Where monetary policy left off, fiscal policy takes off to influence income and constmption and leads the economy toward growth and development. Fiscal policy as « tool utilizes government spending and taxation as means to control the economy. However, fiscal policy also has non- economic objectives which may conflict with economic aims. Political aims and a desire toconform to conditions of foreign creditors , may get in the way of economic objectives. Thus, fiscal policy cannot easily be manipu- lated which goes to show that it should go hand in hand with monetary policy. The government is a very important sector of the economy. In areas where the private sector cannot cope effectively, the government's role becomes even more sig- nificant. When private spending is insuf- ficient and national expenditure has to be raised, it is the government that makes up for the private sector's deficiency. The Philippine government is a big spender in the economy. It buys tables, desks, and chairs for use in public schools and government offices. It buys cement in large bulk to build roads and bridges. It buys hundreds of books to put into shelves of public libraries. It purchases art items and antiques for display in museums and art silleries. The extent of government spend- ‘ng in the economy can be seen in its actual budget shall be shown later in the chapter. % The government is also a big borrower. © have read of the extent of public bor- ‘wing made under the past regime. We fare} FISCAL POLICY have also read of recent: administration to secure Joans. Details on actual SOURCES AND PUBLIC FI is taxation (Table 38). pines are collected by agencies: the Bureau of and the Bureau of C by these’ agencies include in individuals and busi‘Table 38 it Revenues, By TYP® "2007 to 2012 (in million pesos) National ‘Tax Revenues ‘Bureaa of Internal Revenue Domest ~Based Net Income & Profits Encise Tax Seles Taxes & License Other Domestic Tax oxy, Doe Stamp Tax ‘Tax Expenditures ‘Travel Tax : Bureau of Customs ow, Tax Expenditures: Other Ofices :sise taxes. Second, a sense that some ‘mment-sponsored capital improve- suld be paid for gradually over the f the investment by those who will be wr ove! pent taxpayers while fh 5 viging benefits. Third, a deliberate use of the pudget to stimulate the economy. * Government borrowing may be under- taken from internal sources such as the Table 39 National Government of which: Allotment to LGUs Interest Payments ‘Tax Expenditures Subsidy Equity Net Lending‘Table 40 National Government Cash Budget ‘2009 to 2013 Revenues 202.9 ‘Expenditures 1,149,001 1,271,022) ‘Surplus/(-)Deficit czas) 68117) Financing ‘Change in Cash Budgetary Non-Budgetary P preliminary results for 2013 (January to June 2013) Source: Bureau of Treasury Social Services 521,446 Economie Services 361,924 Defense 101449 General Public Services 288,001 Net Lending 15,000 Debt Service-Interest Payment 357,090 generation who will have to pay off the public d that even unborn babies debt, inherited from a h Marcos government, It is however in ment engages inGeneral government expenditures which occupy the top Position among the wisous government expenses, consist of {pending connected with the maintenance if the different government subdivisions nd instrumentalities. Salaries of govern- ‘rent officials and employees fall under {his category. Public welfare expenditures gre outlays that benefit the public directly jn the form of aids, donations, and transfer payments, The government also allocates” ‘2 major portion of its budget to facilitate and hasten the development of the nation. It spends money on its corporations, pays salaries of the people employed in these companies, invests capital to earn profits, Taxation: A Tool Taxation as a tool is not just income of the government. It is 4n instrument to manipulate the economy. 7 In periods of inflation, te ‘ffective tool that can be used t ‘excess money in circulation. An i tax rates will lessen the ‘of the people and cause th ‘ase. Unnecessary sp liminated and this To discourageof the goods because they are included in the prices of goods and serviei ‘Taxation is the system of payments that individuals and businesses are required to pay the government. The systems by which a government may impose taxes are pro- gressive, regressive, or proportional. This system shows the relationship between the tax rate and the tax base. The tax rate is the percentage of the tax that has to be paid by the taxpayer. The tax base is the value that is subject to the tax. In a progressive tax system, the tax rate tends to increase with an increase in the tax base. The Philippine income tax is best described as progressive, A look at the individual gross income tax form issued by the BIR shows that after deducting the exemptions, annual net incomes of 2,500 to 5,000 are subject to a tax rate of people according to their a ‘The regressive tax § tax rates are high for low rease with high bases. This cribed as onerous since tho ability to pay are taxed less | people with less ability to more. This system is norm: with indirect taxes. The eas indirect taxes are colle government highly dep has prevented the abol even if it is considerThe demand and supply curv ‘coffee are normal sloping curves. The d ward sloping demand curve repre the quantities of coffee the consi willing to purchase at various p upward sloping supply curve ‘he quantities the suppliers are wupply curve S,, is another tance of 100%, representing Plus tax curve that have to be p attained at price of P16 anit 9f1,500 bottles of coffee. It ez was imposed, the cons with the tax, he pays PZ ders only P5 of the ts this means the se t PS of the tax,quantity of1,250 bottles of coffee, At alo price of #10, only 750 bottles are offei od fo szle, The imposition of the tax res leftward shift of the supply curve, eat the equilibrium price to increase to’ difference between the old price the 750 bottles were offered for "is P10 and the new price P20 re the tax per bottle, The buyer sh the difference between the old rice and the new equilibrium p is P2.50 and this represents ‘hetax burden, The remaining’ ‘ax has to be shouldered by aon for this bigger share the seller is that the deman ‘relatively elastic, which | “reflected in the highly “uve in the graph. Sh ‘high for the buyer he es "ase his quantity pi Seto him it is a non-Price (>) Cumulative % of HouseholdsIn the above figure, we can there is a shorter gap between the. yerfect equality and the Lorenz: ‘imply means that there is Now jnome distribution among the ‘This shorter gap can be attained of government measures such pogressive system of taxation. Fiscal policy may be used by nent to stimulate or depress th mns on whether or m Adopted during the year.. the private sector is hi 4 deficit budget. At pending is excessive infationary, the n ‘futting tax rates ‘creasingEffects of the Budget ‘We have learned that th balanced budget have an exp while the surplus budget economy. We will now see on how this is 59. Consider a budget w amount to P450 billion: spends 480 billion. 1 cit budget since gov exceed tax revenue b deficit is financed be raised from soureLet us ill 9450 billion. collected from the people is sty that would have been channeled ‘onsumption and savings. At an MPC i 30% of P450 billion would have been of 80% irean consumption and 20% would have eh saved. But this will have to be given apsince the money goes instead to tax pay- wwe. Comparing what the government veually earns from its spending with what fPaiven up the taxpayers, we derive the following: hoe Government expenditure of 450 billion income multiplier of 5 i Income given up on tax payments ‘Consumption spending: 80% of 360 billion x income mm ‘ings: 20% of 450 billion = exe between what the govern ‘and what is given up by the government budget is a strong po ‘hatis helpful in manipulating has staved off the worst economic setbacks deficit “by collect ‘nd spending moneyeee following a deficit reduction program over the medium-term in order to achieve fiscal consolidation by 2009, President Arroyo farther notes. For January 2004, the budget deficit amounted to 16.12 billion. In January 2003, the budget deficit was recorded at 13.95 billion, However, revenue collections increased by 4.7% compared to last year, from P50.74 to 53.13 billion. BIR’s collections of 36.54 billion was 6.9% higher than the 34.17 billion col- lected in January 2003, but 4.5% less than. target. On the other hand, BOC collected 9.58 billion, 0.03 billion less than its 2003 collection. Growth Climate Malacafiang explains that government, spending, which reached 69.26 billion — exceeding the January 2003 level of P64.69 billion by P-4.56 billion or 7.0% — was due to higher net lending to government corpo- rations and higher interest payments. “The spending for regular government operations kept within reasonable levels under the reenacted 2003 budget,” says Budget Secretary Emilia Boneodin. President Arroyo notes the efforts to curb the budget deficit and inflation im- proved the business climate and fueled growth. “Real GDP grew by 4.5% in 2003, the fastest since the Asian crisis and among the region's top performers, despite the Iraq war, SARS, and the Oakwood mutiny,” says. the President. Net factor income from abroad (NFIA) continued to drive up GNP, which grew by 5.5% compared to 4.5% in the same period in 2002. President Arroyo also takes pride in having kept the prices of basic commodi- ties at 2000 levels, such as rice (P19.00/ kg), sugar (P27.00/kg), canned sardines (P8,00/155g), soy sauce (P9.00/350ml), patis (P9.00/350ml), iodized salt (P5.00/250g), laundry soap (P23.00/480g), and detergent i f bars (P'14.50/480g). The 3.1% inflation rate ve | in 2003 is the lowest since 1988. pari Industrial Peace ey ot ‘The President also ordered the bureau. 4" pip craey to simplify and clarify the system oa i incentives and interpret investment laws gon in favor of investors. SF vent ‘As a result, BOL and PEZA-approved joins Al investments increased by 1.68% from P55.79 4? gar billion in 2002 to 66.74 billion in 2003, |! spate again despite Iraq war, SARS, ett 02. St mutiny, and political uncertainty. es, npr Of the total investments, foreign in- ea vestments rose 6.24% to 33.27 billion, litical compared to 31.32 billion in 2002. Among 989 Pati the big investors for 2003 are Victoria's 198°" Bioeriergy (P-4.5B), Petron Corporation snd falling (P5.2B), Asia-Pacific Energy (P2.5B), Sun- | addition, gc power, which manufactures solar water yp surolus cells (P2.5B), Solid Broadband (P2.1B), and es hor Asian Terminals (P1.8B). aed Foreign portfolio investment transact- ary 7 Fh ions registered sizeable net inflows of 675. wed P90 bi million in 2003, $211.7 million. tacien cred ‘The Arroyo administration likewise = maintained industrial peace in 2003, with "figures a conciliation rate of 94% and 38 st Fe standin ‘This, however, was lower than the. Reranteed conciliation rate (36 strike incidents) in 2002. Since 2001, the average strike is 39, way below the annual average 10 strikes in the previous administration. ‘The government also amicably oa 37,081 cases or 48% of all compul: feed tration cases disposed at the R of tration branches from 2001 until the : mee UNE ABANKRUPT GOVERNMENT! ori The bankruptey of the Arroyo admin aig and remained government's en “TBON Facts and Figures, ~seu rou bee he, While the country’s Balance of Pay- etits (BOP) as of October 2008 recorded surplus of $159 million (which the BSP ‘pects to reach $1.2 billion by yearend), foes not reflect a healthy fiscal position, jwith a negative trade balance and sparse inlow of productive capital, what propped vp the BOP? ad Borrowing Binge ‘The flow of speculative capital or port- folio investments contributed largely to the BOP surplus. Also called “hot money,” it reached $477 millions as of October 2003 or {u1% higher than its level during the same period in 2002. Such investment, however, js not only unproductive and extremely yolatile but also flows out massively during times of political uncertainties that result in peso devaluation, low domestic interest rates, and falling value of local stocks. In addition, government debt bolstered the BOP surplus as the Arroyo government continued its borrowing binge in 2003 to finance its gargantuan budget deficit. From January to September alone, government borrowed P320 billion, of which 44% came from foreign creditors. Latest figures show that total goverm= ment outstanding debt (which includes ment) already exceeded the ®3 trillis mark, and surged particularly in the s half of 2003. This means that the inistration is accumulating P1.2bi indebt daily. For government debt and domestic) of a third world cou be sustainable, the International M Fund (IMF) says it should only be. the GDP. The country’s external already comprises 71% of the GDP, the worst in Asia. As of September 2003, t &xternal debt stood at PLS 51% is direct government ens financial instit ral creditors and 49% bonds, aa Budget Deficit Meanwhile, due to neoliberal policies like tariff reduction and giving various fis- cal incentives to foreign investors, combined with age-old problems of corruption andmonths of 2003, Sadly, government did not have the political will to legislate ¢ mest: ingful debt cap policy that would check the massive depletion of the country’s financial expect th provide substantial remains committed Cosmetic Reforms lowing the collapse of ‘Arroyo is in a tight spot. On the one government WOT hand, she has to address the budget deficit free trade a8 but on the other hand, she does not want a to give the impression of reversing the liberalization of the economy that drains billions of pesos in government revenues. ‘After the collapse of the Cancun Ministerial of the World Trade Organization (WTO) in September 2003, Arroyo started institu- ting several reforms to appease the sectors badly hurt by liberalization like big busi nessmen and influential farmers, and at the same time to generate some revenues for government. Based on the recommendation of the Committee on Tariffs and Related Matters (CTRM), Arroyo increased the tariffs on selected imported agricultural products, raw materials and inter products, and finished produets. In terms of revenues generatit projected impact of these reforms is mi mal. The tariff hike on selected raw m ials and intermediate products is exp to generate P1.5 billion in revenues while the tariff hike on finished would result in additional ®1.3 in revenues yearly. These ai insignificant compared with 132.6 billion in potential re government loses every year reduction and fiseal incen foreign investors. In terms of protecting the impact of the reforms is considering that their and the increases still below what th resources.nts), ODA also intensifies the bank- tcy of government because of commit- mat foes. The ADB and the World Bank e such fees (usually 0.75% of the un- pursed loan) to recipients that failed to‘A tax levied as 1% on the first 5 3% on the next 5,000, ete. ‘A tax of 10% on all income Ifa corporation can the incidence of theExercise 2 Match Column A with Column B. Deficit budget Surplus budget Impact Incidence Progressive taxation Regressive taxationExcise tax Economie services Social services Debt servicing Defense expense Non-tax revenues Internal borrowing External borrowing Burden of taxation Exercise 4 Questions for discussion: at. 2. . Be is What is fiscal policy? How d How do you distinguish pr What do you mean by the burden of taxation? — What is the Lorenz cury When are the following