La Carlota City College

City of La Carlota
–o0o-
Business and Management Department

Module in PROEL 13
2nd Semester, AY 2022-2023

ERLINDA B. DOMINGO, CPA

Contact# : 09192117488
Email Add: lindadomingo@yahool.com
Facebook Account: ERLINDA DOMINGO
Facebook Page: BAM- PROEL 13

I. COURSE TITLE : PROEL 13(PUBLIC FINANCE)

II. NUMBER OF UNITS : 3 UNITS

III. COURSE DESCRIPTION :

The course examines issues central to majority of the most pressing issues in public
affairs: market outcomes, government expenditures programs and taxation; examines the major
strengths and weakness of the market and explore why government involvement is necessary;
examines the models welfare economics use to describe optimal patterns of government expenditure
and taxation. Use the models to analyze real-world problems and programs, and use of both
efficiency and equity criteria to evaluate many policies and policy proposals.

IV. COURSE OUTCOMES :

At the end of the semester, the students can:

1. explain the importance of public finance

2. discuss the development of public finance in the Philippines
3. learned and discuss theories on government spending
4. explain government budgeting in the Philippines
5. discuss tax principles, theories, and policies

V. COURSE OUTLINE :

A. PRELIM PERIOD
MODULE 1: CONCEPT OF PUBLIC FINANCE
- What is and why the need to study public finance
- Scope and functions of Public Finance
- Functions of Public Finance
- Private versus Public Finance
- Concept of Finance
- Public Finance and the changing role of government

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 B. MIDTERM PERIOD
MODULE 2.- PUBLIC FINANCE CYCLE
- Formulation of Fiscal Policy
- Generation of Revenue from Taxation and other Sources
- Sources of Tax Revenue
- Major Classes of Tax Revenue
- Expenditure of Funds through National Budget
- Public Borrowings
- Accountability
- Types of corruption in the Local Government
C. SEMI-FINAL PERIOD
MODULE 3.- DEFICIT FINANCING
- Budget Deficit
- Formula of Budget Deficit
- Budget Deficit Financing Identity
- Role of Deficit Financing
- Effects of Deficit Financing
- Public Debt Management
- IMF Guidelines for Debt
D. FINAL PERIOD
MODULE 4.- PUBLIC FINANCE IN DEVELOPMENT

- Public Finance in Developing Countries

- The Role of Public Finance in Development
- Broad Directions which Public Finance Policies Should Strive to
Pursue

VI. CONTENT DISCUSSION :

MODULE 1 DISCUSSION : CONCEPT OF PUBLIC FINANCE

ORIGIN
Public finance is one of the oldest branches of the economic theory. In fact, public finance was
born when the concept of state (government) was born. Public finance came into existence mainly to
satisfy social want, human wants, individual wants(Food, clothing, shelter, etc.) and social
wants(protection of society against external enemies & anti social elements, basic infrastructure etc. )

DEFINITION

1. Public Finance is concerned with the income and expenditure of public authorities and with the
adjustment of one to the other
2. The complex of problems that center around the revenue expenditure process of the government is
referred to as public finance.
3. Public finance deals with the finances of the public in an organized group under the institutions of
government.

SCOPE OF PUBLIC FINANCE

1.Public Revenue
The public revenue refers to the income of the government. Broadly the income of the
government can be divided into tax revenue and non-tax revenue. This part explains the types of taxes,

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the effect on taxes on the economy & the people, the advantages & disadvantage of taxes etc. It also
includes the study of the sources of non-tax revenue of the government.

2. Public Expenditure
This part of public finance explains the objectives of public expenditure, the classification of
public expenditure, causes of increase in public expenditure, effects of spending money in different ways,
etc. This part also explains how the government can influence the production of goods and services,
through the instruments of public expenditure.

3. Public Debt
This part explains the classification of public debt, burden of public debt and the causes
responsible for growth of public debt in modern economies. It also explains why the government requires
loans, debt management and the methods used by the government for debt redemption.

4. Financial administration
This is a more practical part of public finance. It studies the procedure to be followed by the
government in imposing taxes, collecting the taxes, spending the collected money and getting the
government income & expenditure audited by the competent authority. It also explains how the
government adjusts the two sides of public finance to each other.

5. Economic stability & growth

This part of public finance takes us to the objectives of public finance namely, to maintain
internal and external economic stability and to expedite the rate of economic growth. The government has
to maintain the balance between stability and economic growth.

FUNCTIONS OF PUBLIC FINANCE

Public Finance is defined as a study of income and expenditure of the government. Naturally the
functions of public finance are similar to functions of the government. the functions of public finance
have also grown, multiplied and diversified over a long period. They can be presented as follows:
Defense, Maintenance of law and order, Economic growth, Reducing inequalities. Reducing regional
inequalities

1. Defense
The first and foremost responsibility of the state (government) has been to provide
protection to the people against the aggression of other countries or extremists or other groups
of people. Even today the ministry of defense is the one of the most important and high profile
ministries of any government. Avery large part of the budget is earmarked for the defense of
the country.

2. Maintenance of law and order-

Any community is characterized by the presence of the some anti-social elements. They
use other means like committing thefts, smuggling, contract killing etc. and earn their income.
Hence it is the responsibility of the government to protect the community against such anti-
social elements.

3. Economic growth-
The responsibility of a modern state is not only to preserve the social order but to
improve it in all ways. In less developed economies, the economic growth of the country is
given top priority after defense. Public finance has to provide adequate resources for investing
in different sectors and bringing about economic growth.

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 4.Reducing inequalities-
Extreme inequalities are bad. They give rise to social unrest, revolutions and bloodshed.
Hence one of the functions of public finance is to reduce inequalities. This can be done by
charging higher taxes to people with high income and providing aid to people with lower
incomes in the form of free or subsidized food, free houses, medical aid, education etc.
5. Reducing regional inequality-
In a vast country like India, some parts are more developed and some parts are less
developed. Regional inequalities give rise to several problems such as large scale migrations
from less developed parts to more development parts. Public finance helps to reduce regional
inequalities by collecting more taxes from developed states and spending it on less developed
states.

SIMILARITY BETWEEN PUBLIC AND PRIVATE FINANCE

1. The Economic Problem-Both, an individual and a community face the economic problem. Both,
the society as well as an individual have to arrange the wants in an order of importance and
satisfy them. An individual would first pay attention to acquiring food, clothing and shelter. The
society, under the leadership of the government has to pay attention first to defense of the
country, maintenance of law and order and then go to satisfy the other wants in order of
importance.
2. The aim-The aim of the government is to get maximum satisfaction to the community.
Similarly the aim of an individual in earning the income and spending it, is to get maximum
satisfaction for himself and his family members.
3. The procedure to achieve the aim-With the objective of getting maximum satisfaction from
the limited resources available, the government distributes its income on different items of
expenditure in such a way that the marginal utility of money spent on different items to the
community is equal. An individual also follows the same procedure in distribution of his income.
Thus, the law of equi-marginal utility enables both the government and the individual to obtain
maximum satisfaction from the total amount of money spent.
4. Balancing income & expenditure-The income and expenditure of an individual need not
balance every month. Similarly, the income and expenditure of the government need not balance
every year.

DIFFERENCES BETWEEN PUBLIC AND PRIVATE FINANCE

1. Sources of income-The government can depend upon taxation, borrowings and creation of new
money as sources of its income. An individual depends upon salary, rent, interest, profit which
are sources of his income. He can also take a loan. The government can print paper currency
against certain assets and use that currency as its income. This source is not open to an individual.
2. Source and size of borrowing-The government can take an internal loan i.e. loan from its own
citizens or an external loan i.e. loan from some other state or citizens of some other states. An
individual can take a loan from some other individuals. Further, the capacity of the government to
borrow is much larger than the capacity of any individual to borrow. Also, the government can
get loans more easily and on easy terms and conditions as compared to an individual.
3. Balancing income and expenditure- Government – Adjusts income as per the expenditure while
an Individual – Adjusts expenditure as per the income
4. Budget principle and market principle-The government does not enquire about getting a
proper price for its services. Whether the cost of service is covered or not covered, the
government goes on rendering the services to the citizens if they are necessary. An individual is
guided by the market principle. He would produce a commodity or a service and render it to
someone else only if the price received covers the cost of production.
5. Perspective-A society has a very long life, it is almost eternal. Therefore, the government can
take a very long term view of its finances. It may incur some expenditure at present even though,

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 the returns may be reaped after a considerably long time. The vision of an individual is limited. A
person can look to at the most the next generation but not beyond that.
6. Motive-The government works for social welfare. It takes up a particular project without
consideration of profit or loss to itself. An individual looks at the profit motive. A person
produces a commodity or a service and sells it only if the price earned covers the cost of
production and leaves something for the producer of the service.

CONCEPT OF FINANCE:

1. SOUND FINANCE
The concept of sound finance was based upon the belief that in economic
activities, the private sector is always more efficient and careful than the public sector. The private
sector is careful about keeping the cost of production at the lowest level. The private sector uses
resources most efficiently and effectively. The private sector can earn a profit only if the
commodity is produced at the lowest cost and is sold at the lowest price. Hence, it was maintained
that government should not interfere in the working of the economy which was called the market
economy.
SOUND FINANCE -This belief gave rise to following principles:
The government should undertake only two functions namely: the defense of the country
and maintenance of law & order. Government should keep its expenditure at its lowest level. The
government budget should always be balanced. A deficit budget should be avoided at any cost.
The only objective of public finance is to satisfy the wants of the state.

2. FUNCTIONAL FINANCE
The concept of sound finance was strongly challenged by the Great Depression, The
principles of sound finance failed to provide a solution to the problems associated with the Great
Depression. Economists like J. M. Keynes and A. P. Learner tried to find out some new principles
which would help the countries caught in the Great Depression. Principles evolved out of
thinking of these people during the Great Depression is together called as functional finance.
FUNCTIONAL FINANCE- gave rise to following principles:
During inflation, a surplus budget is recommended. Deficit budget is recommended
during depression. Public finance has to discharge several responsibilities like developing
infrastructure, setting up basic and heavy industries etc. Public finance can also be used for social
purposes such as removal of poverty, reducing inequality and reducing regional imbalance.

REDISTRIBUTIVE TAXATION
Inequality exists in every society. To a certain level inequalities are necessary because then it acts
as an incentive for people to work harder. To a certain level inequalities are necessary because then it acts
as an incentive for people to work harder. However, extreme inequalities are bad. They give rise to social
unrest, revolutions and bloodshed. Hence, it is the responsibility of the government to reduce inequalities
by re-distributing income in favor of the poor. One of the method to reduce inequality is by way of
taxation.

TAXATION AS A TOOL OF REDUCING INEQUALITY

The direct taxes are more useful in reducing inequalities in income & wealth and re-distribute
income in favor of the poor. The Indirect taxes are taxes on goods. The poor people spend a larger part of
their incomes on consumption and save a smaller part. Therefore the taxes on goods fall more heavily on
the poorer section of the community.

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For re-distributing incomes and wealth, the direct taxes are imposed at progressive rates. In Indirect taxes
like the excise duty and the customs duty, the necessaries of life like food grains, cheaper clothing,
cheaper footwear are exempted from the indirect taxes. The costly durable consumer goods like
automobiles, expensive TV, watches, cameras etc. are subject to heavy taxes.

TAXATION AS ANTI-INFLATIONARY MEASURE

Inflation is defined as a fall in the value of money i.e. a rise in the price level. In simple words,
commodities which were available at Php 100. 00 are now available at Php 150 0r more.
How inflation takes place? Inflation takes place when people have more purchasing power in their hands.
They show a tendency to spend more. As a result, there is an increase in demand. So when the
expenditure rises, the demand also rises. If the rising demand is not balanced by a rise in supply, the price
level shows a tendency to rise. Taxation as a tool of controlling inflation During inflation, the government
increases the rates of the direct taxes like the income tax wealth tax etc. When the income is reduced, the
expenditure is reduced. When expenditure is reduced, the demand is reduced. A cut in demand is helpful
in preventing a rise in prices and bringing the price level down to a lower level.
Taxation as a tool of controlling inflation- For controlling inflation the government reduces the
taxes on raw materials and on intermediate goods. Government imposes heavy taxes on exports. The
demand for exported goods falls in the foreign countries and thus the exports fall. This leads to an
increase in internal supply and as a result the price level comes down.

CONCEPT OF MAXIMUM SOCIAL ADVANTAGE

The concept of sound finance maintained that government expenditure should be kept at the
lowest level. However, this concept was criticized by various economists. It was maintained that the
effect of public expenditure is more important and not its size. The aim of all government activities is to
increase the welfare of the community. Public finance is an instrument which can help the government in
increasing the welfare of the community. So that public finance which creates “Maximum Social
Advantage” is good.

CONCEPT OF MAXIMUM SOCIAL ADVANTAGE

 THE PROCESS
Public finance has two sides namely taxation (i.e. public revenue) and public
expenditure. A tax is a compulsory payment to be made by an individual to the government
and for which the tax-payer does not get any direct and proportionate return. The money
taken away by the government is spent by it on satisfying collective wants such as defense
of the country, maintenance of law and order, economic development and social welfare
etc. This expenditure creates some satisfaction or utility on the part of the community.

 BALANCE BETWEEN SATISFACTION AND DIS-SATISFACTION

Satisfaction and Dis-satisfaction can be compared to each other and can be
balanced with each other. The dis-utility created by taxation can be balanced against utility
created by public expenditure.

PUBLIC EXPENDITURE=SATISFACTION /TAXATION=SATISFACTION

 MARGINAL PRINCIPLE
A comparison between sacrifice and satisfaction can be made by using the
marginal principle. We can take the sacrifice and benefit separately. The government uses
the marginal principle for ensuring that the total benefit derived by the community from
different items of public expenditure should be maximum. This is possible when the
marginal social benefit derived from different items of public expenditure is equal.

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  MARGINAL SOCIAL SACRIFICE
As a person or the community pays more and more units of money in the form
of taxes, every additional rupee paid imposes more and more sacrifice on the community.
This is derived from the principle of Diminishing Marginal Utility. When a person pays
more and more money, the marginal dis-utility imposed upon him is higher and higher.

 MARGINAL SOCIAL BENEFIT

As the government spends more and more units of money, the utility derived by
the community from every additional rupee spent by the government is less and less. It is
subject to the principle of Diminishing Marginal Utility.

 BALANCE BETWEEN MARGINAL SOCIAL BENEFIT AND MARGINAL SOCIAL

SACRIFICE
The government has to balance the effects of taxation and public expenditure at
every money collected and spent. At a particular money collected and spent, the MSB
becomes equal to MSS. This is the point where the net social benefit (Social Benefit -
Social Sacrifice) is the maximum.

 PUBLIC EXPENDITURE AND LAW OF SUBSTITUTION

The government distributes its income on different items in such a way that the
community gets maximum benefit. Similarly the government imposes different taxes in
such a way that the social sacrifice suffered by the community should be the minimum.

 TAXATION AND LAW OF SUBSTITUTION

The government has to collect a certain amount of money through taxes. The
government can use different taxes. The total amount is collected through different taxes in
such a way that the marginal sacrifice imposed by different taxes on community is equal. If
the government wants to collect a total amount of 4- through taxes, it will collect ` 3-
through Tax ‘A’ and 1 through Tax ‘B’.

RULES FOR IMPLEMENTING MAXIMUM SOCIAL ADVANTAGE

The total amount of taxation and public expenditure are arranged in such a way that the Marginal
Social Benefit of public expenditure is equal to Marginal Social Sacrifice of taxation. MSB = MSS. The
total amount of public expenditure is distributed over different items in such a way that the marginal
social benefit derived from all of them should be equal. The different taxes should be arranged in such a
way that the Marginal Social Sacrifice of all of them should be equal.

EVALUATION OF PRINCIPLE OF MSA

1. Not measurable -The principle of Maximum Social Benefit is developed on the assumption
that the Marginal Social Sacrifice of taxation and Marginal Social Benefit of public
expenditure are measurable in quantity. In practice, they are not measurable.

2. Inevitable expense-Every time the government imposes a tax or spends public money, it is
not possible to compare sacrifice imposed on the community and benefit derived by the
community. Certain expenses like expenses on defense, maintenance of law and order have to
be incurred without social benefit. Small units. The application of marginal principle assumes
that taxation and public expenditure can be increased by small units. In practice, it is not
possible to increase them by small units. They are imposed and increased in lumpy amounts.

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 MODULE 2 DISCUSION : PUBLIC FINANCE CYCLE

Public Finance
Refers to the income and outgo of the governments in the pursuit of national objectives.
It involves the inflow of financial resources in the form of taxes and other revenues, and the outflow of
such resources in the form of expenditure to finance goods and services.

A. Formulation of Fiscal Policy

Fiscal Policy refers to policies on taxation, and other revenue, expenditure, and borrowings which
is intended to promote the stabilization and development of the economy. •Now a days, “Fiscal and
Monetary Policy” is used as a single concept though it has a different aspect of economic policy but have
related impact.The formulation of fiscal and monetary policy made a huge part of economic and social
development but not limited to socio-cultural and political.

B. Generation of revenue from taxation and other sources

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 National Government.
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.
Tax Revenue ◦Is the income that is gained by governments through taxation.

Two Sources of Tax Revenue:

 Direct Taxes
 Indirect Taxes

Direct Taxes- generally means a tax paid directly to the government by the persons on whom it is
imposed

Sources of Direct tax:

 Securities Transaction Tax
 Interest Tax
 Wealth Tax
 Corporate Tax
 Income Tax

Merits of direct Tax

 Anti-inflationary
 Relatively Elastic
 Creates Public Consciousness
 Equity Certainty

Demerits of Direct Taxes:

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  Tax Evasion
 Inconvenient
 Narrow Coverage
 Affects Capital Formation
 Effects on Willingness And Ability to work

Indirect Taxes -Is one in which the burden can be shifted to others.
 The Tax payers is not the tax bearer.
 The impact and incidence of indirect taxes are on different persons.
 An indirect tax is levied on and collected from a persons who manages to pass it on to some other
person or persons on whom the real burden of tax falls. For e.g. commodity taxes or sales tax etc.
are indirect Taxes.

Sources of Indirect Taxes:

 Central Excise Duties
 Customs Duties
 Service Tax
 Other Taxes and Duties
 Taxes of Union Territories

Merits of Indirect Taxes:

 Universality
 Influence on pattern of Production
 Wide Coverage:
 May not affect Motivation to work and Save
 Social Welfare

Demerits of Indirect Taxes

 High Cost of Collection
 Increase Income Inequalities
 Lack of Social Consciousness
 Affects Consumption

 Inflationary Non-tax Revenues refer to all other impositions or collections of the government in
exchange for services rendered, assets conveyed, penalties imposed, etc.

Major Classes of tax Revenues

 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 wealth 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.

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C. Expenditures of Funds through the National Budget
National Budget -A budget is a plan of financial operation composed of estimate or proposed
expenditure for a given period or purposed and the proposed means of financing them.
The principal activities of government are normally controlled by a system Budget.

Budgetary Procedures:
1. Preparation and Presentation ◦ This phase covers the estimation, determination and
translation of government revenues, priorities and activities. ◦ Government entities prepare
their budgets for the year to be submitted to the Department of Budget and Management
(DBM) for review. ◦ The DBM then consolidate all budgets to form a government wide3
budgeting estimate, the ‘NATIONAL BUDGET’. ◦ This shall be submitted to the president
for final approval.
2. Budget authorization and Legislation ◦Involves the submission of the national government
budget to the legislative body for review, deliberation, and formulation of an appropriation
bill to be forwarded to the president for approval and signature.
2. Budget Execution and Operation -Covers the implementation of the various operational
aspect of the budget. Such as release of allotments to the various agencies, the continuing
review of the fiscal position, and other related activities.
Involves the evaluation of expenditures and performance against the predetermined
budget.
Obligation incurred, personnel used and work accomplished are compared with the plans and
goals of various agencies submitted at the time their respective budget is prepared.
Accomplished by the heads of the various agencies who review the performance of
their respective agency; And the commission on Audit (COA) who examines the operations
of the agency.

Government Budgeting:
A budget deficit is incurred when expenditures exceed taxes and other revenues for a year.
And a budget surplus occurs when all taxes and other revenues exceed expenditures for a year. Though
unbalanced means both surplus or deficit budget, a number of economists refer to deficit budget as
unbalanced budget.
Keynes has supported this principle arguing that along with the higher government expenditure,
there will be multiplier effect in the economy.

Elements of Budget:
1. Close to reality- despite being an estimate, it should be based on reality primarily on the basis of
the experience of the previous year.
2. Simple and obvious- since this is a public document, all who are interested should easily get the
required information after looking on it.
3. Flexibility- not only income and expenditure estimates are there but also the policies and
programs of the government. Thus, should have the quality of flexibility.
4. Single fund- a single fund of the government should be established there for all revenues and
expenditures.
5. Extensive- should be in detail about each item of revenue and expenditure.
6. Publicity- it is made public and all the stakeholders are free to comment on this
7. Annularity- prepared for one year fiscal year.

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D. Public Borrowings
Public 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.
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 benefits.
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: ◦ Purely financial, e,i. loans or advances extended to the Philippine government, its
branches, agencies and instrumentalities;
Services rendered or goods delivered to the government for which certificates, notes or other
evidence of indebtedness have been issued to the creditor; and
For external debt such as claims of foreign entities, securities held in trust, non-bonded debts and
obligations of the Philippines government to the International Monetary Fund (IMF).

E. Accountability
Functions of COA
The Commission has the power, authority and duty to examine, audit and settle all accounts and
expenditures of the funds and properties of the Philippine government. Towards that end, it has the
exclusive authority to define the scope, techniques and methods of its auditing and examination
procedures. It also may prevent and disallow irregular, unnecessary, excessive, extravagant or
unconscionable expenditures, or uses of government funds and properties.

Role of COA
1. Examine, audit and settle all accounts pertaining to the revenue and receipts of, and expenditures
or uses of funds and property owned or held in trust by, or pertaining to, the government.
2. Promulgate accounting and auditing rules and regulations including those for the prevention and
disallowance of irregular, unnecessary, excessive, extravagant or unconscionable expenditures, or
uses of government funds and properties
3. Submit annual reports to the President and the Congress on the financial condition and operation
of the government.
4. Recommend measures to improve the efficiency and effectiveness of government operations
5. Keep the general accounts of government and preserve the vouchers and supporting papers
pertaining thereto..
6. Decide any case brought before it within 60 days
7. Performs such other duties and functions as may be provided by law.
(Article IX-D of the 1987 Philippine Constitution)
The Philippine Constitution emphasizes the importance of accountability in the government. Article XI
simply and bluntly begins: “Public office is a public trust,” before it adds that officials and employees
should serve the people with “responsibility, integrity, loyalty and efficiency.”
In the government budget cycle, accountability is laid down by the need for government agencies and
departments submit to submit quarterly and monthly income statements; statements of allotment,
obligations and balances along with other financial reports and documents for audit - a formal process
whereby the authenticity, accuracy and reliability of financial accounts or transactions are checked and
approved.

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There are several kinds of audit:
1. Financial Auditing wherein financial transactions and accounts are checked to ensure the
submitting government agency has complied with the rules and regulations, specifically the pre-
agreed and govern
2. Performance Auditing whereby one is looking at the systems of the agency to assess it has
delivered on its institutional purpose and mandate by linking the budgets with results or results-
based budgets.
3. Internal audit, as the name suggests, an internal check on agency systems and processes.
4. External Auditing involves an outside audit body being brought in to look at the agency.
5. Pre-auditing refers to auditing by agencies before approval of transactions while post- auditing is
auditing by an independent body after.

GOVERNMENT ACCOUNTABILITY AGENCIES

The Philippine government has agencies mandated to ensure accountability and transparency on
its overall operations. These agencies are: The Office of the Ombudsman, Sandiganbayan,
Presidential Anti-Graft Commission, the Civil Service Commission and primarily, for the purpose
of this paper, the Commission on Audit.

 Office of the Ombudsman-The Office of the Ombudsman (Ombudsman) is mandated by the

Constitution as “protectors of the people who shall act promptly on complaints filed against
officers or employees of the government including members of the Cabinet, local government
units and government-owned and controlled corporations and enforce their administrative, civil
and criminal liability in every case where the evidence warrants in order to promote efficient
service by the government to the people.” The Ombudsman does not only cover officials and
employees of the government, but also private individuals who have participated or “in
conspiracy” with them in the filed complaints.

 The Sandiganbayan, or the government’s anti-graft court, is mandated by the 1973 and 1987
Constitutions. It covers criminal and civil cases against graft and corrupt practices and other
offenses committed by public officers and employees with Salary Grade 27 and above, including
those in local government units and government-owned or controlled corporations, which are
related to their official duties as determined by law.

 Presidential Anti-Graft Commission (PAGC) is mandated by Executive Order No. 12 to assist

the President in the campaign against graft and corruption. It investigates and conducts hearings
of administrative cases and complaints against Presidential appointees in the Executive Branch
with Salary Grades 26 and higher including members of the Armed Forces of the Philippines and
Philippine National Police of directed by the President, government-owned and controlled
corporations and public officers, employees and private persons in conspiracy with alleged public
officials.

 Civil Service Commission (CSC) is the central personnel agency of the government and is
tasked in the recruitment, building, maintenance and retention of a highly-competent and
professional workforce. It is also one of the three independent commissions established by the
Constitution with adjudicative powers to render final disputes and personnel actions on Civil
Service. It covers all national government agencies, local government units and government-
owned and -controlled corporations.

 Commission on Audit-The Commission on Audit (COA) is the constitutional commission

mandated to be the supreme audit institution of the government. It has jurisdiction over national

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 government agencies, local government units, government-owned and controlled corporations
and non-government organizations receiving benefits and subsidies from the government.

Characteristics of Corruption
1. Corruption always involves more than one person.
2. On the whole, it involves secrecy.
3. Entails mutual obligation and benefit.
4. Corrupt practices are usually given some legal justification.
5. It involves deception
6. In any form, it is a betrayal of the public trust.
7. It rests on a contradictory dual function. It violates the duty and responsibility within the civic
order

The Philippine Setting

 Corruption in the Philippines is endemic and metastatic
 Income side: use of government power to extort money.
 Expenditure side: malversation of public funds.

Some Dynamics:
 It encourages corrupt high ranking officials to remain corrupt.
 At the lower level, it frustrates younger officials
 The problem is so entrenched that it creates a vicious cycle with various nuances.

Corruption
Philippines suffers from widespread corruption, means of corruption include graft, bribery,
embezzlement, backdoor deals, nepotism, and patronage.
According to a World Bank study in 2006, corruption in the Philippines is considered to be the
worst among East Asia’s leading economies and the country has sunk even lower among those seen to be
lagging in governance reforms. The 2009 Corruption Perceptions Index published by global watchdog
Transparency International, showed that the situation in the country had improved slightly but still
remained serious.
The Philippines ranked 3rd[citation needed] among 180 countries included in the index, up from
its previous 141st ranking in 2008. The nation scored 2.4 in the TI index, compared to 2.3 in 2008, which
ranked it equal to Pakistan, Bangladesh and the Baltic state of Belarus.
Corruption exists in all levels of the government, especially among high-level civil servants,
according to the US Department of State Investment Climate Statement 2013. Companies generally have
little confidence in the Philippine judicial system, and this is due to the allegedly incompetent court
personnel, corruption and long delays of court cases.
As of 2012, the Philippines came in at 105 with a 3.4 CPI in Transparency International's list that
ranks 176 (tied with Algeria, Armenia, Bolivia, Gambia, Kosovo, Mali, and Mexico), countries and
territories based on how corrupt their public sector is perceived to be.
This is better than the Philippines' 129th out of 178,ranking in 2011 with a 2.6 CPI, in
Transparency International's list. The CPI score indicates the perceived level of public sector corruption
on a scale of 0 - 10, where 0 means that a country is perceived as highly corrupt and 10 means that a
country is perceived as very clean. Transparency International-Philippines said some of the factors that
contributed to the Philippines' (2.6) slight jump are the improvement in government service, and cutting
red tape.
The Philippines' corruption further declined in 2014 upgrading its ranking on Transparency.org CPI from
94th to 85th in 2013 and 2014, respectively.
There are several types of political corruption that occur in local government. Some are more
common than others, and some are more prevalent to local governments than to larger segments of

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government. Local governments may be more susceptible to corruption because interactions between
private individuals and officials happen at greater levels of intimacy and with more frequency at more
decentralized levels.

Types of Corruption found in Local Government

1. Embezzlement is the illegal taking or appropriation of money or property that has been entrusted
to a person but is actually owned by another. In political terms this is called graft which is when a
political office holder unlawfully uses public funds for personal purposes.
2. Extortion is threatening or inflicting harm to a person, their reputation, or their property in order
to unjustly obtain money, actions, services, or other goods from that person. Blackmail is a form
of extortion. Bribery is the offering of something which is most often money but can also be
goods or services in order to gain an unfair advantage. Common advantages can be to sway a
person’s opinion, action, or decision, reduce amounts fees collected, speed up a government
grants, or change outcomes of legal processes.
3. Patronage systems consist of the granting favors, contracts, or appointments to positions by a
local public office holder or candidate for a political office in return for political support. Many
times patronage is used to gain support and votes in elections or in passing legislation. Patronage
systems disregard the formal rules of a local government and use personal instead of formalized
channels to gain an advantage.
4. Nepotism is the practice or inclination to favor a group or person who is a relative when giving
promotions, jobs, raises, and other benefits to employees. This is often based on the concept of
familism which is believing that a person must always respect and favor family in all situations
including those pertaining to politics and business. This leads some political officials to give
privileges and positions of authority to relatives based on relationships and regardless of their
actual abilities.

The government is accused of bias in fighting corruption according to the Economists. THE
Philippine police had clapped two senators in jail by June 26th, 2014. Ramon “Bong” Revilla, son of an
ex-senator, and Jose “Jinggoy” Estrada, the son of an ex-president, were the first senators to be arrested.
The third facing prosecution is Juan Ponce “Johnny” Enrile, a veteran of President Ferdinand Marcos’s
regime. If convicted, they may face life imprisonment. All are members of the opposition. They are
accused of benefiting from the suspected embezzlement of billions of pesos from the Priority
Development Assistance Fund, known as the pork barrel. Each year, the government used to give each of
the 24 senators 200m pesos ($4.6m) from the pork barrel, and each of the 290 congressmen 70m pesos.
They were meant to spend it on development projects. The effect was to give political dynasties the
wherewithal to buy the loyalty of generations of voters, and to give presidents the wherewithal to buy the
loyalty of the political clans. Last year the Supreme Court ruled the fund illegal, but only after a
newspaper exposed a scheme to funnel money from it to bogus NGOs, which would then give kickbacks
to politicians. Investigations cast suspicion on dozens of politicians, including some in government.

Anti-Corruption
The Coalition Against Corruption (CAC) is an alliance of the academe, business sector, civil
society organizations, and Church that fights corruption. Launched on 21 September 2004, its mission is
to implement and support counter- corruption projects in the area of procurement reforms and delivery of
essential public services. CAC’s goals are to strengthen public participation in governance and to ensure
proper use of public funds. The projects supported by CAC include government procurement monitoring,
textbook and medicine monitoring, internal revenue allotment (of barangays) monitoring, Priority
Development Assistance Fund (Pork Barrel) monitoring, catching the big fish, and lifestyle checks on
public officials.

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 MODULE 3 DISCUSSION: DEFICIT FINANCING

Budget deficit is the annual difference between government outlays and receipts (g-t).
The government budget constraint identifies financing options open to the government: g= t+∆b +∆mb
Where,
G=total government expenditure.
T=total government revenue from taxes, charges, and sales.
∆b=change in public debt
∆bm= change in monetary base (reserve money

Deficit financing g-t= ∆b +∆mb

 The idea is that if the government spends more than the revenue either it should borrow or create
base money or do both. If the government is in surplus, it will either retire debt or contract the
monetary expansion.
 Borrowing from the domestic sector can have also crowding out, the idea that increase in
government purchases ultimately cause reductions in private consumption or investment.
 Monetary expansion to finance the government deficit can have inflationary implications.
 Government borrowing can be made raising through internal debt or external debt.

BUDGET DEFICIT FINANCING IDENTITY:

budget deficit=domestic borrowing+ foreign borrowing+ printing money + arrears

 Withdrawal of past accumulated cash balances by the government

 Borrowing from public
 Borrowing from central bank and other banks
 Issuing new currency
 External loan
 Forced savings

Why there is the need of deficit financing?

(ROLE OF DEFICIT FINANCING):

 To augment rate of net investment (particularly in developing countries, private sector is not
proactive to take investment initiative because of the various constraints, thus there is the large
role of the government and has to )
 Development of economic and social overheads
 To control economic depression
 Reconstruction of the economy
 Augment community savings
 Incentive to private investment
 Utilization of the natural resources
 War financing

Effects of deficit financing

 Inflation: expansion of money supply and expansion of credit leads to inflation.
 Crowding out of the private investment: excessive reliance on public borrowing creates distortion
on investment of the private sector and may also cause high interest, additional disincentive for
investment.

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  Balance of payments difficulties: as monetary income of the people rise, and also because of the
rise in government expenditure, imports may rise causing an adverse effect on balance of
payments
 Increases debt servicing: causing high government expenditure and pushes country towards
vicious circle of debt and deficit. And also challenges long term debt sustainability.
 Arrears: past accumulated debt if cannot be repaid because of the increased deficit, it causes
inefficiency and loss of creditability.
 Rises tax burden to finance debt service, which creates distortions in the behavior of economic
agents.

PUBLIC DEBT MANAGEMENT

Public debt management, which is also called sovereign debt management is the process of
establishing and executing a strategy for managing the government's debt in order to raise the required
amount of funding, achieve its risk and cost objectives, and to meet any other sovereign debt management
goals the government may have set, such as developing and maintaining an efficient market for
government securities.

Internal Debt Management

Objectives:
1. To influence the size and maturity of debt
2. To influence the appropriate pattern of debt
3. To affect the type of holders of debt
4. To limit debt service cost
5. To create capital market
6. To give priority to domestic over foreign issues on domestic market
7. To give priority to public sector borrowing

External debt management

Key elements:
1. Policy guidelines on appropriate level, terms and purpose for foreign borrowing.
2. Reorganization of the existing stock of external debt so as to maintain an optimum level of debt
structure.
3. Monitoring the operations relating to loan commitments, disbursements, and debt servicing on all
loans.
4. accurately recording and maintaining loan by loan information.
5. Preparing projections of debt and debt service levels to facilitate domestic cost budgeting and
foreign exchange management.
6. Liaison with various creditors, keeping them informed of macroeconomic developments.
7. Regular portfolio review on a sector and/or creditor basis

IMF GUIDELINES FOR PUBLIC DEBT MANAGEMENT

1. Objectives and Coordination
 Objectives: the main objective of public debt management is to ensure that the government's
financing needs and its payment obligations are met at the lowest possible cost over the medium
to long run, consistent with a prudent degree of risk
 Scope: debt management should encompass the main financial obligations over which the central
government exercises control.
 Coordination with monetary and fiscal policies
2. Transparency and accountability

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  Clarity of roles, responsibilities and objectives of financial agencies responsible for debt
management
 Open process for formulating and reporting of debt management policies.
 Accountability and assurances of integrity by agencies responsible for debt management public
availability of information on debt management policies.
 Accountability and assurances of integrity by agencies responsible for debt management
3. Institutional framework
 Governance
 Management of internal operations
 Public availability of information on debt management policies
 Accountability and assurances of integrity by agencies responsible for debt management.
4. Debt management strategy
 The risks inherent in the structure of the government's debt should be carefully monitored and
evaluated. These risks should be mitigated to the extent feasible by modifying the debt structure,
taking into account the cost of doing so.
 in order to help guide borrowing decisions and reduce the government's risk, debt managers
should consider the financial and other risk characteristics of the government's cash flows
 Debt managers should carefully assess and manage the risks associated with foreign-currency and
short-term or floating rate debt.
5. Risk management framework
 A framework should be developed to enable debt managers to identify and manage the trade-offs
between expected cost and risk in the government debt portfolio.
 To assess risk, debt managers should regularly conduct stress tests of the debt portfolio on the
basis of the economic and financial shocks to which the government-- and the country more
generally--are potentially exposed.
6. Development and maintenance of an efficient market for government securities
 Portfolio diversification and instruments: the government should strive to achieve a broad
investor base for its domestic and foreign obligations, with due regard to cost and risk, and should
treat investors equitably
 Primary Market : debt management operations in the primary market should be transparent and
predictable. To the extent possible, debt issuance should use market-based mechanisms, including
competitive auctions and syndications.
 Secondary Market: governments and Central Banks should promote the development of resilient
secondary markets that can function effectively under a wide range of market conditions.
 The systems used to settle and clear financial market transactions involving government
securities should reflect sound practice

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 MODULE 4 DISCUSSION: PUBLIC FINANCE IN DEVELOPMENT

Public finance shapes the course of development. It affects aggregate resource use and financing
patterns and, together with monetary and exchange rate policies, influences the balance of payments, the
accumulation of foreign debt, and the rates of inflation, interest, and exchange. Public spending, taxes,
user charges, and borrowing also affect the behavior of producers and consumers and influence the
distribution of wealth and income in an economy. Balance of payments crises and foreign debt problems
are at least aggravated, and are often caused, by imprudent fiscal policy. Their solution almost invariably
involves some combination of cutting public spending and raising additional revenue, thus freeing
resources for exports and debt service. Careless fiscal austerity can lead to prolonged recession, however,
and can place a disproportionately heavy burden on the poor. For this reason the structural aspects of
public finance policy, how spending is allocated and revenue raised matter as much as the overall
macroeconomic balance.

This lesson examines public finance in developing countries especially our country against the
backdrop of today's uncertain economic outlook. The main concern is how appropriate public finance
policies can improve the quality of government. The discussion is timely for two reasons. First, budget
deficits and external debts pose a dilemma for many governments: how can they achieve short-term
stabilization without retarding long term development? Second, the perception of government has shifted
during the past decade; where government was once commonly seen as a catalyst of development, many
now think it an obstacle.

Developing countries must continue to reform domestic policies, while the net resource transfers
from the developing countries must be reduced if these countries are to resume sustained economic
growth.

Five Broad Conclusions Emerge on Public Finance in Developing Countries

1. Prudent and stable macroeconomic fiscal management is far preferable to successive phases of
extreme fiscal expansion and contraction.
2. Modest and sustainable fiscal deficits promote growth, while shielding the poor from the heavy
burdens of fiscal austerity.
3. Greater reliance on user charges and simplified, restructured general tax systems can increase
public revenue and reduce economic distortions.
4. Clear priorities and concentration on quality are necessary for efficient and effective public
spending. Priorities tend to emerge more forcefully if decision-makers are aware of their specific
resource constraints and expect to abide by them in planning and budgeting.
5. Autonomous and accountable decentralized public entities, including sub-national levels of
government and state-owned enterprises, can improve the efficiency of both spending and
revenue gathering. But administrative constraints limit the scope for speedy decentralization;
increased private sector involvement in the provision of public services should therefore be
explored wherever feasible.Well-designed public finance policies can be powerful tools for
relieving poverty.

THE ROLE OF PUBLIC FINANCE IN DEVELOPMENT

Many of today's public finance issues have troubled policymakers for centuries how to raise and
allocate public funds effectively while limiting budget deficits and how to delegate authority while
maintaining accurate accounts and financial discipline. The public sector affects the economy not only
through its taxation and spending, but also through interventions such as price controls and licensing.

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Although country experiences vary widely and rigorous assessment is difficult, the public sector now
appears to be as important in developing countries as in the industrial countries. The expanded role of the
public sector carries with it risks and opportunities, however. The risks arise from the ineffective use of
public resources and from the overextension of government into areas that are better left to private
markets. The opportunities arise from the government's power, in principle, to allocate resources
efficiently when markets fail to do so and from its ability to provide relief to those in poverty. It is the
task of public finance to balance the opportunities and the risks, and thus improve the quality of
government.

7 Broad Directions Which Public Finance Policies Should Strive to Pursue.

1. Fiscal policy for stabilization and adjustment - Large fiscal deficits are often at the root of both
external and internal macroeconomic imbalances. External imbalances express themselves as
current account deficits, capital flight, and rapidly expanding external debts. Internal imbalances
take the form of high real interest rates, falling private investment, and rising inflation. Prudent
fiscal policy that is, fiscal deficits consistent with low and stable inflation, a sustainable level of
foreign debt, and a favorable climate for private investment is indispensable to stabilization and
adjustment. Furthermore, reforms in many other areas financial liberalization, currency
devaluation, price deregulation, trade reform, and so on can work only if the fiscal implications
are taken into account.
2. Reforming tax systems- When public deficits need to be reduced, the economic cost of raising
more revenue must be weighed against the cost of cutting public spending. More revenue and less
spending will both be needed as a rule. The temptation in the short term is to rely on ad hoc
increases in revenue because they are administratively and politically convenient. But in many
countries this approach has led to complex and highly distortionary revenue systems that not only
fail to collect sufficient revenue but also damage long-term growth. Most of today's systems
could be restructured to increase yield, reduce distortions, and minimize the burden on the poor.
3. Improving the allocation of public spending -Governments can promote both economic growth
and equity by supplying the physical infrastructure needed for productive private investment and
by providing social services to meet the basic needs and improve the productivity of the
population. But the high cost of raising revenue means that it is vital to set priorities and attain
quality in public spending. Priorities can be set by considering what governments do best and
what markets do best. Governments must provide "public goods" that benefit all citizens, such as
law and order and national defense. They should also be involved in providing goods and services
with large external benefits to society, such as primary education, basic health care, and
immunization programs. Direct investment or regulation is needed to control monopolies caused
by a single source of supply or large returns to scale relative to the size of the market water
supply, sanitation and power, for instance. Finally, government subsidies on goods and services
consumed by the poor are sometimes justified, but, to contain the cost, they should be accurately
targeted.
4. Spending priorities and revenue options in selected sectors - Sectoral perspectives on public
finance highlight the need to consider revenue and spending jointly. Similar problems insufficient
spending on cost effective activities, inefficient public programs, and limited access by the poor
beset current public involvement in education, health, urban services, and rural infrastructure in
many countries. Solving these problems calls for three sorts of public finance reform:
A. redirecting spending toward activities in which government participation is most
critical,
B. increasing the reliance on user and other benefit-related charges to finance such
spending, and
C. decentralizing some public responsibilities to those in closer touch with local needs
and conditions.

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 5. Financing local government- Decentralization is advisable for goods and services that are
regional or local, rather than national, in character, such as water supply and sanitation, transport,
and even some health and education services. In such cases it can increase public accountability
and responsiveness to local preferences. The scope for decentralizing is greatest in urban areas,
but broadening the involvement of rural communities in water supply, irrigation, and rural roads
can also improve the quality of public services.
6. Strengthening public finance through reform of state-owned enterprises - State-owned
enterprises (SOEs) were usually established either to decentralize some key public sector
activities or to move others from the private sector to the public domain. In some developing
countries certain SOEs have succeeded as commercial ventures, contributing to public revenues
and playing important roles in nation-building. In most countries, however, the achievements of
SOEs have fallen short of what was hoped for. Their success has been hampered by a multiplicity
of conflicting objectives and a lack of fiscal discipline.
7. Directions for reform- Prudent budget policies, reduced costs of raising revenue, efficient and
effective public spending, strengthened decentralization in government, and public finance
policies consistent with poverty alleviation

Progress simultaneously on all fronts will be difficult to attain in most countries. Nonetheless, neglect of
any one area can easily lead to problems in the others. A comprehensive approach to public finance
reform is therefore essential to produce consistent policy advice and to implement sustainable reform.

VII. ASSESSMENT :
Assignment/outputs - 20
Quizzes - 20
Periodic Exam - 60
Total - 100%

VIII. REFERENCES :

Handbook in CWTS by Firma Romualdez, Eduardo; Yoingco, Angel; Casem,

Antonio Jr., Philippine Public Finance. GIC Enterprise and Co.,Inc., Manila,
Philippines

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