Module 7: Public Expenditure

Lesson 1: Expenditures in the Public Sector

Learning Objectives:
This module introduces the fundamental concepts of expenditures in the public sector, its
background and development.

At the end of the module, the students should be able to:

1. Identify the roles of public expenditure;
2. Explain the importance of the classification of public expenditure; and
3. Analyze the patterns of Philippine expenditure.

KEYWORDS/PHRASES:
 public expenditure
 production
 economic growth
 distribution

Introduction
The government collects taxes, borrows and incurs debts, accepts gifts and donations, receives
grants and insures savings. In all of these, government plan in order to finance its social
programs for the people. The government also spends its revenues to stabilize the country‘s
economy by safeguarding against extreme stagflation. It is the height of inutility for government
to have boom of resources yet fail intentionally to service the wants and demands of its
constituents. Public expenditures, as an instrument of public finance, have to be conceived,
implemented, and evaluated with same concern and skill when resources were acquired. Funds
for public expense may suffer being overspent, misspent, wastefully spent, even in the language
of auditing, unconscionably spent.

Didn‘t we hear millions of pesos paid for non-performing election computer machines, or
counter funds not consumed nor returned to government coffers, overpriced procured office
supplies, or acquired agricultural fertilizers distributed in non-agricultural lands of cities and
urban areas?

The methods of expenditure which developed in the early government practices can hardly be
called systematic. These expenditures were made in a more or less haphazard fashion, unplanned
and unaudited along the precepts of accountability.

The first unique public treasury in the different states was usually for the service of the king, if
not for religious purposes. There were no expenditures for protection, as the citizens were the
ones protecting the state. In foreign wars the citizens furnished their own weapons with rewards
based on success of their enterprise. Fortress-cities, ships, roads, and temples were built through
the labor of slaves and forced work. The pyramids of pharaohs, Intramuros of Manila, TajMahal
of India, and China‘s Great Wall are but living evidence of this machination.

Ancient Athens had a highly developed system of expenditures. Large public buildings were
erected and huge sums were spent on public works of various kinds. Expenditures for public
festivals and sacrifices, of donations to the people, compensations for attending the assemblies
were often wasteful and extravagant. An interesting feature of early Athenian expenditure is the
large sums spent on the poor and on war orphans.

In Rome the public wealth was not distinct from the private wealth of the citizens. Money was
spent for religion, maintenance of the government, the erection of public buildings, and the
construction of roads. Provision was made for poor classes, and various kinds of public charities
were established. The system of expenditures in Rome was more developed than in Athens.
Citizens who rendered services to the state received payment from the state. The soldiers were on
the payroll of the government.

With feudalism, earlier forms of public life were practiced. Public expenditure is not separable
from private. The citizen served the State without remuneration. The public expenditure was
primarily in the interest of the ruler. If his interests coincided with the interests of the public,
then only did the public benefit from the expenditures of the government.
In constitutional governments, the public gained a voice in the government, and the control of
the purse came to the constitutional legislative bodies. The expenditure for the support of the
crown now becomes one for the people. The final establishment of constitutional government has
introduced a new criterion for judging public expenditure: expenditure no longer to gratify the
whim of the ruler or of the governing body, but it must benefit the people as a whole; otherwise
it will not meet with the popular approval necessary to sanction governmental decision.

Public Expenditure: Meaning and Nature

Public expenditure means expenses which government incurs for its own administration,
providing social welfare and pursuing economic development.
The volume of public expenditure is enormously increasing year after year because of various
political, social and economic reasons. After the Second World War, tremendous development
took place for the reconstruction and revival of the economies which have been dismantled and
devastated by the war. The modern states have been involved in many economic activities unlike
during the early periods.
COMPARISON: PRIVATE AND PUBLIC EXPENDITURE
Causes for The Growth of Public Expenditure In Modern Times

Public expenditure has recorded a continuous increase over time due to the following causes:

a. Defense. Increasing due to internal and external terrorist activities and national disorders.
Large amount of public expenditure in the annual budget is earmarked for the defense forces
and local security forces like police, military, etc.
b. Population explosion. With more people, more schools, hospitals, police, and jobs are
required by the growing number.
c. Transport and communications: These are keys for the overall development of the state.
d. Industrialization, urbanization and nationalization: To initiate, establish, maintain and
develop the industries is a responsibility which need large amounts of public expenditure.
e. Unemployment: Socio-economic problems are created like corruption, bribery, prostitution,
etc. bringing about decline in the moral standards of the citizens.
f. Advancement in the field of science and technology: No country can exist in isolation
from other countries totally disregarding scientific and technological developments.

Principles of Expenditure

The principles of expenditure are: economy, sanction, benefit, surplus, elasticity, productivity,
distribution, certainty, and coordination.
a. Principle of Economy
Public resources should be used only as necessary. Avoid wasteful utilization of public funds
such as delayed formulation of plans and their execution, and/or faulty planning and execution.
Planning, Programming, Budgeting and Zero-Based Budgeting are techniques which may be
applied to meet these objectives.
b. Principle of Benefit
Public expenditure should be incurred only if it is beneficial to the society. Public expenditure
affects income and wealth distribution, and has effects on production, etc.
c. Principle of Surplus
Deficit budgeting should be avoided. Government should not over-spend and run into a debt.
d. Principle of Elasticity
Increasing or decreasing public expenditure at the time of need should be possible.
f. Principle of Productivity
Public expenditure is a stimulant to productivity. It should foster capital formation and
generation of employment opportunities.
e. Principle of Equitable Distribution
The government should direct its expenditure to provide the less-privileged sector of the society
such as providing free recreational facilities and welfare projects.
f. Principle of Certainty
Public expenditure should be allocated with certainty to various uses.
g. Principle of Coordination
National and local programs and projects should be pre-determined and properly coordinated.

Kinds of Public Expenditure

There are several classifications of public expenditure, each of them indicating an area of
possible effects on the economy.

a. Productive and Unproductive Expenditures

Some expenditure are in the forms of consumption, others are in the nature of investment and
help the economy to improve its productive capacity.

Under the laissez-faire philosophy, the only productive public expenditures are those which are
incurred to create and maintain social overheads. They add to the tangible assets of the
government, or more precisely income yielding tangible assets of the government including
public enterprises of commercial type.
Expenditures on administration, defense, justice, law and order, and maintenance of the State are
unproductive.
b. Transfer and Non-transfer Expenditures
Transfer expenditures are not related to the production of goods and services or generation of
income. They cause a transfer of income from government to individuals. Examples are: interest
payments, retirement benefits, and unemployment benefits.

Non-transfer expenditures result in the exchange of goods and services for money. They include
the payments made by the government on the use of factor services for productive activities.
Examples are: expenses on education, agricultural development, and civil works.

c. Revenue and Capital Expenditures.

Revenue expenditures are those that do not either create assets or cause a reduction in liabilities.
Examples are: Salaries, Retirement Benefits.
Capital expenditures either create assets or cause reduction in liability. Examples are: equity
share of corporations purchased by the government; repayment of government debts.

d. Development and Non-Development Expenditure.

Development expenditures relate to growth and development of the government. Examples are:
expenses on education, health, agriculture, civil works, and power generation.
Non-development expenditures relate to non-development activities of government. Examples
are: expenses on military, peace and order, interest on loans, retirement benefits.
e. Plan and Non-plan Expenditure
Plan expenditures are those incurred within the purview of the government‘s planned
development programs which include consumption and investment expenditure. Examples are:
expenses on agriculture, power, communications, transportation, education.
Non-plan expenditures are those beyond the purview of government‘s planned development
programs. Examples are: subsidies, interest payments, military, peace and order.
Expenditures in the Context of Philippine Experience

The National Government Budget is allocated according to the following major sectors:
a. Social services. Expenses for social services are: a) education, culture and manpower
development; b) health services; c) social security and welfare and employment; d) housing
and community development; and, e) land distribution.
b. Economic services. Provision for economic services are: a) communications, roads and
transportation facilities; b) agriculture, agrarian reform and natural resources; c) water
resources development and flood control; d) trade and industry; e) power and energy; and f )
tourism.
c. Defense. Expenditures for defense support the general effort to ensure national security,
stability, peace and order which are indispensable to political stability, economic growth and
development.
d. General public services. General public services expenditures are spent for: a) general
administration of governance, foreign affairs and international commitments, election
exercises, audit performance, civil service operations and lawmaking functions; and b) public
order and safety, including various functions pertaining to law enforcement, maintenance of
public order and safety and political administration.
e. Debt burden. Expenditures for payment of debt principals government's regular and
assumed debt burdens from domestic and foreign sources, including interest payments.
f. Infrastructure expenditures. Disbursement of funds for the construction of various basic
public works, such as roads, ports, airports, water supply, irrigation, and other capital
investments. The benefits programs and projects redound to the general public.
Expense Class refers to each of the three general categories of expense objects:
 Personal Services (PS)
 Maintenance and Other (MOOE)
 Operating expenses
 Capital Outlays (CO)
Expenditure Program by Object

The Budget of Expenditures and Sources of Financing (BESF) of the national budget provides a
three-year tabulation of the National Government‘s expenditure program showing expense
objects grouped into:
a. Current Operating Expenditures (Personal Services and Maintenance and Other Operating
Expenses)
b. Capital Outlays

Current Operating Expenditures is the amount budgeted for the purchase of goods and
services for the normal government operations within a budget year. This includes goods and
services that will be used or consumed during the budget year.

a. Personal Services are payment of salaries, wages and other compensation (e.g. merit, salary
increase, cost-of-living allowances, honoraria and commutable allowances) of permanent,
temporary, contractual and casual employees of the government.
b. Maintenance and Other Operating Expenses are costs incurred by government in the
exercise of its administrative, regulatory, or service functions.
c. Capital Outlays are appropriations spent for the purchase of goods and services with benefits
extending beyond the fiscal year and which add to the assets of government. It includes
investments in the capital stock of government-owned or controlled corporations and their
subsidiaries.

Capital expenditures are those classified as capital goods or durable goods to be used for non-
military and productive purposes. Examples are construction of roads and bridges, dams, power
and irrigation works, schools and hospitals with high multiplier effect on the economy. These
activities stimulate the growth and expansion of economic activities of the private sector and
facilitate the integration of local industries.
The capital outlays are broadly classified as follows:
a. Infrastructure outlays. Disbursement of funds for the construction of various basic public
works of the country like roads, ports, airports, water supply, irrigation, and other capital
investments, the benefits of which extend to the general public.

In the National Budget, infrastructure expenditures generally refer to the capital outlays of
the Department of Public Works and Highways and the Department of Transportation and
Communication, the School Building Program of the Department of Education, and the
national irrigation projects of the Department of Agriculture.
Types of infrastructure projects:
 Locally-funded Projects. Projects financed out of revenue collections and domestic
borrowings.
 Foreign-assisted Projects. Government projects wholly or partly financed by foreign
loans and/or foreign grants.
b. Equity contributions to government corporations. These are the National Government
investments in the authorized capital stock of government-owned or controlled corporations.
c. Capital transfers to local government units. Capital transfers to local government units
(LGUs) refer to the portion of the Internal Revenue Allotment (IRA) accruing to LGUs,
equivalent to not less than twenty percent (20%) of their IRA allocations. These are
earmarked for development projects construction/improvement, repair and maintenance of
local roads, concrete Barangay roads/multi-purpose pavements, and the rehabilitation and
improvement of communal irrigation projects/systems.
d. Other capital outlays. The other capital outlays of the government are land acquisition and
land improvement outlays, buildings and structures outlays, acquisition of vehicles, aircraft,
water transport vehicles, equipment, furniture, fixtures, and others.
PATTERNS OF PUBLIC EXPENDITURE