ROMBLON STATE UNIVERSITY

Liwanag, Odiongan, Romblon

COLLEGE OF BUSINESS AND ACCOUNTANCY (CBA)

Public Finance and Cooperative Management

Learning Outcome:
Identify and understand the different sources in financing the national government
expenditures.

Learning Objectives:
At the end of this module, you should be able to:

1. understand how the national government expenditures are being financed ;

2. explain the privatization program of the government ;
3. understand why the government engage in borrowing and to distinguish domestic
from foreign borrowings ;
4. identify the different categories of expenditures and their economic importance ;
5. explain the pros and cons of privatization.

Introduction

Government expenditures exert decisive impact on the entire economy. In countries

where economic planning has gained a foothold, government spending is one single factor
which would significantly influence their rise, stagnation or decay. In the ultimate analysis
because of its far reaching importance in the nation’s economy, public spending can be
metamorphosed into an instrument for either progress or retrogression.

What are expenditures?

Expenditures are obligations that the government incurs that must be paid during or
after the year when they were incurred. The term expenditure is more generic than
"expense" in that the latter refers to items of expenditure that are current.
 ROMBLON STATE UNIVERSITY
Liwanag, Odiongan, Romblon
COLLEGE OF BUSINESS AND ACCOUNTANCY (CBA)

Expenditures are classified in various ways:

1. By expense class and object of expenditures;

2. By sector;
3. By recipient entities;
4. By region

What is meant by expense class?

Expense class refers to the classification of expenditures by the nature or type of

obligation. There are four expense classes:

a) Current Operating Expenditures (COE);

b) Capital Outlays (CO);
c) Net Lending; and
d) Debt Amortization.

FINANCING OF NATIONAL GOVERNMENT EXPENDITURES

What are the major sources of funds to finance the national budget?

The national budget is financed from the following fund sources: 1) revenues from
both tax and non-tax sources; 2) borrowings from both domestic and foreign sources; and,
3) withdrawals from available cash balances
 ROMBLON STATE UNIVERSITY
Liwanag, Odiongan, Romblon
COLLEGE OF BUSINESS AND ACCOUNTANCY (CBA)

What are revenues and their major classifications?

Revenues refer to all cash inflows of the national government treasury which are
collected to support government expenditures but do not increase the liability of the NG.
Revenues consist of tax and non-tax collections.

What is a tax? What agencies are authorized to collect taxes?

A tax is a compulsory contribution mandated by law and exacted by the

government for a public purpose. The major tax collecting agencies of the national
government are the Bureau of Internal Revenue and the Bureau of Customs.

What are the major classes of tax revenues?

The major classes of tax revenue are: a) taxes on income and profits; b) taxes on
property; c) taxes on domestic goods and services; d) taxes on international trade and
transactions; and e) other sources.

Taxes on income and profits are imposed on all taxable income earned or received
by a taxpayer, whether as an individual, as a partnership, or as a corporation, during a
particular period of time, usually lasting one year.

Taxes on domestic goods and services are imposed on the use or sale of locally
manufactured goods as well as local services availed of within the domestic territory.

Taxes on international trade and transactions include import and customs duties, and
other international trade-related collections of the government.

Taxes on property are imposed on the ownership of weath or immovable property

levied at regular intervals and on the transfer of real or personal property.

Other taxes primarily include collections from the motor vehicles tax, immigration tax
and forest charges.

What are non-tax revenues?

Non-tax revenues refer to all other impositions or collections of the government in

exchange for services rendered, assets conveyed, penalties imposed, etc.

What is the privatization program?

The privatization program was launched by the government in 1987 pursuant to

Proclamation No. 50 to sell non-performing assets (NPAs) of government financial institutions
and government-owned and controlled corporations transferred to the national
government. This program enables the NG to divest itself of assets that would be more
productive in the hands of the private sector.
 ROMBLON STATE UNIVERSITY
Liwanag, Odiongan, Romblon
COLLEGE OF BUSINESS AND ACCOUNTANCY (CBA)

What are borrowings?

Borrowings refer to funds obtained from repayable sources, such as loans secured by
the government from financial institutions and other sources, both domestic and foreign, to
finance various government projects and activities.

What are domestic borrowings? What are foreign borrowings?

Domestic borrowings are funds obtained from sources within the country. Domestic
borrowings of the national government are usually made through the auction of treasury
bills, notes and bonds to the public.

Foreign borrowings, on the other hand, are funds obtained from sources outside the
country, such as Asian Development Bank (ADB), International Bank for Reconstruction
Development (IBRD), Overseas Economic Cooperation Fund (OECF), etc. Foreign
borrowings can be obtained through loans secured from foreign financial institutions or
through the flotation of government securities in the international market.

Why does the government borrow?

The government borrows from any of the following reasons:

1. to finance national government deficits;

2. to obtain foreign exchange;
3. to secure financing at more favorable terms than the opportunity cost of
revenues;
4. to take advantage of benefits attached to the funds, e.g. technology; and,
5. to balance the timing of resources with the project gestation and repayment of
benefit

What are constructive cash receipts?

Constructive cash receipts are foreign loan proceeds in the form of goods and
services for which no cash is remitted to the national treasury. Such goods or services have
been paid directly by the lender to the supplier.

What are net borrowings?

Net borrowings refer to gross borrowing less debt amortization.

What is debt service?

Debt service refers to the sum of debt amortization and interest payments on foreign
and domestic borrowings of the national government or the public sector. Under the current
system of budgeting, only interest payments are treated as part of the expenditure program
because it represents a real expense item, i.e. the cost of borrowed funds, which should form
part and parcel of cost of the items financed by the loan. Debt principal is treated as an
off-budget item because it is merely a return of borrowed funds; hence it is reflected as a
financial account.

EXPENDITURE CATEGORIES AND THEIR ECONOMIC IMPORTANCE

What are the major current operating expenditures of the national government?

The major current operating expenditures of the national government are:

1. Personal services, like salaries and wages, social security contributions, overtime
pay, etc.;
 ROMBLON STATE UNIVERSITY
Liwanag, Odiongan, Romblon
COLLEGE OF BUSINESS AND ACCOUNTANCY (CBA)

2. Maintenance and other operating expenditures, such as traveling expenses,

supplies and materials, water, illumination and power Services, rent, etc.;
3. Interest payments;
4. Allotments to Local Government Units;
5. Subsidies to government-owned and controlled corporations.

What is the government's policy regarding current operating expenditures?

The government's policy regarding current operating expenditures maybe

summarized as follows:

1. Limit the growth of current operating expenditures with provisions for inflation
adjustments;
2. Encourage cost reduction measures in operation, particularly overhead expense
items;
3. Provide adequate maintenance funds for infrastructure facilities; and.
4. Control the growth of spending for personal services within the level that can be
sustained by available resources.

What are the capital outlays of the national government?

The capital outlays of the national government are appropriations spent for the
purchase of goods and services, the benefits of which extend beyond the fiscal year and
which add to the assets of government, including investments in the capital stock of
government-owned or controlled corporations and their subsidiaries. The capital outlays of
the national government may be broadly classified as follows: infrastructure outlays, equity
contributions to government corporations, capital transfers to local government units, and
other capital outlays. Capital expenditures, particularly those classified as capital goods or
durable goods to be used for non-military and productive purposes, such as construction of
roads and bridges, dams, power and irrigation works, schools and hospitals, are generally
desirable because of their high multiplier effect on the economy, i.e., they stimulate the
growth and expansion of economic activities of the private sector and facilitate the
integration of industries.

What are infrastructure expenditures?

Infrastructure expenditures refer to the disbursement of funds for the construction of

various basic public works of the country, such as roads, ports, airports, water supply,
irrigation, and other capital investments, the benefits of which extend to the general public.
In the national budget, infrastructure expenditures generally refer to the capital outlays of
the Department of Public Works and Highways and the Department of Transportation and
Communication, the School Building Program of the Department of Education, Culture and
Sports, and the national irrigation projects of the Department of Agriculture.

What constitute the other capital outlays of the government?

The other capital outlays of the government consist of land acquisition and land
improvement outlays, buildings and structures outlays, acquisition of vehicles, aircraft, water
transport vehicles, equipment, furniture, fixtures, etc.

What are capital transfers to local government units (LGUs)?

Capital transfers to local government units (LGUs) pertain to the portion of the Internal
Revenue Allotment (IRA) which accrue to LGUs equivalent to not less than twenty percent
(20%) of their IRA allocations, earmarked for development projects such as the
construction/improvement, repair and maintenance of local roads, concrete barangay
roads/multi-purpose pavements, and the rehabilitation and improvement of communal
irrigation projects/systems.
 ROMBLON STATE UNIVERSITY
Liwanag, Odiongan, Romblon
COLLEGE OF BUSINESS AND ACCOUNTANCY (CBA)

What are the equity contributions to government corporations?

Equity contributions to government corporations refer to the national government

investments in the authorized capital stock of government-owned or controlled
corporations.

What are interest payments?

Interest payments represent the cost of borrowed funds which form part and parcel
of the cost of the items financed by the loan. Interest payments are, therefore, considered
as the real expense item in the budget.

How is the national government budget sectorally allocated?

The national government budget is allocated according to the following major

sectors: social services, economic services, defense, general public services, and debt
burden.

Allocation for social services include those for:

1. education, culture and manpower development;

2. health services;
3. social security, welfare, and employment;
4. housing and community development; and,
5. land distribution.

Provision for economic services include those for:

1. communications, roads and transportation facilities;

2. agriculture, agrarian reform and natural resources;
3. water resources development and flood control; d
4. trade and industry;
5. power and energy; and
6. tourism.

Expenditures for defense include those that support the general effort to ensure
national security, stability and peace which are indispensable to economic growth and
development.

General public services expenditures are those that are spent for:

1. general administration such as general government stipulation fiscal affairs,

foreign affairs and international commitments, electoral, audit, civil service and
lawmaking functions; and

2. public order and safety including various functions pertaining to law enforcement,
maintenance of public order and safety and political administration.

Expenditures for debt burden are those that go into the servicing of government's
regular and assumed debts from domestic and foreign sources, including interest payments.

What is debt service?

Debt Service consists of the repayment of interest and related costs. The payment of
principal amortization is no longer included in the budget, but it is included in the cash
outflow. The reason for this is that principal payment is a financing transaction rather than
an expenditure.
 ROMBLON STATE UNIVERSITY
Liwanag, Odiongan, Romblon
COLLEGE OF BUSINESS AND ACCOUNTANCY (CBA)

How are government expenditures categorized by cost structure? What is the significance
of this categorization?

The national government budget is broken down into the following cost categories:

1. general administration and support;

2. support to operations, and
3. projects.

Expenditures for general administration represent those that are normally considered
as agency overhead (i.e. the cost of general supervision) which the agency will incur to exist
as a unit.

Examples of expenditures for general administration and support are those spent for
general management and supervision, human resources development, and for productivity
incentive benefits.

Support to operations refers to those activities that facilitate the performance of the
agency's mandated functions and services.

Examples of expenditures under this category are those that are meant for policy
formulation and planning services; for program/project coordination, monitoring and
evaluation; and for information management support system.
 ROMBLON STATE UNIVERSITY
Liwanag, Odiongan, Romblon
COLLEGE OF BUSINESS AND ACCOUNTANCY (CBA)

Expenditures for operations are those that go to regular activities directly addressing
the agency's mandates. They include expenditures for programs involving the production of
goods; delivery of public services; regulation of societal activities; conduct of basic
governance; or provision of general management and supervision of the entire government
bureaucracy.

Project expenditures are those that fund activities which result in the accomplishment
of identifiable outputs within a designated period. Project expenditures may be sourced
from foreign assistance or from local funding.

The categorization of the budget by functional cost components allows for a better
analysis of government expenditures to focus on more priority needs thus improving the
quality of government spending.

References:
Romualdez, Eduardo Z et al. PHILIPPINE PUBLIC FINANCE. GIC Enterprises and Co. Inc.
Manila

https://www.dbm.gov.ph

https://www.ombudsman.gov.ph/UNDP4/wpcontent/uploads/2012/12/Chap1_FAQ.
pdf