by the Committee for Economic development an organization of outstanding business
leaders

-budget should recognize the need for counter cyclical fiscal policy, namely surpluses during prosperous
period and deficits in times of recession.

-The basic rule is that tax revenue will rise during boom and fall during a depression
-Budget should become an automatic stabilizing instrument, with tax rates kept stable, the governments
revenue from taxes will rise when the national income rises and fall latter falls
- Booming economic conditions mean high personal incomes, high corporate profits and high sales volumes
(large tax base)
- When economic activity continues to decline, the surplus diminishes, the budget would balance and then
justifiable deficit would appear.

c. Formula Flexibility
-is a system of counter-cyclical variations in tax rates, on the one hand and in government expenditures, on
the other hand, with these variations automatically going into effect when certain designated indices rise or fall.

-the so called peril points, these changes in selected indices example rise or fall in the level of employment.
CPI etc

d. The managed Compensatory Budget Program

- This policy attempts to fit the budget to the changes in the business cycles, when the national income and
employment are expected to fall, the program calls for a combination of expenditure increase and tax reduction in
the amount necessarily to minimize instability.
- If economic activity is on upswing tax rates would be increased and expenditures pruned to siphon off
excess purchasing power, the surplus generated can be utilized for debt reduction.

The Growth of Public Spending

a. Wagner’s Law- “ The law of Ever- increasing State Activity”

- It was formulated by Adolph Wagner a German economist 1883
- It states that demand for social goods and services tends to Increase elative to the demand for private goods
as real per capita incomes rise.

b. Parkinson’s Law
- it was formulated by C. Northcote Parkinson
- This law of organizational growth, which is especially pronounced among administrative staff, is based on
two premises: (1) the psychological desire f individual officials to have more and more subordinates(but not rivals)
and (2) the phenomenon that the personnel of an organization perform work for one another

c. Somer’s Principles of Government expenditures

-These are suggestion of Professor Harold Somer in arriving at appropriate expenditure policies.

1. Principle of Minimum expenditure

 The government should spend the least it possibly can, consistent with the protection of its
citizens.

2. Principle of Minimum Interference with Private Enterprise

Government spending should have a little interference with private enterprises.

It should not provide public works that would compete with established private firms

The government should not set up retail stores and factories.

3. Principle of Maximum Employment

The aim of the government expenditures is sometimes to raise the level of employment as high as
possible.

4. Principle of Maximum advantage

Maximum advantage should be achieved at all times. The implication is that each should spent
where the marginal social utility is the greatest

These historical budget principles are substantially as follows:

1. Publicity – The main stages of the budget process, which include executive recommendation, legislative
considerations and action, budget execution, should be made public.

2. Clarity – The budget should be understandable to every citizen. As was said by a British writer in 1764:
“The Administration has condescended… to explain the budget to the meanest capacity”

3. Comprehensiveness – The budget should contain expenditures and revenues on a gross basis, reflecting
all governmental activities without exception, and should show the surplus available for debt retirement or the
deficit to be met by new revenue legislation or borrowing

4. Budget Unity – All receipt should be recovered into one general fund for financing all expenditures.
This principle condemns ear marking of revenue for specific purposes of expenditures, except incases of trust
accounts, or in cases where a special and direct relationship exists between receipts and expenditures.

5. Detailed Specification – Receipts and appropriations should be expressed in detailed specifications.

Transfer of items should be permitted only in exceptional cases.

6. Prior Authorization – The budget should be submitted, considered, and acted upon in advance of the
period during which the expenditures are to made, it should include estimates for all foreseeable needs, thus
reducing as far as possible request for supplemental and deficiency appropriations. Budget execution should stay
strictly within the legislative authorization and should be checked by an auditing agency reporting to the legislature.

7. Periodicity – Appropriations should be authorized for a definite period of time.

8. Accuracy – Budget estimates should be as accurate as possible and there should be no “padding” of
expenditures estimates or providing for hidden reserves by underestimating revenue.

Reference:

Romualdez, Eduardo Sr. E., Yoingco, Angel Q. and Cosem, Antonio O. Philippine Public Finance, Manila,
Philippines, G10 Enterprise, 1994