LESSON 1
It
PUBLIC FINANCE
referred as Local Fiscal Administration
involves inflow of financial resources in the form of taxes and other revenues,
and outflow such as resources in form of expenditure to finance goods or
services.
is the management of a country’s revenue, expenditures, and debt load through
various government and quasi-government institutions.
Management of Country's Revenue
Funding Public Services
Revenue is the primary source of funding for essential public services such as
education, healthcare, infrastructure, and social welfare. Adequate funding
ensures the provision of these services, contributing to the overall well-being
and development of the population.
Economic Stability
Well-managed revenue helps maintain economic stability. A stable and
predictable revenue stream allows the government to plan and implement
consistent fiscal policies, contributing to a more stable economic environment.
Investment in Infrastructure
Infrastructure development is crucial for economic growth. Properly managed
revenue enables governments to invest in roads, bridges, utilities, and other
critical infrastructure projects, fostering economic development and
improving the quality of life for citizens.
Social Programs and Welfare
Revenue plays a key role in financing social programs and welfare initiatives.
This includes support for vulnerable populations, unemployment benefits, and
poverty alleviation programs. Effective revenue management ensures that
these programs can be sustained over the long term.
Debt Servicing
Countries often incur debt to finance projects are address budget shortfalls.
Revenue is essential for servicing and repaying these debts. Proper
management ensures that debt levels remain sustainable and do not lead to
financial crises.
Macroeconomic Policies
Governments use revenue as a tool for implementing macroeconomic policies.
Through taxation and spending, they can influence economic growth,
inflation, and employment levels. Effective revenue management allows for
the implementation of counter-cyclical measures during economic downturns.
Investment in Education and Innovation
Education and innovation are crucial drivers of long-term economic growth.
Revenue enables governments to invest in education systems, research and
development, and innovation initiatives, fostering a skilled workforce and a
competitive economy.
Poverty Reduction
Revenue can be directed towards poverty reduction programs, helping to uplift
disadvantaged communities. By providing resources for education, healthcare,
and job creation, revenue management can contribute to reducing poverty and
promoting social equity.
International Reputation and Creditworthiness
Effective revenue management contributes to a country's fiscal responsibility
and enhances its international reputation. Maintaining sound fiscal policies
and meeting financial obligations positively impacts a nation's
creditworthiness and ability to attract foreign investment.
Government Operations
Revenue is essential for the day-to-day operations of the government.
covers salaries for public servants, administrative costs, and other expenses
associated with running government agencies. Adequate revenue ensures the
smooth functioning of government institutions.
Resource Allocation
Expenditure management involves allocating resources to different sectors
based on priorities and national goals. Proper allocation ensures that essential
areas such as education, healthcare, infrastructure, and social welfare receive
adequate funding, promoting overall development.
Public Services Provision
Government expenditure is a primary means of delivering public services.
These services, including education, healthcare, public safety, and
infrastructure development, contribute to citizens' quality of life and societal
well-being.
Economic Stimulus
During economic downturns, governments can use expenditure as a tool for
economic stimulus. Increased spending in critical areas can boost economic
activity, create jobs, and mitigate the impact of recessions.
Infrastructure Development
Expenditure is vital for the construction and maintenance of essential
infrastructure such as roads, bridges, utilities, and public facilities.
Infrastructure development is a key driver of economic growth and improved
living standards.
Social Welfare Programs
Government expenditure supports social welfare programs aimed at assisting
vulnerable populations, reducing poverty, and addressing social inequalities.
These programs contribute to social cohesion and inclusivity.
Education and Innovation
Expenditure on education and research fosters innovation, human capital
development, and economic competitiveness. Investing in education systems
and research institutions prepares the workforce for the challenges of a rapidly
changing global economy.
Healthcare
Adequate expenditure on healthcare is essential for maintaining public health
and addressing emerging health challenges. Well-funded healthcare systems
contribute to a healthier population and increased productivity.
Debt Management
Effective expenditure management is crucial for maintaining a sustainable
fiscal position. Prudent spending helps avoid excessive borrowing, reducing
the risk of unsustainable debt levels and potential financial crises.
Public Sector Operations
Expenditure covers the costs associated with the day-to-day operations of the
public sector, including salaries for public servants, administrative expenses,
and maintenance of government institutions.
Fiscal Responsibility
Responsible and transparent expenditure management enhances a country's
fiscal credibility. Sound fiscal policies, efficient resource utilization, and
accountability contribute to a positive perception among citizens, investors,
and international institutions.
Balancing the Budget
Effective expenditure management contributes to the goal of balancing the
budget. A balanced budget ensures that government spending does not
consistently exceed revenue, promoting fiscal discipline and stability.
Environmental Sustainability
Expenditure decisions can support environmental sustainability by allocating
funds for eco-friendly projects, conservation efforts, and initiatives aimed at
addressing climate change.
Components of Public Finance
TAX COLLECTION
Tax collection is the main revenue source for governments. Examples of taxes
collected by governments include sales tax, income tax (a type of progressive
tax), estate tax, and property tax. Other types of revenue in this category
include duties and tariffs on imports and revenue from any type of public
services that are not free.
BUDGET
The budget is a plan of what the government intends to have as expenditures
in a fiscal year. In the national government, the president submits to Congress
a budget request, the House and Senate create bills for specific aspects of the
budget, and then the President signs them into law.
EXPENDITURES
Expenditures are everything that a government actually spends money on,
such as social programs, education, and infrastructure. Much of the
government’s spending is a form of income or wealth redistribution, which is
aimed at benefiting society as a whole. The actual expenditures may be greater
than or less than the budget.
DEFICIT/SURPLUS
If the government spends more then it collects in revenue there is a deficit in
that year. If the government has less expenditures than it collects in taxes,
there is a surplus.
NATIONAL DEBT
If the government has a deficit (spending is greater than revenue), it will fund
the difference by borrowing money and issuing national debt.
Total government revenue or tax collection is represented by the blue bar. This
is a source of cash for the government.
Expenditures are a use of cash, and to the extent that they are greater than
revenue, there is a deficit.
The difference between revenue and expenditures is the deficit (or surplus)
that is funded with national debt.
Importance of Public Finance
Resource Allocation
Public finance helps in the efficient allocation of resources by determining
how government funds are distributed among various sectors such as
education, healthcare, infrastructure, and social welfare. This allocation
influences the overall well-being and development of the society.
Public Goods and Services
Public finance is instrumental in providing public goods and services that are
essential for the entire community but may not be efficiently provided by the
private sector. Examples include national defense, public safety, and
infrastructure projects.
Economic Stability
Public finance policies, including fiscal and monetary measures, play a
significant role in achieving economic stability. Governments can use fiscal
tools to counter economic cycles, stimulate growth during downturns, and
control inflation during periods of expansion.
Social Welfare
Public finance supports social welfare programs aimed at reducing poverty,
addressing inequality, and providing support to vulnerable populations.
Programs such as unemployment benefits, healthcare, and housing assistance
contribute to social cohesion and equity.
Infrastructure Development
Governments use public finance to invest in infrastructure projects, including
transportation, energy, and communication networks. Infrastructure
development is essential for economic growth, job creation, and improved
quality of life for citizens.
Education and Human Capital Development
Public finance is a key driver of education systems, contributing to the
development of human capital. Investments in education enhance the skills
and productivity of the workforce, fostering innovation and economic
competitiveness.
Healthcare
Adequate funding for healthcare is critical for public health and well-being.
Public finance supports the development of healthcare infrastructure, the
provision of medical services, and the implementation of public health
initiatives.
Environmental Conservation
Public finance can be directed towards environmental conservation efforts,
including initiatives to address climate change, protect natural resources, and
promote sustainable development practices.
Redistribution of Wealth
Public finance can be used to implement progressive tax policies and social
welfare programs that aim to reduce income inequality and redistribute wealth
within society.
Fiscal Policy and Management
Public finance provides governments with the tools to implement fiscal
policies that respond to economic challenges. This includes managing budget
deficits, controlling public debt, and ensuring fiscal responsibility.
Crisis Management
During economic crises, public finance can be used to implement stimulus
measures, provide financial assistance to affected sectors, and stabilize the
economy.
International Relations
Public finance also influences a country's standing in the international
community. Responsible fiscal policies contribute to a positive reputation,
impacting foreign investments, trade relationships, and participation in global
initiatives.
Definition of Private Finance
When the optimization of finances is undertaken at a micro-level, it is called
Private Finance. So, private finance is the management and analysis of the
financial activities of an individual, household, business enterprise, etc. which
may cover savings, investments, insurance, banking, personal loans, tax
management, credibility, fixed deposits, retirement planning, real estate
planning and so forth. It involves the division or application of income on
various items, based on their priority with the help of a budget, savings,
protection and expenses, and after taking into account multiple factors such as
risk involved, needs, future prospects, etc It aims at meeting personal financial
goals, which can be anything such as saving for the future, buying a property,
travelling abroad, retirement planning, etc.

Public Finance refers to that part of finance which is related to the financial
activities of the public authorities at different levels, i.e. center, state and local,
and the alternative ways to finance the expenditure of the government. It is
also called as public sector economics, as the development of nation solely
depends on it.

It includes – public revenue, public expenditure, public debt, financial

administration, budget, accounts, auditing and financial control. The analysis
of public finance aims at understanding the consequences of government
spending on different activities, regulations, taxes and borrowing on the
wages, investment and disbursement of income.

It has three main functions:

Optimum allocation of resources

Distribution of Income

Economic Stabilization

Public finance deals with – How the government collects or raises funds?
How are the funds utilized? How they incur expenses? How is the process of
collection and application of funds administered? What facilities, subsidies,
welfare payments and utilities are provided to the masses?

Key Differences between Private and Public Finance

The difference between private and public finance can be discussed in the
points below: LESSON 2

• Public Finance refers to that branch of finance which studies
government financial dealings, including government spending,
borrowing, deficits and taxation. On the flip side, by Private
Finance, we mean the study and analysis of the income,
expenditure, and debt of private individuals, firms and household.
• In public finance, the government ascertains the total expenditure
to be made on different sectors first and then identifies the sources
from which the revenue can be generated to meet those expenses.
On the contrary, in the case of private finance, any individual,
household, or business enterprise decides the quantum of
expenditure to be made, on the basis of his/her income.
• The main objective of private finance is to manage the finances in
such a way which helps in earning maximum profit. As against, the
primary objective of public finance is the welfare of the general
public.
• In private finance, the individual seeks to maintain a surplus
budget by spending only a certain portion of his income. On the
contrary, in public finance, the government usually frames a deficit
budget, during the phase of economic development, war or
depression.
• In private finance, the individual’s income and his/her expenditure
is his /her own affair, and so it can be kept secret. Conversely, in
public finance, the government uses public money, for providing
public utility services, that is why it cannot be kept secret.
• Public finance is related to the yearly budget of the government,
which is fixed, but private finance is related to daily, weekly or
monthly budget of an individual or household.
• Public finance is relatively more elastic than private finance
because an individual cannot make sudden and huge changes in his
income, but the same is possible in case of public finance
LOCAL FISCAL ADMINISTRATION
It refers to systems, structures, processes, officials and personnel, and the
policy environment governing intergovernmental, and inter-local fiscal
relations, affecting, among others, the giving and receipt of allotments and
grants from the national government (NG) to local government units (LGUs
Fiscal Policy
Refers to the policies on taxation and other revenue, expenditure and
borrowings which is intended to promote stabilization and development of the
economy
Scope
● allotment sharing between LGUs;
● sharing of taxing powers between the NG and LGUs, and among
LGUs;
● policy on tax rates and structure;
● revenue and expenditure planning;
● revenue utilization and expenditure allocation; monitoring and
approval of budgets, tax
● ordinances and other fiscal measures;
● policy on borrowing and borrowing instruments;
● appointment and supervision of local fiscal officers
VERTICAL FISCAL RELATIONS
The fiscal relations between the national government and its agencies, on the
other hand, and the LGUs on the other, which we may call vertical fiscal
relations. This is also referred to in the literature as central-local fiscal
relations, with the Internal Revenue Allotment as its core.

INTER-LOCAL FISCAL RELATIONS

The fiscal relations among LGUs themselves, which may be referred to as the
inter-local fiscal relations.

Remember:

● Philippine intergovernmental fiscal transfers are of three types: (a)

the internal revenue allotment (IRA), a formula-based grant, (b)
 and a share in national wealth, origin-based and (c) ad-hoc
conditional grants.
The Philippine Local Government Units
NATIONAL-LOCAL GOVERNMENT SHARE IN THE ECONOMY
SECTION 289. Share in the Proceeds from the Development and Utilization
of the National Wealth. - Local government units shall have an equitable share
in the proceeds derived from the utilization and development of the national
wealth within their respective areas, including sharing the same with the
inhabitants by way of direct benefits.
SECTION 290. Amount of Share of Local Government Units. – Local
government units shall, in addition to the internal revenue allotment, have a
share of forty percent (40%) of the gross collection derived by the national
government from the preceding fiscal year from mining taxes, royalties,
forestry and fishery charges, and such other taxes, fees, or charges, including
related surcharges, interests, or fines, and from its share in any co-production,
joint venture or production sharing agreement in the utilization and
development of the national wealth within their territorial jurisdiction.
SECTION 291. Share of the Local Governments from any Government
Agency or -Owned and -Controlled Corporation. - Local government units
shall have a share based on the preceding fiscal year from the proceeds
derived by any government agency or government-owned or - controlled
corporation engaged in the utilization and development of the national wealth
based on the following formula whichever will produce a higher share for the
local government unit
(a) One percent (1%) of the gross sales or receipts of the preceding calendar
year; or
(b) Forty percent (40%) of the mining taxes, royalties, forestry and fishery
charges and such other taxes, fees or charges, including related surcharges,
interests, or fines the government agency or government -owned or -controlled
corporation would have paid if it were not otherwise exempt.
SECTION 292. Allocation of Shares. - The share in the preceding Section
shall be distributed in the following manner:
(a) Where the natural resources are located in the province
(1) Province - Twenty percent (20%);
(2) Component city/municipality - Forty-five percent (45%); and
(3) Barangay - Thirty-five percent (35%)
Provided, however, That where the natural resources are located in two (2) or
more provinces, or in two (2) or more component cities or municipalities or in
two (2) or more Barangays, their respective shares shall be computed on the
basis of:
(1) Population - Seventy percent (70%); and
(2) Land area - Thirty percent (30%).
(b) Where the natural resources are located in a highly urbanized or
independent component city:
(1) City - Sixty-five percent (65%); and
(2) Barangay - Thirty-five percent (35%)
SECTION 293. Remittance of the Share of Local Government Units. – The
share of local government units from the utilization and development of
national wealth shall be remitted in accordance with Section 286 of this Code:
Provided, however, That in the case of any government agency or
government-owned or -controlled corporation engaged in the utilization and
development of the national wealth, such share shall be directly remitted to the
provincial, city, municipal or Barangay treasurer concerned within five (5)
days after the end of each quarter.
TRENDS IN LOCAL GOVERNMENT REVENUES AND
EXPENDITURES
First is the inadequacy of own-source revenue to finance basic and devolved
functions, which render LGUs dependent on transfers from the national
government. This is referred to as the problem of vertical imbalance.
Invariably, the Internal Revenue Allotment (IRA) has occupied a primordial
position in local finance.
Second is the reliance on a few local taxes particularly the real property tax
and business tax.
A third observable pattern is the uneven growth of the finances of local
governments resulting in uneven levels of expenditures and hence access to
local public services, which may be viewed as the horizontal imbalance.
Local finance data from the Commission on Audit from 1990 to 1994 showed
that the basic RPT and revenue from business taxes and licenses remain the
most reliable local revenue raisers.
*The revenue from the amusement tax is rising in absolute amount, but its
share to total revenue fluctuated.
*The community tax revenue collection does not reflect the rising income
and value of property.
*The revenue from the franchise tax likewise behaved erratically during the
same period.
Devolution is the transfer of power and authority from the national
government to local government units (LGUs); political and territorial.
TRENDS IN LOCAL GOVERNMENT EXPENDITURES
The trend in the local expenditures has been partly dealt with in the previous
section in relation to local revenues. In this section, emphasis is placed on the
sector distribution of local expenditures.
An examination of the composition of local government expenditures shows
that the trend in the sectoral and object distribution of expenditures from 1992
to 1994 has shown favorable, but minimal changes. The total amount of
expenditures has definitely increased, and its composition has changed
commensurate to the devolution of functions from national government
agencies.
From 1990 to 1994 the bulk of local expenditures is devoted to general public
services, which include salaries and wages of employees. Significantly,
expenditures on general public services declined while social services’ share
of expenditures improved
The object distribution of LGU expenditures remains heavily skewed
towards
○ Personal Services (PS),
○ Maintenance and Other Operating Expenses (MOOE),
○ Capital Outlay (CO).
Personnel Services (PS)
An expenditure category/expense class for the payment of salaries, wages and
other compensation of permanent, temporary, contractual, and casual
employees of the government (DBM, 2012).
Maintenance and Other Operating Expense (MOOE)
An expenditure category/expense class for support to the operations of
government agencies such as expenses for supplies and materials;
transportation and travel; utilities (water, power, etc.) and the repairs, etc.
(DBM, 2012)
Capital Outlays (CO)
An expenditure category/expense class for the purchase of goods and services,
the benefits of which extend beyond the fiscal year and add to the assets of the
Government, including investments in the capital stock of GOCCs and their
subsidiaries (DBM, 2012)
GRANTS, INTERLOCAL LOANS, AND OTHER FORMS OF
VERTICAL SHARING OF REVENUES, NATIONAL LOANS, AND
ASSISTANCE TO LGUs
On Grants
● By authority of the Sanggunian, LGUs can directly negotiate and
secure financial grants or donations from local and foreign
assistance agencies without the need for clearance or approval of
the National Economic and Development Authority (NEDA).
● While this may be done, the national government or any of its
agencies can also enter into bilateral or multilateral grant
agreements for and on behalf of LGUs. In any case, LGU
proposals may have to be cleared, endorsed or approved by NEDA
or any national agency, if such is a condition of the funding agency.
On Inter-local Loans
● Provisions on inter-local loans are rather loose and difficult to
implement. The Code only says that the majority of all the
members of the local Sanggunian shall approve the loan, grant or
subsidy to other local governments. The only limitation mentioned
in the Local Government Code pertains to the amount that an LGU
should lend, which is not to exceed its surplus fund in the
preceding fiscal year. The formulation of the terms and conditions
under which such loan, grant, or subsidy may take place is left to
the parties concerned. It is possible that interest rates, terms of
repayment, collateral, and other requirements would vary greatly
from one LGU to another.
● Provisions on inter-local loans are rather loose and difficult to
implement. The Code only says that the majority of all the
members of the local Sanggunian shall approve the loan, grant or
subsidy to other local governments. The only limitation mentioned
in the Local Government Code pertains to the amount that an LGU
should lend, which is not to exceed its surplus fund in the
preceding fiscal year. The formulation of the terms and conditions
under which such loan, grant, or subsidy may take place is left to
the parties concerned. It is possible that interest rates, terms of
repayment, collateral, and other requirements would vary greatly
from one LGU to another.
OTHER FORMS OF VERTICAL SHARING OF REVENUES,
NATIONAL LOANS, AND ASSISTANCE TO LGUs
Share in Tobacco Excise Tax
This benefits four provinces in Region 1 – Abra, Ilocos Norte, Ilocos Sur, and
La Union. The amount of collection is divided among the four provinces on
the basis of actual volume of tobacco acceptances for the same year. The
sharing is 30% to province, 40% to municipalities and cities, of which 50%
will be shared in proportion to volume of tobacco; and 30% to the
Congressional District. The share of each LGU shall be treated as a special
account in the General Fund to be utilized specifically for cooperatives,
livelihood, and agro-industrial and industrial projects.
Municipal Development Fund
It is a special revolving fund created under Presidential Decree No. 1914 dated
March 29, 1984. The fund is made available to provinces, cities, and
municipalities through an appropriate agreement between the Department of
Finance and the local government unit concerned.
It is the national government’s mechanism through various foreign loans or
grants availed of from international lending institutions such as the World
Bank, Asian Development Bank, US Agency for International Development,
OECF, among others, are channeled or relent to local governments.
Countryside Industrialization Fund
This Act promotes industrialization throughout the Philippines. It provides for
the establishment of manufacturing, processing and related industries in all
towns and cities by establishing a fund and mechanisms for the granting of
financial assistance to such industries.
Type of Funds Maintained By LGU
General Fund-fund that is available for any purpose to which the legislative
body may decide to apply it. It is composed of receipts or revenues that are
not, by law or by contractual agreement , applicable to a specific purpose
Special Funds
● Special Education Fund
● Trust Fund
Special Funds
Special Education Fund-LGC states that a province or city may levy and
collect an annual tax of one percent of the assessed value of real property in
addition to the basic real property tax and the proceeds of which will go
exclusively to the special education fund and can be used only for that purpose
Trust Fund
-consists of private and public monies which have officially come into
possession of the local government or of a local government official as trustee,
agent or administrator or which have been received as a guarantee for the
fulfillment of some obligation.
LESSON 3
Local Government Unit
A local government unit (LGU) refers to a political subdivision or
administrative division of a country that is established by law to perform
specific functions and deliver public services within a defined geographic
area. LGUs are typically created to decentralize governance and bring
decision-making closer to the people, thereby promoting local autonomy and
responsiveness to local needs.
The specific structure and functions of LGUs can vary widely depending on
the country's legal framework and administrative system. In many countries,
including the Philippines, LGUs are organized into different levels, such as
provinces, cities, municipalities, and barangays (villages or districts), each
with its own set of responsibilities and powers.
LGUs are usually empowered to enact local ordinances, levy taxes, manage
public services, undertake infrastructure projects, and promote economic
development within their jurisdictions. They may also have their own elected
officials, administrative offices, and budgetary processes to carry out their
functions effectively.
Overall, the concept of an LGU embodies the principle of subsidiarity, which
advocates for devolving powers and responsibilities to the lowest level of
government capable of addressing them efficiently. This decentralized
approach to governance aims to foster local participation, accountability, and
responsiveness, thereby enhancing democracy and public service delivery.
Legal Framework Of Local Government Units
Autonomy: The Local Government Code grants autonomy to LGUs,
empowering them to enact laws, levy taxes, and exercise other powers for
efficient governance within their territorial jurisdictions.
Local Government Structure: LGUs are classified into several levels,
including provinces, cities, municipalities, and barangays (the smallest
political units). Each level has its own set of functions and responsibilities.
Powers and Functions: LGUs are tasked with various responsibilities,
including but not limited to local legislation, fiscal administration,
development planning, social services, infrastructure development, and
environmental management.
Election and Appointment: Local officials, such as mayors, vice mayors,
councilors, and barangay officials, are elected by the constituents. Some
positions may also be appointed by higher authorities or elected officials,
depending on the specific jurisdiction.
Fiscal Autonomy: LGUs have fiscal autonomy, which means they have the
power to generate their own revenue and manage their finances. They can
impose local taxes, fees, and charges, subject to certain limitations set by law.
Intergovernmental Relations: The Local Government Code also outlines
mechanisms for cooperation and coordination between different levels of
government, such as the national government and LGUs, to ensure effective
delivery of services and implementation of programs.
Local Government Units' Code: Apart from the Local Government Code,
there may be other laws, ordinances, and regulations that govern specific
aspects of LGUs, depending on the locality and specific needs.
Regulatory Agencies: The Department of the Interior and Local Government
(DILG) serves as the primary government agency responsible for supervising
and overseeing the operations of LGUs and ensuring their compliance with
laws and regulations.
The following political subdivision have the power to tax:
Province-It is the largest unit in political structure of the Philippines. It
consists in varying number of municipalities and, in some cases, of component
cities.
City-There are two classes of cities in the Philippines: the highly urbanized,
the independent component cities which are independent of the province, and
the component cities which are part of the province where they are located and
subject to their administrative supervision
Municipality-It is a political corporate body which is endowed with the
facilities of a municipal corporation, exercise by and through the municipal
government in conformity with law. It is a subsidiary of the province which
consists of a number of barangays within its territorial boundaries, one of
which is the seat of government found at town proper.
Barangay-The smallest political unit into which cities and municipalities in
the Philippines are divided. It is the basic unit of the Philippine political
system.
Institutions involve in Local Government Finance
• Local Government Unit (LGU)
• Department of Interior and Local Government (DILG)
• Bureau of Local Government Finance (BLGF)
• Local Finance Committees (LFCs)
• Local Development Councils (LDCs)
• Commission on Audit (COA)
• Local Government Financing Institutions (LGFIs)
Local Government Unit (LGU)
LGUs themselves are the primary institutions responsible for local
government finance. These include provinces, cities, municipalities, and
barangays. Each LGU has its own revenue-raising powers, such as taxation,
fees, charges, and other local income sources. They also manage their own
budgets and expenditures according to the guidelines set by law.
Department of Interior and Local Government (DILG)
• The DILG is the primary government agency tasked with
supervising and overseeing the operations of LGUs. It provides
guidance, capacity-building, and technical assistance to LGUs in
various aspects, including financial management.
Bureau of Local Government Finance (BLGF)
The BLGF is an agency under the Department of Finance (DOF) specifically
mandated to oversee and regulate local government finances in the
Philippines. It assists LGUs in revenue generation, financial planning,
budgeting, and expenditure management. The BLGF also provides training
and technical assistance to LGU officials and personnel.
Local Finance Committees (LFCs)
LFCs are established within LGUs to assist in the formulation and
implementation of local budgets. They are responsible for reviewing budget
proposals, ensuring compliance with fiscal regulations, and monitoring budget
execution. LFCs typically include representatives from the LGU's executive
and legislative branches, as well as finance and planning offices.
Local Development Councils (LDCs)
LDCs are multi-sectoral bodies established at the local level to coordinate
development planning and budgeting processes. They play a vital role in
aligning local development priorities with available resources and funding
mechanisms. LDCs include representatives from the government, private
sector, civil society organizations, and other stakeholders.
Commission on Audit (COA)
The COA is the supreme auditing institution in the Philippines, responsible for
auditing government agencies, including LGUs, to ensure transparency,
accountability, and efficiency in the use of public funds. COA audits help
detect irregularities, prevent corruption, and improve financial management
practices in LGUs.
Local Government Financing Institutions (LGFIs)
LGFIs are specialized financial institutions that provide funding, loans, and
other financial services to LGUs for infrastructure projects, public services,
and other development initiatives. These institutions may include local
government financing arms, cooperative banks, and other credit facilities.
Local government units, by virtue of the 1987 Constitution and the Local
Government Code of 1991, otherwise known as Republic Act 7160 have been
the power to raise certain taxes.
Power to Create Sources of Revenue (Sec. 129)
• Each Local Government Unit (LGU) has the power to create its
own sources of revenue and to levy taxes, fees and charges.
• The grant of power to create sources of revenue is consistent with
the basic policy of local autonomy.
• The taxes, fees and charges shall accrue exclusively to the LGU.
• Each Local Government Unit (LGU) has the power to create its
own sources of revenue and to levy taxes, fees and charges.
• The grant of power to create sources of revenue is consistent with
the basic policy of local autonomy.
• The taxes, fees and charges shall accrue exclusively to the LGU.
Constitution Authorizes Creation of Sources of Revenue and Levy Taxes
Section 5. Each local government unit shall have the power to create its own
sources of revenues and to levy taxes, fees and charges subject to such
guidelines and limitations as the Congress may provide, consistent with the
basic policy of local autonomy. Such taxes, fees and charges shall accrue
exclusively to the local governments.
Section 130. Fundamental Principles- The following fundamental principles
shall government the exercise of the taxing and other revenue-raising powers
of local government units:
a. Taxation shall be uniform in each local government unit
b. Taxes, fees, charges and other imposition shall
1. Be equitable and based as far as practicable on the
taxpayer’s ability to pay
2. Be levied and collected only for public purposes
3. Not be unjust, excessive, oppressive, or confiscatory
4. Not be contrary to law, public policy, national economic
policy, or in restraint of trade.
c. The collection of local taxes, fees and charges and other impositions shall in
no case be let any private person
d. The revenue collected pursuant to the provision of the Code shall inure
solely to the benefit of, and be subjected to disposition by, the local
government until levying the tax, fee, charge or other imposition unless
otherwise specifically provided herein.
e. Each local government unit shall, as far as practicable, evolve a progressive
system of taxation.
Sources of Financing
Internal Sources-funds generate within the jurisdiction of LGU
• Taxes, fees and charges
• Income derived from investments, privatized and development
enterprise and inter-local government
Taxes, Fees and Charges
• Taxes are enforced contributions, fees are imposed in the exercise
of regulatory powers, and charges are cost recovery impositions for
services delivered or for use of LGU facilities.
• Real Property Tax is the biggest source of locally generated
revenue for most provinces and municipalities.
Real Property Taxes
• Real Property Tax is the tax due on real properties in the
Philippines. This is assessed by the local government unit such as a
province, city or municipality.
• Local Government Code enunciates that a province or city or a
municipality within the Metropolitan Manila Area may levy an
annual ad valorem tax on real property such as land, building,
machinery, and other improvement not hereinafter specifically
exempted.
Income Derived from Investments, Privatized and Development
Enterprises and Inter-Local Government
• LGUs may incorporate development enterprises where income
from investments may be derived.
• LGUs may also group themselves together or consolidate their
effort, services and resources for purposes commonly beneficial to
them and may derive income from such undertaking
Scope of Taxing Powers of LGUs under LGC 1991
External Sources-funds coming from national fund/outside the local
government Jurisdiction
• Share from National Wealth
• Grants and Donations
• Domestic Loans and Credit-Financing Schemes
• National Tax Allocation (Formerly known as Internal
Revenue Allotment)
Share from Utilization of National Wealth
• LGUs have an equitable share from the proceeds derived from the
utilization and development of national wealth within respective
areas.
• LGUs are entitled to 40% of the National Government’s Gross
collection in the preceding fiscal year
• LGUs have an equitable share from the proceeds derived from the
utilization and development of national wealth within respective
areas.
• LGUs are entitled to 40% of the National Government’s Gross
collection in the preceding fiscal year
Grants and Donations
• LGU may secure financial grants or donations from local and
foreign assistance agencies. Other forms of grants may be fund
allocation from Senators or Congressmen or Special Projects from
the President or other national agencies.
Domestic Loans and Credit-Financing Schemes
• LGUs may contract loans and other forms of indebtedness from
government or private banks and lending institutions
• Local Government Code of 1991 allows LGUs to tap non-
traditional revenue sources for local governments
• LGUs may utilize credit financing, build-operate-transfer schemes,
bond flotations, and other investment strategies to enable them to
finance local development programs and projects.
National Tax Allocation
• Consonance with the Sec. 6, Art VI of the Philippines
Constitutions
• Refers to the share of the local government in the collection of
taxes imposed by the national government.
• Local government are entitle to the national revenue taxes. These
include the income tax, VAT and excise taxes.
• Transfers resources to local government to help them finance the
expenditures responsibilities that have been devolved on them,
such as primary health care among others.
Computation and Distribution of National Tax Allocation among LGUs
• Forty % of the BIR collection (with a 3 year lag) is distributed to
local governments following a predetermined formula. The amount
is distributed in to stages:
• Distribution to local governments according to type
• Allocation following a predetermined set of criteria
Major Issues Surrounding NTA Distribution
● The present LGU sharing of NTA is disproportionate to the
services they absorbed from the National Government.
● Provinces and municipalities, saddled by limited taxing powers,
are receiving less than the cost of services expected from them
● LGUs with higher income are receiving bigger share on transfer
per capita basis.
How can LGUs enhance their own tax revenues?
“Local government units may exercise the power to levy taxes, fees or charges
on any base or subject not otherwise specifically enumerated herein or taxed
under National Internal Revenue Code, that taxes, fees or charges shall not be
unjust, excessive, oppressive, confiscatory or contrary to declared national ○ Establish one-stop shops for tax payments and business
policy: provided, further, that the ordinance levying taxes, fees or charges permit applications
shall not be enacted without any prior public hearing conducted for the
purpose”

● Congress has not to cover all the aspects of local taxation

● LGU have the unique opportunity to continue exploring new

revenue measures that will provide them with significant resources
for improving both services and governance.

Policy and Action Framework for Enhancing LGU Tax Revenues

● Local Taxes

○ Prepare Local Revenue Generation Plan

○ Conduct public consultations on revenue measure

○ Update Local Tax Code

○ Computerize Tax Administration and Financial

Management System

○ Improve taxpayer services and make it easier for

taxpayer to pay establish customer friendly offices or
one-stop shops for securing business permits
applications

○ Provide incentives to tax collectors

● Real Property Taxes

○ Conduct tax mapping operations for real property

○ Regularly conduct General Revision of Property

Assessment and Classification and adopt realistic
Schedule of Fair Market Value

○ Computerize records of the Assessor’s and Treasurer’s

Offices

○ Link up with the Registrar of Deeds, Building Official,

Geodetic Engineers, and other relevant government
agencies

○ Strengthen tax collection enforcement

○ Engage participation of other stakeholders to help in a

tax information and education campaign

○ Display approved Schedule of Fair Market Value in

Conspicuous places

○ Display transaction flow charts

● Local Business Taxes

○ Conduct business tax mapping-inventory of business

establishments-and tie up with the records and tax maps
of the Assessor’s Office

○ Use presumptive income levels in determining gross

receipts of business

○ Conduct examination of books of accounts of business

establishments to counteract massive under declaration
of business establishments

○ Use of information database of other government

agencies through institutionalize inter agency tax
information-sharing scheme

○ Establish one-stop shops for tax payments and business

permit applications

○ Use of information database of other government

agencies through institutionalize inter agency tax
information-sharing scheme