GOVERNMENT AND THEROLE AND SCOPE OF ITS SERVICES
Through these mediums, individual
Government is an organization formed to exercise authority over the
actions of people who live together in a society and to provide financial and
non-financial essential services. Those services influence the day-to-day
living of the people (Romualdez, Yoingco, &Casem, 1973) as well as the
industries. Example of the role and scope of Government’s services are as
follows:
Construction and maintenance of roads and bridges, communication and
power facilities, both for home and industrial uses;
Educational and health services;
Peace and order;
Fire protection;
Subsidies to consumers in terms of lower prices for essential
commodities;
Protection to industries like high tariff rates on competing foreign articles;
Level of money supply, the interest and discount rates;
Development of new technologies;
Financing manpower training;
Union and management problems are arbitrated;
Air and water pollution are looked into;
Production and sale of certain items that impair health;
Mental facilities are scrutinized;
Solution to traffic problems;
Construction and maintenance of parks and recreational places;
Promotion and support of cultural and aesthetic endeavors are
undertaken;
Fertility and mortality rates are looked into; and
Price and wage levels are established.
However, to enable the government to engage in the above activities or
services, it has to raise revenue mainly through imposition of taxes. Many
citizens and resources are employed in the production of government and
private industries. They are receiving income yet they need to pay taxes.
In many cases, they are still recipients of services financed by those taxes
(Hyman, 2014).
The extent to which individuals have the right to participate in decisions
that determine what governments do, how much they spend and how they
obtain the means to finance their functions reflect political interaction of
citizens.
Political institutions constitute the rules and generally accepted procedures
that evolve in a community for determining what government does and how
government outlays are financed.
desires are translated into binding decisions concerning the extent and
functions of government
PUBLIC FINANCE AND ITS CLASSIFICATION
Public Finance,according to Hyman (2014), is a field of economics that
studies government activities and the alternative means of financing
government expenditure. A crucial objective is to understand the impact of
government expenditures, regulation, taxes, and borrowing on incentives
to work, invest, and spend income.
While Romualdez, Yoingco&Casem (1973) defined public finance as a
field of study in economics which deals with the utilization of scare
resources, that have alternatives uses, to satisfy human wants. It is
considered synonymous to government finance, public economy, or the
economics of the public household. Part of economics is to deal with the
revenue and expenditure patterns of the government and their various
effects on the economy. In other words, it is the study of economics
aspects that arise in the operations of the public budget. Previously people
see public finance as evil but now it becomes important in the solution of
the economic problems of production, distribution, consumption and full
employment.
Classification of Public Finance:
Public Finance is classified into two, namely: Private Finance and Public
Finance. Both have basic economic goal, that is, the satisfaction of human
wants, hence they differ with (1) private wants and public wants, (2) the
financial means available, and (3) the budgeting procedure practiced.
1) Private Want and Public Wants
Private finance relates to private wants while public finance deals with
public wants. Private wants are those that can be satisfied through the
mechanism of the market because their enjoyment can be made subject
to price payments. Consumer can be satisfied with the goods and services
by paying a stipulated price.
Whereas, Public wants are those that cannot be satisfied through the
working of the market because their enjoyment by any individual consumer
is independent of his payment or contribution. Meaning to say, one is not
excluded from the satisfaction of a public want even if he does not pay for
it. Example: Police and fire protection. Even an individual is a payer of tax
or not, both can avail the police and fire protection services. The road and
bridges constructed by the government are available to use by anybody as
long as the government is not looking for a toll payment.
Public want is also classified into a social and merit wants.
Social wants are those wants whose satisfaction should be subject to the
principle of consumer sovereignty, that is, resources should be allocated
in response to the effective demand of consumers. On the other hand,
Merit wants are those thatare subject to the exclusions principle and are
satisfied by the market within the limits of effective demand. They become
merit wants if considered so meritorious that their satisfaction is provided
for through the market and paid for by private buyers. Example: free
education, low-cost housing, subsidized essential consumer items.
2) Financial Means Available
Private finance cannot avail of taxation and printing money as means of
raising revenue in the same way as public finance.
However, If the government decides to construct a bridge, it can generate
resources with which to undertake such a project through taxation, printing
money, borrowing, or through the sale of assets and services. With respect
to borrowing, especially in the case of external debt, the government has
a decided edge over private entities. In other words, public finance can rely
more heavily on borrowing to augment its resources than in private finance.
Whenever a private corporation decides to construct a building, it can float
securities (evidence of indebtedness) and issues shares of stock (evidence
of ownership), or utilizes its income and other assets, but it cannot
raiseresources through taxation and printing money.
3) Budgeting Procedures
In private finance, the preparation of the budget starts from the income
side, that is, the private entity determines income and additional resources
from borrowing, and then proceeds to individual expenditure items.
Public finance, on the other hand, usually works the other way around. The
government determines first its expenditure needs, and then looks around
for possible ways of financing them. This budgeting procedure can indeed
contribute to deficit spending, that is government receipts (which already
include borrowing) do not fully cover government expenditures. For private
finance, this situation represents faulty management. In the case of public
finance, which does not operate on the basis of profit expectations, deficit
financing may, at times, be an acceptable alternative.
BASIC ECONOMIC PROBLEMS
Every nation, rich or poor, has economic problems. However, these are
more serious and widespread in poor countries. Economic problems do
exist because of 2 fundamental facts: resources are limited and human
wants are unlimited.
Human wants cannot possibly be all satisfied because resources are
scarce. Example, every family wants a house and a farm. This is not
possible in many countries, especially in less developed countries. In fact,
most countries cannot
even meet the most basic needs of their people like food, clothing and
shelter, unlike US whose people are capable of satisfying their essential
needs. If some group cannot, it is the government that provides them with
basic goods and services. Welfare programs and other social security
benefits are made available to the less fortunate, and to the aged.
But still, rich countries have economic problems. People, human as they
are, are not ultimately satisfied with the consumption of basic goods only.
Naturally, they aspire for a higher standard of living. And it is the
responsibility of the economic system to help the people acquire it. The
economic system of any nation – United States or Uganda – has three
basic economic problems: What goods to produce and in what quantities?
How to produce the goods? And for whom are the goods produced?
A. What goods are to be produced?
It is not really possible to produce all the goods that people want for their
satisfaction. To remedy such problem, a system of priorities has to be
established. Clearly, basic needs of the people are given to priority.
Unfortunately, in the less developed countries even the most basic needs
or goods cannot be produced in sufficient quantities for every poor family.
The decision on the problem of production priorities depends on the types
of economic system. If it is under capitalism, the goods which command
the higher prices or profits are produced first. Since communism is for
service and not for profit, goods are produced according to the needs of
the people. In the case of socialism, it is a combination of capitalism and
communism. The major industries are controlled by the state. Production
therefore of goods is based on needs and profits.
B. How are the goods produced?
The ideal situation is to produce the goods with the most efficient method.
This involves machines, technology, management, and skills. Many
developing countries are deficient on these. They use primitive methods of
production – not much different from those during the ancient times. Thus,
their productivity is extremely low, and this contributes to their poverty and
underdevelopment.
On the other hand, the rich nations have comparatively lesser problems on
production methods. They have the money to buy the best tools and
techniques of production. This does not mean, however, that they have no
production problems. Take the case of the US. Due to geographical
limitations, it cannot produce all the needs of its people. It is searching for
a better technology of producing products that are excellent substitutes for
oil and other imported products.
C. For whom are the goods produced?
The distribution of goods is determined by the economic system. Under
capitalism, goods are allocated in the markets. Those who have the
money, and they are willing to buy, get the goods. Obviously, the rich
acquire more goods and services than the poor. Those who are below the
poverty line do not even eat every day. They cannot even buy medicines
for their dying children.
In communism, goods are distributed according to the needs of the people.
The government supplies the needs of the people, such as food, clothing,
shelter, education, health, etc. Of course, if such country is poor, it cannot
adequately meet the needs of its people. But the available scarce goods
are fairly distributed so that
no member of society is extremely poor. In fact, communism is a classless
society. There is equality.
Under socialism, both market and state determine the distribution of goods.
Essential and strategic goods are being allocated by the government at
cost. The very poor ones and the aged enjoy welfare programs. Goods that
are given to the private sector are sold profit. Those who are interested
and have the money can get them, like cars and other luxury products.
MIXED ECONOMIC SYSTEM
Pure economic systemsdo not exist anymore. Russia and China operate
under a heavy socialist economy. This is a combination of communism and
socialism. Many countries have mixed system like the US, Japan and the
Philippines. This is a combination of capitalism and socialism, but more of
capitalism. It has been observed that both the capitalistic and the
communistic countries are moving forwards socialism.
The mixed system is a blend of free market economy and government
intervention. It is intended to give incentives to businessmen, and to protect
the welfare of the consumers. Due to imperfections of the market system,
and the presence of less fortunate members of society, the government
has to interfere in market forces. Many businessmen have lost their
honesty. They create artificial shortage to raise their prices. These
unscrupulous activities have to be checked by the government. The
government has also the responsibility to help the poor. They cannot
depend on the market for their survival. Unfortunately, the less developed
countries have very limited ability to aid their poor citizens.
ECONOMIC DEVELOPMENT
Development is a progressive process. It involves the interaction of
different factors. For example, in the case of increasing the harvest of palay
per hectare, various inputs are combined like a fertilizers, insecticides,
irrigation, and technology, among other things. There are properly applied
in order to produce more output. Such process is development.
Economic development is a progressive process of improving human
conditions, such as the reduction or elimination of poverty, unemployment,
illiteracy, inequality, disease and exploitations. Evidently, economic
development is not only an economic process. It involves both economic
and non-economic factors.
Economic factors are capital, technology, and market.
Non -economic factors are culture, religion, government, education, among
other things. The combination and interaction of these factors determine
the extent and nature of economic development. In fact, the non-economic
factors have stronger influence on the economic development of nations.
Some countries are progressive while others are not because of the
aforementioned factors of development.
CLASSIFICATION OF COUNTRIES
The economy of a country is measure by its gross national product (GNP)
or per capita income. The basis of comparison is the economy of the highly
developed countries, usually the US. If the GNP of a certain nation is near
the GNP of the rich countries, it is classified as intermediate.
Those that are far below are classified as less developed. The rich ones
are classified as highly developed. Countries which are backward,
underdeveloped, agricultural, developing or less developed are generally
considered poor nations. Nevertheless, there are few countries that are
underdeveloped but they are not necessarily poor. Countries which have
advanced, industrial or developed economies are rich countries. Those
countries whose economies are between the highly developed and less
developed are called intermediate countries/economies.
Example
Highly developed countries – US, Japan, France, Denmark, Australia,
Russia, Sweden, West Germany, Canada and Israel
Intermediate countries – Argentina, Cuba, Libya, Spain, South Africa,
Austria, Saudi Arabia, Singapore, Poland, Venezuela
Less developed countries – Kenya, Somalia, Tanzania, Uganda, El
Salvador, Honduras, Peru, India, Philippines, Vietnam
DEVELOPMENT AND ITS OBSTACLES
Is it really possible to attain economic growth without economic
development? It has been said that growth is the product of development.
Not a few less developed countries are apparently progressive for they
have modern buildings and well-developed fruit plantations. There are
many corporations
which are very profitable but all of these are owned and managed by
foreigners. Among the masses, poverty, ignorance, squalor, and disease
have been rampant. Only the foreigners and the few local elite have
become prosperous. There are countries in the Middle East which have
experienced rapid economic growth due to their incomes from oil. They
have been able to construct modern buildings, and other symbols of high
living. However, there are no significant institutional changes in their
education, public administration, and health. Cultural lags are dominant in
their societies. Even their economic institutions are still in the process of
development. Because of their big petro-dollars, they can import skills,
technology, management, and materials. In short, they can buy
development.
Development means more than imposing buildings, beautiful houses,
elegant cars, money or modern machines. It includes fundamental
changes in society, ways of life, values and institutions. On the other hand,
development without growth is inconceivable. Whenever there is real
development, there will always be growth because growth is a natural
consequence of development.
Obstacle to Development
There are many formidable obstacles that stand on the patch of the less
developed countries, namely:
1. Deficient in capital.
They cannot afford to buy sufficient modern tools of production.
Moreover, management and manpower skills are not adequate. The
technology which they like to adopt is difficult to implement because it
requires imported technicians and machines. Besides, foreign technology
is capital-intensive and labor saving. This only worsens the massive
unemployment problems of the poor countries.
2. Population explosion.
Poor countries are very rich in human resources. Their birth rate is
much higher than in the rich countries. This is a serious problem because
the rate of employment and production in the poor countries is very low.
So, every year more persons are to be fed and employed. Since it is not
easy to control the growth of population for cultural and religious reasons,
and it is difficult to increase production, there is growing gap between the
two. Hence, may poor countries become poorer, and they languish in the
quagmire of poverty and squalor.
3. Man Himself
is the greatest obstacle to economic development. Before
improving his physical environment, he should be the first to be improved.
– his attitudes and values. The development of people is the only real and
enduring kind of development. It is the principal key to the progress of the
poor nations.
Module 2
THE DEVELOPMENT OF PUBLIC FINANCE
INTRODUCTION
The development of the state was a product of developing public finance
institution. Changes in concepts of what should be the functions and
responsibilities of the state have to a large extent shaped concepts of what
the goals of public finance ought to be. For after all, public finance raises
and spends revenue for the functions of the state. These functions have
been changing with the development of society. Thus, tracing the
development of public finance institutions necessitates an examination of
the development of organized society itself.
The history of public finance in the Philippine setting is traced from the
primitive period, that is, prior to the arrival of the Spaniards in 1521. The
era of the Spanish administration which lasted for nearly four countries,
traces the developments under a colonial ruler. The coming of the
Americans, by virtue of the Treaty of Paris of 2898, relates the start of
United States influence on Philippine public finance. The development is
then seen through the Commonwealth, the Japanese occupation, the early
period of the Republic, and contemporary developmental strides. As in the
case in the worldwide development of public finance, Philippine public
finance started from simple tributes to finance personal expenses of the
ruler and has since developed into the complex instrument designed to
attain accelerated economic development that it is today.
PRIMITIVE SOCIETIES
The origin of public finance institutions was probably start with the
beginnings of the state under the slave societies. During the primitive
stage, there was no public finance. People were living by acquiring foods
through hunting or fishing, indicating they are living on a subsistence basis,
with hardly any surplus. Whatever was acquired from hunting and fishing
was immediately consumed. Battle over territories, the capture of defeated
tribes who were turned into slaves, the development of settled agriculture
and rudimentary advances in the production of goods led to the great slave
empires of Asia, Africa and Europe.
The early public finance institutions of these slave societies served as
foundations for modern institutions and practices.
The role of public finance, became linked with function of government. To
protect and maintain the state system, the government had to perform
several vital functions. Among the most basic of these functions:
A. Expenditures
1) Protection of the people, the territory and sovereignty from outside
aggression. As the state was undergoing its initial state of formation under
the slave empires, it was subjected to constant aggression within and from
outside. At the same time, it had to do evil aggression to eliminate its
neighbors expand its frontiers and consolidate its territories. Ancient public
finance was, therefore, characterized by enormous public expenditure for
defense and aggression. The provision and maintenance of armies and
navies were basic allocations of the public purse. As a matter of fact,
writers claim that public finance started with war activities. This was the
largest single item of expenditures in ancient times. Regimes were literally
driven into bankruptcy because of war expenditures. War was such a
frequent preoccupation that peace has been defined as “an uneasy period
between two wars.”
2) The preservation of internal peace and order and security and the
administration of justice. Considering the fact that a vast majority of the
population might rebel any time, peace and order for the ruling minority
was a primary concern. The administration of justice, of course, was for
the free citizens and not for the slaves. Security, within and without, can
therefore be considered as the main function of ancient governments; it
therefore followed that much of public finance was poured in its activity.
3) The maintenance of a state religion. Religion helped stabilize and
rationalize the ruling order in slave empires. It therefore played a major role
in justifying the slave system. In slave empires, as in Egypt, the rulers were
considered gods and goddesses; they were looked upon as human
manifestation of deities and were considered religious as well as temporal
leaders.
4) The maintenance of the king and his household was deemed the
inalienable right of the sovereign. It was the people’s obligation to
provide him with revenues and he, to spend such (as a divine obligation),
for anything he deemed good for the public welfare.
5) The state concerns included limited goods and services like the
distribution of free grain in times of famine as in Rome, public recreation,
and physical education.
B. Revenues
To finance its public functions: the state imposes and collect revenues
1) to the slave 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 peoples. The vassalage taxes imposed on
conquered provinces and donations or gifts from the wealthy citizens of the
state.
2) Imposes taxes in times of emergency.
3) Gifts of some citizens
4) Public domain particularly from agriculture and mines
5) Poll tax levied on Egyptians male populations and non-Roma citizens
engaged in business
6) Tax on inheritance
7) Higher tax rate for childless couples and unmarried individuals
C. BUDGETING
Budgeting was exercised because of the need to allocate public revenues
for specific purposes. Since the public budget was emerged with the king’s
purse, there was no distinction between the public and the king’s private
expenditures.
D. BORROWINGS
Public borrowings and debt management were unheard of. Although there
was already a form of money lending, the ancient state did not borrow
money even in emergencies. It only solicited gifts or levied limited taxes.
The ancient state was relatively self-sufficient and public expenditures
were usually borne by the citizens and non-citizens without recourse to
loans.
PRE-SPANISH PERIOD
The monarchial form of government during the early period is known as
barangay.
The barangays were independent and governed by rulers, called datus or
rajahs who enjoyed the unconditional loyalty of the people. The
relationship between the datu and his subjects was direct. The subjects
paid a tribute, called buiz, from the crops that they gathered or raised. They
also rendered personal services to the ruler by assisting him with his wars,
exploits, and various miscellaneous services, such as cultivating the ruler’s
land. In return the ruler-maintained peace and order and assisted his
subjects in obtaining the necessities of life. Some members of the
barangay, like the nobles and freemen were exempt from paying tributes
and from rendering services to the ruler except in case of war
SPANISH PERIOD
Spain imposed tributes or taxes upon Filipinos for its survival and
benefit. In year 1569, the fist Spanish Governor-General to the Philippines,
Miguel Lopez de Legaspi commenced the strict collection of tributes from
the Filipinos. The tribute was payable in kind or produce of the soil at the
official price. Several years, they levied a low duty of 3 percent on goods
from the orient and 2 percent on goods from Mexico purely for revenue
purpose.
With the beginning of the era of mercantilism, the direct trade with Spain
was curtailed, the volume was restricted and all goods had to be sent to
Mexico. Other trade restriction was enforced locally in the Philippine and
the result was that the Spanish treasury was obliged to make good serious
deficits in the Philippine government budget, Spain annual contribution to
the Philippine treasury was accelerated.
Prior to the coming of American in 1898, the taxes imposed and collected
during the Spanish regime were:
1. Specific duties on all imports
2. Surtaxes for harbor improvements
3. Ad valorem taxes on imports
4. Consumption taxes on certain imports
5. Miscellaneous charges, and
6. Export duties.
Internal revenue derived from the following sources:
1. Industrial taxes
2. Urbana taxes
3. Stamp taxes
4. The sale of certificates of registration (cedula)
5. The public domain
COMING OF THE AMERICAN
1. Tariff duties and internal taxes imposed by the Spanish
Government were continued for some time.
2. The enactment of a United States income tax law in 1913 brought
forth income taxation in the Philippines.
3. Phil. Income Tax Law, Act No. 2833 dated March 7, 1919,
embodied the rates and exemptions of the 1916 US income tax
law.
4. June 15, 1939, comprehensive taxation came into the Phil. With
the enactment of the National Internal Revenue Code,
Commonwealth Act. No. 466., which contribute much to the
general fund of the national government even up to present.
JAPANESE PERIOD
1. While, the Japanese authorities imposed various new or radically
increased sales and luxury taxes and license fees, the printing of
Japanese war note, was resorted to for running the government.
2. Before the Japanese occupation, total Philippine money supply,
currency and demand deposits, never exceeded P300 million, less
than 1/20th of the amount the Japanese placed in circulation, using
the lowest estimate.
3. It is of the interest to note that the National Assembly of the
Japanese-sponsored Philippine Republic authorized the creation
of a Central Bank which did not actually come into being.
EARLY YEARS OF THE REPUBLIC
1. During the Spanish period, the government had a centralized
budget. The annual budget was prepared in Manila and was sent
to Spain for approval by the Minister of the Colonies. It included the
estimated receipt and expenditures of the central, provincial, and
municipal governments for the year.
2. During the early years of American sovereignty, the Philippines
Commission approved the annual budget of the government.
Under the Phil. Bill of 1902, the Phil. Assembly and the Philippine
Commission exercised this power jointly. This law provided that in
case the 2 houses (the Senate and Congress) should disagree and
no budget was approved for a given year, the budget of the
preceding year was to be followed. This budgetary system was
patterned largely after the English System and was introduced in
the Philippines, 1917.
3. Under the Jones Law, the Governor General was required to
submit to the Philippine Legislature, within 10 days after the
opening of its regular session, a budget of receipts and
expenditures to be used as the basis of the annual appropriation
bill for the national government.
4. The budgetary system of the national government is governed by
the Constitution.
5. The contents and procedures in the preparation of the budget are
provided for in the Budget Act of 1937, Commonwealth Act No.
246, and the Revised Budget Act of 1954, Republic Act. No. 992.
6. The Bureau of the Treasury is one of the oldest bureaus of the
national government. From 1901 until the creation of the Central
 Bank in 1948, The National Treasury was the depository of all the
funds of the government. It was charged with the:
(1) receiving deposits from all government offices – national,
provincial, city, and municipal,
(2) It paid all government obligation by cashing treasury
warrants drawn by the various bureaus, offices,
instrumentalities and subdivisions of the government
(3) in charged with the receiving deposits from the government
offices – national, provincial, city, and municipal, and
(4) receipt and custody of all funds pertaining to national
collections, including legal including legal disbursements,
cash management and forecasting with a view to avoiding
deficits and enabling the treasury to obtain cash under
favorable terms and conditions, and the provision of funds
for pensions, retirements and gratuities, loan repayments
and sinking fund contributions and interest payment.
7. One of the landmarks in the Philippine monetary setup and public
finance is the establishment of the Central Bank on June 15, 1948,
Section 115 of Republic Act No. 265 which states that Central Bank
shall act as the fiscal agent and banker of the Government, its
pollical subdivision and instrumentalities.
8. The period 1949-1951, various developments happened, namely,
a) Imposition of import controls to check the drain
on the international reserve and to shift the
pattern of imports from consumer to capital
goods,
b) Licensing of all imports,
c) Imposition of selective credit controls, and
d) Adoption of a flexible system of exchange
control.
9. The government sector was a major factor in the maintenance of
economic
(5) stability in 1952-1954. Changes are as follows:
• 1952, a surplus was realized
• 1953, Government had opportunities to
prosecute development projects:
a) Tax exemptions law, amending Republic Act No. 35,
providing more
(6) Effective instrument for accelerating industrial
development.
b) Creation of Tariff Commission was enacted.
c) Republic Act No. 1000 authorizing the issuance of bonds
up to
(7) P1billion to finance public works and economic
development projects, launching a 3-yearperiod of heavy
deficit spending.
* 1954, large expenditure outlays for economic development were
provided
a) Retail Trade Nationalization Law was passed on June 19, 1954,
allowing the Filipino to engage in retail trade, except those who were
already in the business at the time the law was passed
* 1955, the Laurel-Langley Agreement which revised the 1946 Trade
Agreement with the US, known as Bell Trade Act was formalized. Under
this revised agreement, Philippine tariffs on US goods beginning January
1956 willrise rapidly than US tariffs on goods coming from the
Philippines.
* 1957 saw the adoption of various measures to curtail inflationary
pressures as well the adoption of austerity measures in the government
sector. The ceiling for domestic bond issues were reduced and the
government cut expenditures to bring down the level of total
spending to more manageable proportions
9. To consolidate the overall stabilization program was drawn up in March
1959. The most important features of the plan which subsequently
authorized by Congress was the imposition of a margin levy of not more
than 40% on the sale of foreign exchange by the Central Bank. The law
came into effect in July, 1959 with the rate set at 25%.
The tax was expected to achieve three objectives:
(1) to act on the excessive aggregate demand by reducing the disposable
income of individuals and business firms.,
(2) to stabilize fiscal operations by making available a portion of the tax
revenue to reduce the deficit, and
(3) to reduce the pressure on the international reserve by raising the cost
of imports and services purchased abroad.