BASIC CONCEPTS IN BUDGETING

1. What is a fund?

The word "fund" in government has taken several meanings or connotations. It

is sometimes used to refer an appropriation which is a legislative authorization
to spend or an allotment which is an authorization by the Department of
Budget and Management (DBM) to obligate, or as actual cash available.

2. What basis law governs the use of government funds?

The following provision of the Philippines Constitution sets the basic rule for
the use of government funds:

"Art. VI, Sec. 29. No money shall be paid by the Treasury except in pursuance
of an appropriation made by law."

The aforequoted provision of the Constitution also establishes the need for all
government entities to undergo the budgeting process to secure funds for use
in carrying out their mandated functions, programs and activities.

3. How are government funds appropriated?

Funds for the use of government entities are appropriated or authorized

following a process with the following major steps : 1) individual agencies
prepare their estimates of expenditures or proposed budgets for the
succeeding year and submit these estimates or proposals contained in required
budget forms to the DBM following baseline figures, guidelines and timetable
earlier set; 2) agencies justify details of their proposed budgets before DBM
technical review panels; 3) DBM reviews and consolidates proposed budgets of
all agencies for inclusion in the President's proposed budget for submission to
Congress; 4) agencies explain the details of their proposed budgets in
separate hearings called by the House of Representatives and the Senate for
inclusion in the General Appropriation Bill; and 5) the President signs the
General Appropriation Bill into law or what is known as the General
Appropriations Act (GAA).

4. What is a government budget?

In general, a government budget is the financial plan of a government for a

given period, usually for a fiscal year, which shows what its resources are, and
how they will be generated and used over the fiscal period. The budget is the
government's key instrument for promoting its socio-economic objectives.

The government budget also refers to the income, expenditures and sources of
borrowings of the National Government (NG) that are used to achieve national
objectives, strategies and programs.

Section 22, Article VII of the Constitution states that:

"The President shall submit to the Congress within 30 days from the opening
of every regular session, as the basis of the general appropriation bill (GAB), a
budget of expenditures and sources of financing including receipts from
 existing and proposed revenue measures."

5. What is the expenditure program?

The expenditure program is that portion of the national budget that refers to
the current operating expenditures and capital outlays necessary for the
operation of the programs, projects and activities of the various government
departments and agencies.

6. What is the financing program?

The financing program includes the projected revenues from both existing and
new measures, the planned borrowings to finance budgetary transactions and
the payment of debt principal failing due.

7. What is referred to by the term "national government budget"?

The National Government budget (also known simply as the budget) refers to
the totality of the budgets of various departments of the national government
including the NG support to Local Government Units (LGUs) and Government-
Owned and Controlled Corporations (GOCCs). It is what the national
government plans to spend for its programs and projects, and the sources of
what it projects to have as funds, either from revenues or from borrowings
with which to finance such expenditures.

8. On what is the national government budget spent?

The national budget is allocated for the implementation of various government

programs and projects, the operation of government offices, payment of
salaries of government employees, and payment of public debts. These
expenditures are classified by expense class, sector and implementing unit of
government.

9. Why does the government prepare a new budget every year?

The preparation of the government's budget every year is in accordance with

the provision of the Constitution which requires the President to submit a
budget of expenditure and sources of financing within 30 days from the
opening of every regular session of Congress.

The yearly preparation of the budget is also in consonance with the principle
which requires all government spendings to be justified anew each year. This
principle ensures that government entities continuously evaluate and review
the allocation of resources to project/activities for cost efficiency and
effectiveness.

What are the sources of appropriations that make up the annual

10.
budget?

The sources of appropriations of the annual budget are: 1) new general

appropriations legislated by Congress for every budget year under the General
Appropriations Act (GAA); and 2) existing appropriations previously authorized
by Congress. Under the Constitution, Article VI, Section 29, no money can be
 withdrawn from the Treasury except in pursuance of an appropriation made by
law.

11. What are the existing or continuing appropriations?

Existing or continuing appropriations are those which have been previously

enacted by Congress and which continue to remain valid as an appropriation
authority for the expenditure of public funds. There are two type of existing
appropriations :1) continuing and 2) automatic.
Continuing appropriations refer to appropriations available to support
obligations for a specified purpose or project, such as multi-year construction
projects which require the incurrence of obligations even beyond the budget
year. Examples of continuing appropriations are those from existing laws such
as : RA 8150, otherwise known as the Public Works Act of 1995; and Republic
Act No. 6657 and Republic Act 8532 which set funds specifically for the
Agrarian Reform Program (ARP). Currently, appropriations for capital outlays
and maintenance and other operating expenses are considered as continuing
appropriations but only for a period of 2 years.

Automatic appropriations, on the other hand, refer to appropriations

programmed annually or for some other period prescribed by law, by virtue of
outstanding legislation which does now require periodic action by Congress.
Falling under this category are expenditures authorized under Presidential
Decree (PD) 1967, RA 4860 and RA 245, as amended, for the servicing of
domestic and foreign debts, Commonwealth Act 186 and RA 660, for the
retirement and insurance premiums of government employees, PD 1177 and
Executive Order 292, for net lending to government corporations, and PD
1234, for various special accounts and funds.

Are all appropriations supported by resources and allocable

12.
during the budget year?

No, only programmed appropriations are supported by corresponding

resources, that is, they already have definite funding sources and are readily
implementable. Unprogrammed appropriatons are not yet supported by
corresponding resources and are nevertheless included by Congress in the
General Appropriations Act. These are called standby appropriations which
authorize additional agency expenditures for priority programs and projects in
excess of the original budget only but only when revenue collections exceed
the resource targets assumed in the budget or when additional foreign project
loan proceeds are realized.

13. What is the "one-fund" concept?

The "one-fund" concept is the policy enunciated through PD 1177 which

requires that all income and revenues of the government must accrue to the
General Fund and thus can be freely allocated to fund programs and projects
of government as prioritized.

14. Why is the "one-fund" concept important?

The "one-fund" concept is a fiscal management policy requiring that as much

as possible, all revenues and other receipts of the government must enter the
General Fund and their utilization and disbursement subject to the budgeting
process. The one-fund concept is significant in that it serves as an avenue
 through which fiscal authorities may properly allocate scarce government
resources in accordance with the priorities in the over-all program of economic
development.

It likewise provides a mechanism to control drawdowns on pooled resources.

Regularly, the level of funds disbursed are monitored against the level of
revenues generated. This way, we are able to stick to the targeted level of
disbursement for a given period and avoid incurring a deficit. It also alerts us
of possible revenue shortfalls.

What is a balanced budget? What happens when the budget is

15.
not balanced?

In the context of government budgeting, a budget is said to be balanced when

revenues match expenditures or disbursements.

When expenditures exceed revenues, the government incurs a deficit which

may result in the following situations:

• The government borrows money either from foreign sources or from the
domestic capital market which increases the debt stock of the NG and its
debt servicing requirements;
• The government borrows money from the Bangko Sentral ng Pilipinas; or,
• The government withdraws funds from its cash balances in the Treasur

16. What has been the government's fiscal policy?

Historically, national government expenditures have always exceeded total

revenues resulting in annual budget deficits. Thus, the national government
had to resort to borrowing to cover said deficits which resulted in the
ballooning of foreign and domestic debts. However, in 1994, the government
broke the deficit trend by posting a budget surplus of P16 billion through an
aggressive privatization and revenue generation program and a prudent
expenditure program. Since then, the government has been exerting efforts to
maintain the surplus budget policy.

17. Why is surplus budgeting necessary?

The surplus budget policy is important to encourage economic growth. The

less the government borrow from the public, the lesser the pressure on
interest and inflation rates and the more funds are made available in the
financial market. Such funds may be used by businessmen to build factories,
hire workers, buy equipment and open more employment opportunities. By
keeping more funds in the hands of the private sector rather than competing
for credit, the government helps make financing available for families who
want to own homes, buy cars, or support their children's education. The
government also needs to generate a budget surplus to repay the huge debt it
has accumulated over the years. The reduction of the national budget debt will
correspondingly lessen government's requirements for interest and principal
payments. This becomes important particularly during periods of rising interest
rates and unstable exchange rates.

18. What is the total resource budget concept and its significance?
 Total resource budgeting is a concept adopted by the present budgeting
system which requires the preparation of the national government within the
framework of the total impact of all government entities on the national
economy. Under this concept, the National Government (NG) budget is
considered as only one component of the entire public sector resources.
Government-Owned and Controlled Corporations (GOCCs) and Local
Government Units (LGUs) are also considered as substantial contributors to
total public resources.

GOCCs and LGUs are therefore required to prepare their budget consistent in
form and timing with that of the NG to facilitate comprehensive evaluation of
the overall budget.

In total resource budgeting, the energies and capabilities of all public entities
are harnessed in drawing up the optimal package of goods and services that
can be sustained by available resources.

19. What is the consolidated public sector fiscal position?

The consolidated public sector fiscal position (CPSFP) refers to the net deficit
or surplus calculated after summing-up the budget balances of all government
entities, namely the national government, the non-financial government
corporations (usually includes only the 14 major GOCCs), government financial
institutions, local government units, the social security institutions, the Oil
Price Stabilization Fund, the Bangko Sentral ng Pilipinas, and the Central
Bank-Board of Liquidators.

Through the CPSFP, the government is able to assure itself that all public
resources are mobilized and used in magnitudes that are consistent with
overall macroeconomic targets and the government's economic priorities.

20. What is the planning-programming-budgeting system (PPBS)?

The planning-programming-budgeting system (PPBS) is a concept that

stresses the importance of establishing a strong linkage between planning and
budgeting. It emanates from the policy of the government to formulate and
implement a national budget that is an instrument of national development,
reflective of national objectives, strategies and plans.
Under the PPBS concept, the budget is anchored on the degree by which the
accomplishment of economic plans and the attainment of target contained in
the Medium-Term Philippine Development Plan (MTPDP) and the Medium-Term
Public Investment Program (MTPIP) are supported.
 THE BUDGETING PROCESS

1. What is government budgeting?

Government budgeting is the critical exercise of allocating revenues and

borrowed funds to attain the economic and socia l goals of the country. It also
entails the management of government expenditures in such a way that will
create the most economic impact from the production and delivery of goods
and services while supporting a healthy fiscal position.

2. Why is government budgeting important?

Government budgeting is important because it enables the government to plan

and manage its financial resources to support the implementation of various
programs and projects that best promote the development of the country.
Through the budget, the government can prioritize and put into action its
plants, programs and policies within the constraints of its financial capability
as dictated by economic conditions.

What are the major processes involved in national government

3.
budgeting?

Budgeting for the national government involves four (4) distinct processes or
phases : budget preparation, budget authorization, budget execution and
accountability.

While distinctly separate, these processes overlap in the implementation

during a budget year.

Budget preparation for the next budget year proceeds while government
agencies are executing the budget for the current year and at the same time
engaged in budget accountability and review of the past year's budget.

4. How is the annual national budget prepared?

The preparation of the annual budget involves a series of steps that begins
with the determination of the overall economic targets, expenditure levels,
revenue projection and the financing plan by the Development Budget
Coordinating Committee (DBCC). The DBCC is an inter-agency body composed
of the DBM Secretary as Chairman and the Bangko Sentral Governor, the
Secretary of the Department of Finance, the Director General of the National
Economic and Development Authority and a representative of the Office of the
President as members. The major activities involved in the preparation of the
annual national budget include the following:

a. Determination of overall economic targets, expenditure levels and budget

framework by the DBCC;
b. Issuance by the DBM of the Budget Call which defines the budget
framework; sets economic and fiscal targets; prescribe the priority thrusts
and budget levels; and spells out the guidelines and procedures, technical
instructions and the timetable for budget preparation;
c. Preparation by various government agencies of their detailed budget
estimates ranking programs, projects and activities using the capital
 budgeting approach and submission of the same to DBM;
d. Conduct a budget hearings were agencies are called to justify their
proposed budgets before DBM technical panels;
e. Submission of the proposed expenditure program of
department/agencies/special for confirmation by department/agency
heads.
f. Presentation of the proposed budget levels of department/agencies/special
purpose funds to the DBCC for approval.
g. Review and approval of the proposed budget by the President and the
Cabinet;
h. Submission by the President of proposed budget to Congress.

To meet the Constitutional requirement for the submission of the President's

budget with 30 days from the opening of each regular session of Congress, the
budget preparation phase is guided by a budget calendar.

5. How does the budget become a law?

In accordance with the requirements of the Constitution, the President submits

his/her proposed annual budget in the form of Budget of Expenditure and
Sources of Financing (BESF) supported by details of proposed expenditures in
the form of a National Expenditure Program (NEP) and the President's Budget
Message which summarizes the budget policy thrusts and priorities for the
year.

In Congress, the proposed budget goes first to the House of Representatives,

which assigns the task of initial budget review to its Appropriation Committee.

The Appropriation Committee together with the other House Sub-Committee

conduct hearings on the budgets of departments/agencies and scrutinize their
respective programs/projects. Consequently, the amended budget proposal is
presented to the House body as the General Appropriations Bill.

While budget hearings are on-going in the House of Representatives, the

Senate Finance Committee, through its different subcommittees also starts to
conduct its own review and scrutiny of the proposed budget and proposes
amendments to the House Budget Bill to the Senate body for approval.

To thresh out differences and arrive at a common version of the General

Appropriations Bill, the House and the Senate creates a Bicameral Conference
Committee that finalizes the General Appropriations Bill.

6. What is the General Appropriations Act?

The General Appropriations Act (GAA) is the legislative authorization that

contains the new appropriations in terms of specific amounts for salaries,
wages and other personnel benefits; maintenance and other operating
expenses; and capital outlays authorized to be spent for the implementation of
various programs/projects and activities of all departments, bureaus and
offices of the government for a given year.

7. How is the budget implemented?

Budget implementation starts with the release of funds to the agencies. To

accelerate the implementation of government programs and projects and
 ensure the judicious use of budgeted government funds, the government
adopted the Simplified Fund Release System (SFRS) beginning 1995.

In contrast to the previous system of releasing funds based on individual

agency requests, the SFRS is a policy-driven system which standardized the
release of funds across agencies which are similarly situated in line with
specific policy initiatives of the government.

Following the SFRS, the agency budget matrix (ABM) is prepared by the DBM
in consultation with the agencies at the beginning of each budget year, upon
approval of the annual General Appropriations Act. The ABM is a
disaggregation of all the programmed appropriations for each agency into
various expenditure categories. As such, the ABM serves as a blueprint which
provides the basis for determining the timing, composition and magnitude of
the release of the budget.

Based on updated resources and economic development thrusts and consistent

with the cash budget program, the Allotment Release Program (ARP) which
prescribes the guidelines in the prioritization of fund releases is prepared.

The ARP serves as basis for the issuance of either a General Allotment Release
Order (GARO) or a Special Allotment Release Order (SARO), as the case
maybe, to authorize agencies to incur obligations.

Subsequently, the DBM releases the Notice of Cash Allocation (NCA) on a

monthly or quarterly basis. The NCA specifies the maximum amount of
withdrawal that an agency can make from a government bank for the period
indicated. The Bureau of the Treasury (BTr), replenishes daily the government
servicing banks with funds equivalent to the amount of negotiated checks
presented to the government servicing banks by implementing agencies.

The release of NCAs by the DBM is based on: 1) the financial requirements of
agencies as indicated in their ABMs, cash plans and reports such as the
Summary List of Checks Issued (SLCI); and 2) the cash budget program of
government and updates on projected resources.

Agencies utilize the released NCAs following the "Common Fund" concept.
Under this concept of fund release, agencies are given a maximum flexibility in
the use of their cash allocations provided that the authorized allotment for a
specific purpose is not exceeded. Project implementation is thus made faster.

8. Why are adjustments made on the budget program?

Adjustments are made on the budget even during implementation primarily

because of the following:

• Enactment of new laws - Within the fiscal year, new legislations with
corresponding identified new revenue sources are passed which necessitate
adjustments in the budget program.
• Adjustments in macroeconomic parameters - The macroeconomic targets
considered in the budget are periodically reviewed and updated to reflect
the impact of recent developments in the projected performance of the
national economy and on the set fiscal program for the year. The relevant
indicators affecting the budget aggregates include the following: the Gross
National Product (GNP), inflation rate, interest rate, foreign exchange rate,
oil prices, and the level of imports. Thus, a sensitivity measure on the
 impact of these parameters on the budget will determine whether recent
macroeconomic developments have a negative or favorable effect on the
budget.
• Change in resources availabilities - Budget adjustments are undertaken
when additional resources becomes available such as new grants, proceeds
from newly negotiated loans and grants. Corresponding budget
adjustments are also made when resources generation falls below the
targets.

What mechanism ensure that funds have been properly allocated

9.
and spent?

Cognizant of the fact that no propitious results can be obtained, even with
maximum funding, if agency efficiency is low and funds are wastefully spent,
systems and procedures are set in place to monitor and evaluate the
performance and cost effectiveness of agencies. These activities are subsumed
within the fourth and the last phase of the budget process-the budget
accountability phase. At the agency level, budget accountability takes the form
of management's review of actual performance or work accomplishment in
relation to the work targets of the agency vis-à-vis the financial resources
made available.

Also, detailed examinations of each agency's book of accounts are undertaken

by a resident representative of the Commission on Audit (COA) to ensure that
all expenses have been disbursed in accordance with accounting regulations
and the purpose(s) for which the funds have been authorized.

Is the role of the DBM in the budgeting process limited to

10.
national government agencies?

No, the role of the DBM in the budgeting process is not limited to national
government agencies. It coordinates all three levels of government-national
government department/agencies, government-owned and controlled
corporations (GOCCs) and local government units (LGUs) - in the preparation,
execution and control of expenditures of their corresponding components
entities.

The DBM reviews the corporate operating budgets of GOCCs and ensures the
proper allocation of cash. The DBM likewise formulates and recommends the
budget policy covering the allowable deficit and the criteria for the
determination of the appropriate subsidy and equity of GOCCs.

For LGUs, the DBM reviews the annual and supplemental budgets of provinces,
and highly urbanized cities and manages the proper allocation and release of
the Internal Revenue Allotment (IRA) of LGUs and their share in the utilization
of national wealth.
 RELEVANT MACROECONOMIC PARAMETERS

What macroeconomic parameters are crucial in the determination

1.
and review of the budget?

The major macroeconomic parameters crucial in the determination and review

of the budget include the following level: level and growth in real/nominal
Gross National Product (GNP) and Gross Domestic Product (GDP), inflation
rate, 91-day Treasury bill rates and the London Interbank Offered Rate
(LIBOR), foreign-exchange rate, level and growth of exports and imports, and
population growth.

How are these macroeconomic parameters determined as bases

2.
of the budget levels?

The macroeconomic parameters or the targets and assumption which form the
basis of the budget estimates are determined by the DBCC which coordinates
the projections of main fiscal and economic authorities such as the National
Economic and Development Authority (NEDA), the Department of Finance
(DOF), the Bangko Sentral ng Pilipinas and the Department of Budget and
Management based on historical and/or desired patterns of economic behavior.

3. What is the Gross National Product (GNP)?

The Gross National Product (GNP) is the measure of the total value of all final
goods and services produced in an economy in a given year. It takes into
account everything produced by Philippine nationals or companies both within
or outside of the country and includes remittances of Overseas Filipino
Workers (OFWs). To avoid "double counting," however, the GNP only sums up
all the value-added of final products or considers only the final value of goods
and services produced and excludes the contributions made by intermediate
producers.

The GNP is oftentimes used as an indicator of economic activity. A higher GNP

indicates an expansion of the economy's production capacity which generally
means that more jobs are created and more incomes are received. The per
capita GNP (GNP divided by population) is also an important gauge of
economic development and is often used as the basis for classifying countries
as underdeveloped or developing.

4. How does the GNP affect the budget?

A higher GNP generally results in a larger tax base and consequently, higher
revenue collections from the domestic market which could be made available
to the government to finance public services and development programs and
projects or to increase the budgetary surplus, depending on government's
policy.

5. What is inflation and how does it affect government budgeting?

Inflation refers to the persistent upward movement in the general price level
resulting in the diminishing purchasing power of a given nominal sum of
 money. The inflation rate is the annual rate of change in the general price
level often measured by the Consumer Price Index.

When the inflation rate increases, government revenues particularly from

domestic-based taxes also rise because of the increase in the prices of taxable
products. At the same time, disbursements are also expected to increase
because of higher cost requirements for maintenance and other operating
expenditures such as supplies and materials, transportation services and
capital outlays.

The inflation rate thus serves as an indicator of the possible level of increases
in the agency's budget to cover price escalation.

What is the 91-day Treasury Bill rate? How does it affect the
6.
budget?

The 91-day Treasury Bill (T-Bill) rate refers to the interest rate on Treasury
Bills maturing within 91 days issued by the national government to general
funds for general purposes, including the payment of outstanding obligations
of the government. It serves as a ballweather indicating the rate of interest in
the market.

The T-Bill rate is a significant factor affecting the budget in terms of the level
of domestic debt, the cost of servicing the public domestic debt, and the level
of revenues via the tax withheld from the interest income on the sale of
government securities. An increase in T-Bill rate will raise government
revenues due to the 20% withholding tax on interest income. At the same
time, however, it will increase additional requirements for interest payments.

7. What is the LIBOR and its significance in the budget?

The London Interbank Offered Rate (LIBOR) is the rate offered to prime
borrowers in the international capital market based in London, and is used as
the base for most interest quotations.

An increase in LIBOR means an increase in expenditure for foreign interest

payments which will reduce budgetary surplus if the increase in foreign
interest payments will not be matched by additional revenue flow.

How does the foreign exchange rate reckon with government

8.
expenditures.

The foreign exchange rate is the rate at which a currency is exchanged for
another currency, in the case of the Philippines, the peso to the US dollar. Any
change in the exchange rate assumption will correspondingly change the peso
cost of all expenditures paid in US dollars like foreign debt service, both
repayment and interest, the regular operating requirements of foreign-based
government offices like embassies, consulates, etc. and other government
contracts which are to be settled using foreign currency.

What is the role of the level of imports in determining the level of

9.
expenditures?
 The level of imports is not a direct input in the determination of expenditures.
However, it is a key input in the estimation of revenues, particularly
international trade taxes and income/sales taxes. An increase in the import
level implies additional tax revenues and therefore a corresponding increase in
the cash surplus.

10. What is the implication of population growth on expenditure?

Growth in population means higher expenditure requirements for government

because of more demand for services. Population growth is specifically
important in projecting population-based expenditures like education, health
and other social services.
 EXPENDITURE CATEGORIES AND THEIR
ECONOMIC IMPORTANCE

What are the major current operating expenditures of the

1.
national government?

The major current operating expenditures of the national government are:

• Personal services, like salaries and wages, social security contributions,

overtime pay, etc.;
• Maintenance and other operating expenditures, such as traveling expenses,
supplies and materials, water, illumination and power Services, rent, etc.;
• Interest payments;
• Allotments to Local Government Units;
• Subsidies to government-owned and controlled corporations.

What is the government's policy regarding current operating

2.
expenditures

The government's policy regarding current operating expenditures maybe

summarized as follows:

• Limit the growth of current operating expenditures with provisions for

inflation adjustments;
• Encourage cost reduction measures in operation, particularly overhead
expense items;
• Provide adequate maintenance funds for infrastructure facilities; and.
• Control the growth of spending for personal services within the level that
can be sustained by available resources.

3. 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.
4. 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.

5. 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.

6. 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.

7. 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.

8. 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.

9. 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: a) education, culture and
manpower development; b) health services; c) social security, welfare, and
employment; d) housing and community development; and, e) land
distribution.

Provision for economic services include those for: a) communications, roads

 and transportation facilities; b) agriculture, agrarian reform and natural
resources; c) water resources development and flood control; d) trade and
industry; e) power and energy; and f) 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: a) general
administration such as general government stipulation fiscal affairs, foreign
affairs and international commitments, electoral, audit, civil service and
lawmaking functions; and b) 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.

How are government expenditures categorized by cost structure?

10.
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.

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.
 FINANCING OF NATIONAL GOVERNMENT EXPENDITURES

What are the major sources of funds to finance the national

1.
budget?

The national budget is financed form 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

2. 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.

3. 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.

4. 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.

5. 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.
6. What are the desirable features of a tax system?

A tax system should be revenue-productive; simple and easy to administer,

equitable, and progressive.

What are the government's current efforts to improve tax

7.
collections?

The national government has continuously expended an all-out effort to

strengthen its revenue-generating capability through legislative and
administrative reforms.

Recently, the government came up with a comprehensive measure to overhaul

the tax system to bring in badly needed revenues for the government.

Called the Comprehensive Tax Reform Program (CTRP), the new tax measure
has three principal components, namely, a) income tax reform; b) excise tax
reform; and, c) fiscal incentives reform.

The CTRP aims to widen the tax base, simplify the tax structure to minimize
leakages, undeclared revenues, overstated deductions and corruption to make
the system more elastic and easier to administer.

8. 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.

9. 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.

10. 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.

11. Why does the government borrow?

 The government borrows from any of the following reasons:

• to finance national government deficits;

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

12. 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.

13. What are net borrowings?

Net borrowings refer to gross borrowing less debt amortization.

14. What liabilities are included under public debt?

Public debt includes obligations incurred by the government and all its
branches, agencies and instrumentalities, including those of government
monetary institutions. It consists of all claims against the government which
may be payable in goods and services, but usually in cash, to foreign
governments or individuals or to persons natural or juridical. Obligations
maybe: 1) purely financial, i.e., loans or advances extended to the Philippine
government, its branches, agencies and instrumentalities; 2) services
rendered or goods delivered to the government for which certificates, notes or
other evidence of indebtedness have been issued to the creditor; and 3) for
external debt such as claims of foreign entities, securities held in trust, non-
bonded debts and obligations of the Philippine government to the International
Monetary Fund (IMF).

15. 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.
 OFTEN MISCONSTRUED BUDGET TERMINOLOGIES

1. What is the difference between appropriation and allotment?

Appropriation refers to an authorization made by law or legislative enactment

directing payment out of government funds under specified conditions or for
specific purposes.

On the other hand, allotment is an authorization issued by the DBM to an

implementing agency to incur obligations for specified amounts contained in a
legislative appropriation.

2. How is an appropriation distinguish from the budget?

An appropriation refers to an authorization made by law or legislative

enactment directing payment out of government funds under specified
conditions or for specific purposes. On the other hand, the budget may be
construed as the total amount of appropriations programmed to be spent
during the budget year and that can be supported by available resources in
accordance with the fiscal program to enable the national government to enter
into contract for the delivery of goods and services to the public.

3. How do distinguish obligation from disbursements?

Obligations are liabilities legally incurred and committed to be paid for by the
government either immediately or in the future.

Disbursements refer to the actual withdrawal of cash from the Bureau of the
Treasury due to the encashment of checks issued by agencies and payment of
budgetary obligations.

What is the difference between the expenditure program and the

4.
financing program?

The expenditure program refers to the ceiling on the obligation that can be
incurred by the government in a given budget year. Said ceiling is supported
by estimated financial resources.

The financing program pertains to the projected revenues from both existing
and new measures, the payment of debt principal due, as well as the planned
borrowings to finance budgetary transactions.

How do we distinguish the obligation budget from the cash

5.
budget?

The obligation budget is the proposed amount of commitments that the

government may incur or enter into for the delivery of goods and services in a
fiscal year.

On the other hand, cash budget is the aggregate of revenues, borrowings and
disbursements of the National Government. It shows the actual deposits and
 withdrawals of cash of national government agencies from the BTR for
payment of current and previous year's obligations.

How do we differentiate between programmed appropriations

6.
and unprogrammed appropriations?

Programmed appropriations are appropriations with definite/identified funding

as of the time the budget is prepared while unprogrammed appropriations are
those which provide standby authority to incur additional agency obligations
for priority programs or projects when revenue collection exceed targets, and
when additional grants or foreign funds are generated.

What is the difference between expenditure authorized by the

7.
annual general appropriations and the obligation program?

The obligation program refers to a portion of total appropriations programmed

for the fiscal year, unutilized prior years accounts, payments for automatic and
continuing accounts that can be supported by available resources in
accordance with the fiscal program.

The annual general appropriations refers to the appropriations authorized

under the General Appropriations Act or the new legislative authorizations
enacted and approved by Congress. This appropriation level includes
Programmed and Unprogrammed Appropriations.

What is the difference between the disbursement program and

8.
the cash release program?

The disbursement program refers to the actual withdrawal of cash from the
Treasury due to the encashment of checks issued by agencies and from
payment of other obligations.

The cash release program refers to the program of Notice of Cash Allocation
(NCA) releases to be made by the DBM based on the Agency Work and
Financial Plan and the cash available in the Bureau of the Treasury. The NCA
provides the authority for the maximum amount of withdrawals that an
agency can make from government servicing banks for the month indicated.

How do we distinguish capital expenditures from infrastructure

9.
expenditures?

Capital expenditures refer to expenditures for capital goods or durable goods

which are used for productive purposes such as the construction of roads and
bridges, dams, power and irrigation works, schools and hospitals. It is also
known as capital outlays, referring to the purchase of equipment and fixed
assets, the benefits of which extend beyond the budget year and which add to
the assets of the government.

Infrastructure expenditures, however, is a subcomponent of capital outlays

which refer to spending for the construction of various basic public works,
such as roads, ports, airports, water supply, irrigation and other capital
investments particularly of the Department of Public Works and Highways, the
Department of Transportation and Communication, the school building
program of DECS and the national irrigation projects of the Department of
 Agriculture.

How do we differentiate the national budget from the public

10.
sector budget?

The national budget refers to the totality of the budget of the various
departments of the national government including support to LGUs and
GOCCs.

The public sector budget or the consolidated public sector budget is the
aggregate of revenues, expenditures and indebtedness of all units of
government, including the national government and its agencies and
instrumentalities, local government units, and government-owned and/or
controlled corporations.