MANAGING FINANCIAL

RESOURCES IN THE
GOVERNMENT
Presented by:

Fidencio D. Pangilinan, Jr.

Coleen Amabelle Carillo
Emelinda V. Serrano
Irish Nicole M. Aquino
TABLE OF CONTENTS
 WHAT IS FISCAL ADMINISTRATION?
 GOVERNMENT EXPENDITURE REVENUE
 REVENUE GENERATION IN THE GOVERNMENT
 GOVERNMENT BUDGETING AND ITS PROCESS
 GOVERNMENT ACCOUNTING AND AUDITING
 GOVERNMENT BORROWINGS
WHAT IS

fiscal
administration?
◆Definition of Fiscal Administration
◆ History
◆ How it works
◆ Fiscal Administration
FISCAL ADMINISTRATION

• Zeros in on the management of financial resources.

• The composite of those activities and operations to

generate revenue, make these available and see to it
that the funds are wisely, lawfully, effectively and
efficiently spent.
FISCAL ADMINISTRATION
• The act of administering monetary transactions going in and out
of the country, as well as managing the budgets for the
government, educational sectors, and other public service
entities.

• Displays the truth about how the public organizations and the
government provides public services and commodities for the
citizens.

• Independent subject from the sciences accounting , economics,

politics, etc.; interdisciplinary and aims for any distinct goal of
 HISTORY
OF
FISCAL ADMINISTRATION
1897 - Department of Finance is established
- Revolutionary Government was found in Naic, Cavite

1901 - Department of Finance and Justice was formally organized

1916 - Department of Finance and Department of Justice is split into two independent
departments (Reorganization Act No. 2666)

1936 - Formulation and Preparation of Government's Budget was transferred from

Department of Finance to Budget Commission which was newly established.

1949 - Central Bank of the Philippines was established

 HISTORY
OF
FISCAL ADMINISTRATION

1949 - Secretary of Finance Miguel Cuaderno relinquished the Finance

Portfolio Pio Pedrosa to be able to serve as the Governor of the Central
Bank of the Philippines.

1987 - Ministry of Finance was reverted as a department following the

ratification of the 1987 constitution.

1988 - The value added tax was introduced, replacing a complicated

tax structure.
FISCAL POLICY OF THE PHILIPPINES
• Refers to “the measures employed by governments to stabilize
the economy, specifically by manipulating the levels and
allocations of taxes and government expenditures.” (Britannica)

• The Fiscal Policy of the Philippines are more focused on both

domestic and external sources, with tax as the main source of
revenue, with some non-tax revenue also being collected.

Fiscal Measures
• Frequently used in tandem with monetary policy to achieve certain
goals.
ORGANIZING FOR
FISCAL ADMINISTRATION
Most interested in
Top Management fiscal activities.

Deeply involved in
Middle Management fiscal activities.

Affected by whatever
Rank and File results from fiscal
activities.

What is Fiscal Administration?
How it works
Principal Agencies tasked with fiscal
functions:
Congress (especially the Lower House)
Functions
Department of Finance
of Agencies in Fiscal
Department of Budget and Management
Administration
Commission on Audit
In its broad sense, fiscal
activity is present in all
levels of the organization.
There are certain agencies
tasked for some functions
in fiscal administration.
Department of Finance
Tasked with:
• Revenue Regeneration and Collection
• Fund Custody
• Disbursements
• Keeping of Accounts
Department of Budget and Management
Tasked with:
• Review of Estimates
• Fiscal Policy Studies
 done in close consultation with
National Economic Development
Authority, the Central Bank and other
economic planning entities.
Commission on Audit
Tasked with:
• fund and performance audit
Congress
Tasked with:
• revenue and expenditure policies
FISCAL CONTROL MECHANISMS
• There are basically four justifications for expenditure
control through the budget
1. prevent misappropriation of funds

2. control to implement prospective policy

3. ensure the wisdom and propriety of expenditures

4. prevent deficits
LOCAL FISCAL ADMINISTRATION
• 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);

 allotment sharing between LGUs;

 sharing of taxing powers between national government (NG) and LGUs,

and among LGUs;

 policy on tax rates and structures;

LOCAL FISCAL ADMINISTRATION
 revenue and expenditure planning;

 revenue utilization and expenditure allocation; monitoring

and approval budgets, tax ordinances and other fiscal
measures;
 policy on borrowing and borrowing instruments; and

 appointment and supervision of local fiscal officers

What is Fiscal Administration?
How it works
Functions
of Local Officials in
Fiscal Administration
Just like a cycle, Fiscal
Administration also has its
own circulatory system to
make sure that the national
budget is secured and well-
spent.
Local Chief Executive
• Executive Direction and
Control
Local Sanggunian
• Taxing Authority
• Enactment of Policies,
Implementing Rules and
Regulations
Composition of Local
Finance Cluster
• Assessor
• Accountant
• Budget Officer
• Treasurer
• Planning and Development
Officer
What is Fiscal Administration?
How it works Five Major Elements as the scope of the Local Fiscal
Administration

Processes
Systems
Officials /
Personnels

Policy Environment
Governing inter-
governmental and
Structures inter-local fiscal
relations
What is Fiscal Administration?
How it works

In public administration, Local Fiscal Administration is commonly

referred to as the formulation, implementation and evaluation of local
fiscal policies by local governments.

Local Government Finances

Fiscal relations between national and local government centre on the following
major areas of fiscal administration:
Allotment of internal Shares of Earnings of Local Government
revenue shares Government Agencies Borrowing
or Government Owned
Shares of Local or Controlled
Governments in National Corporations Engaged Review of Local
Wealth Exploitation in the Utilization and Government Budgets
Development of
National Wealth
What is Fiscal Administration?
How it works

Aspects of Local Fiscal Administration

and the LGUs on the other

The fiscal relations between

1. the national government and

which we may call vertical financial
relations. This is also referred in the
its agencies, on the one hand
literature as central-local fiscal relations,
the Internal Revenue Allotments at its core

The fiscal relations among LGUs

as the inter-local
themselves, which may be referred to fiscal relations. 2.
What is Fiscal Administration?
How it works

Legal Basis for Local Fiscal

Administration
THIS SECTION
STATES:

Section 2 “THE TERRITORIAL AND

Article X POLITICAL SUBDIVISIONS
of the
1987
SHALL ENJOY LOCAL
Constitution 45%
AUTONOMY”
government
expenditure
& revenue
Government Expenditure and Revenue
Definitions

• Also known as “Government Spending”, refers to the

Government purchase of goods and services, which include public

consumption and public investment, and transfer

Expenditure payments consisting of income transfers (pensions, social

benefits) and capital transfer.

Government • Also called as “National Revenue”, refers to the

money received by a government from taxes and

Revenue non-tax sources to enable it to undertake

government expenditures.

These two are components of the government budget

and tools of the government's fiscal policy.
What is Fiscal Administration?
How it works Major Sources of Funds to Finance National Government
Expenditure

Major Classes of Tax

Revenues from Revenues:
both tax and non-
tax sources 1. Taxes on income and
profits
2. Taxes on Property
3. Taxes on Domestic
Goods and Services
Borrowing from 4. Taxes on
International Trade
both domestic and
and Transactions
foreign sources
5. Other Sources

Withdrawals from
available cash
balances
Government Expenditure and Revenue
Philippine Setting

Government Expenditures
Government
GE
The Philippine Government reached an all time-
Government Revenues
Expenditures
high in the expenditures in the second quarter of
2020 with P8.54 Trillion.

Government Revenues
GR The Philippine Government reached
an all time-high in the revenues in
June of 2020 with P350.97 Billion.
Government Expenditure and Revenue
Philippine Setting

Government
Philippine
Government

Expenditure
(January 2020 - October 2020)
Government Expenditure and Revenue
Philippine Setting

Government

Philippine
Government

Revenue
(January 2020 - September 2020)
 References
Financing of National Government Expenditures
https://www.dbm.gov.ph/wp-content/uploads/2012/03/PGB-B5.pdf

Theory and Practice of Public Administration in the Philippines

Avelino P. Tendero
1993

Handbook of Local Fiscal Administration in the Philippines

Alicia B. Celestino, Norberto G. Malvar, Romulo R. Zipagan Sr.
December 1998

Internal Revenue Allocation

https://www.treasury.gov.ph/?page_id=3471

Local Fiscal Administration

Jocelyn C. Cuaresma and Simeon A. Ilago

Public Fiscal Administration

https://www.academia.edu/34626340/PUBLIC_FISCAL_ADMINISTRATION_pptx
Government
Budgeting
CONSTITUTIONAL PROVISIONS & MAJOR LAWS
AFFECTING THE BUDGET/BUDGET PROCESS:
PHILIPPINE CONSTITUTION

• Sec. 24, Art. VI: All appropriation, revenue or tariff bills increase of the public debt, bills of local
application and private bills shall originate in the House of Representatives, but the Senate may propose
or concur with amendments.

• Sec. 22, Art. VII: The President shall submit to the Congress, within thirty days from the opening of
every regular session as the basis of the general appropriations bill, a budget of expenditures and
sources of financing, including receipts from existing and proposed revenue measures.

• Book VI of Executive Order No. 292 series 1987, or the Administrative Code of 1987 entitled
National Government Budgeting

• Other Applicable Laws

GOVERNMENT BUDGETING

is the critical exercise of allocating revenues and borrowed

funds to attain the economic and social goals of the country. It
also entails the management of government expenditures in such
a way that will create the most economic impact from the
production and delivery of goods and services while supporting a
healthy fiscal position.
KINDS OF BUDGET
A. Annual Budget
-a budget which covers a period of one year. It is the basis of an Annual
appropriation.
B. Supplemental Budget
-- a budget which purports to supplemental or adjust a previous budget which is
deemed to inadequate for the purpose for which is intended.
C. Special Budget
- a budget of special in nature and submitted in a special forms on account of the fact
that itemizations are not adequately provided in the Appropriation Act or that
amounts are not included in the Appropriation Act.
National Budget
NATIONAL BUDGET

◦ is the proposal of revenues and expenditures

of a government expects for a given fiscal
year.
BUDGET PREPARATION
Consolidation,
DBCC sets Executive
Validation &
parameters Review Confirmation

Technical Presentation
Budget Call Budget To President
Hearings & Cabinet

Stakeholders Agency The

Budget President’s
Consultation Proposals Budget
BUDGET PREPARATION
• Budget preparation starts with the Budget Call
which sets the parameters and procedures to
guide agencies in preparing their respective
Budget Call proposed budgets.

• seeks to increase citizen participation in the

budget process, departments and agencies are
tasked to partner with civil society
Stakeholders organizations (CSOs) and other citizen-
stakeholders as they prepare their agency
Consultation budget proposals.
BUDGET PREPARATION
• These are conducted after departments and agencies
submit their Agency Budget Proposal to the DBM. Here,
agencies defend their proposal budget before a technical
Technical panel of DBM, based on performance indicators on
Budget output targets and absorptive capacity. DBM bureaus then
Hearings review the agency proposals and prepare
recommendations.

• The recommendations are presented before an Executive

Review Board which is composed of the DBM Secretary
and senior officials.
Executive • Implementation issues are also discussed and resolved.
Review
BUDGET PREPARATION• DBM then consolidate the recommended agency budgets
and recommendations into a National Expenditure Program
(NEP) and a Budget of Expenditures and Sources of
Financing (BESF).
• As part of the consolidating process, the deliberations by
Consolidation,
Validation and the DBCC determine the agency and sectoral allocation of
Confirmation the approved total expenditure ceiling, in line with the
macroeconomic and fiscal program. Heads of major
departments are invited to this meeting.
• The proposed budget is presented by DBM, together with
the DBCC, to the President and Cabinet for further
refinements of prioritization. After the President and
Presentation to Cabinet approve the proposed National Expenditure Plan,
President and the DBM prepares and finalizes the budget documents to be
Cabinet submitted to Congress.
 Budget Preparation
• The budget preparations phase ends with the
The submission of the proposed national budget –the
President’s “President’s Budget”-to Congress.
Budget

* The President’s Budget consist of the following documents, which help legislators
analyze the contents of the proposed budget:
 President’s Budget Message (PBM)
 Budget of Expenditures and Sources of Financing (BESF)
 National Expenditure Program (NEP)
 Details of Selected Programs and Projects
 Staffing Summary
Budget of Expenditures and Sources of
Financing (BESF)
Mandated by the Constitution, this document contains macroeconomics assumptions, public
sector context (including overviews of LGU and GOCC financial positions), breakdown of
the expenditures and funding sources for the budget year, the current and the previous years.
Click icon to add picture

National Expenditure Program (NEP)

Submitted to assist Congress in the review and deliberation of the proposed
national budget for the legislation of the annual appropriations measures for the
next fiscal year. It contains the details of the government’s proposed programs
BUDGET LEGISLATION
BUDGET LEGISLATION
also called the “ Budget Authorization
Phase” this starts upon the House Speaker’s
Receipt of the President’s Budget or the
General Appropriations Bill (GAB) and
ends with the President’s enactment of the
General Appropriations Act (GAA).
BUDGET LEGISLATION
House Deliberation

- As in the House process, the Senate conducts its own

committee hearing and plenary deliberations on the GAB.
Budget deliberations in the Senate formally start after the
House of Representatives transmits the GAB.
- The Committee submits its proposed amendments to the GAB
to plenary only after it has been formally transmitted by the
House.
BUDGET LEGISLATION
Senate Deliberations

- As in the House process, the Senate conducts its own

committee hearing and plenary deliberations on the GAB.
Budget deliberations in the Senate formally start after the
House of Representatives transmits the GAB.
BUDGET LEGISLATION
Bicameral Deliberations

- Once both House of Congress have finished their

deliberations, they will each constitute a panel to
the Bicameral Conference Committee. This
committee will then discuss and harmonize the
conflicting provisions of the House and Senate
Versions of the GAB. A Harmonized Version of the
GAB is thus produced.
BUDGET LEGISLATION
Ratification and Enrolment

- The Harmonized or “Bicam” Version is then

submitted to both Houses, which will the vote to
ratify the final GAB for submission to the
President. Once submitted to the President for his
approval, the GAB is considered enrolled.
BUDGET LEGISLATION
* The Veto Message
• The President and DBM then review the GAB and prepare a Veto
Message, where budget items subjected to direct veto or conditional
implementation are identified, and where general observations are made.

* Reenactment

• When the GAA is not enacted before fiscal year starts, the previous years
GAA is automatically reenacted. This means that agency budgets for
programs, activities and projects remain the same.
 BUDGET EXECUTION

◦ This is where the people’s money is actually spent. As soon as

the GAA is enacted, the government can implement its priority
programs and projects.
BUDGET EXECUTION
• The budget execution phase begins
Release
with DBM’s issuance of guidelines
Guidelines and
on the release and utilization of
Program funds.

• Agencies are required to submit their

Budget
BEDs at the start of budget
Execution
execution. These documents outline
Documents agency plans and performance
(BEDs) targets.
BUDGET EXECUTION
• Allotments, which authorize an
agency to enter into an
Allotmen obligation, are either released
by DBM to all agencies
t comprehensively through the
Agency Budget Matrix
Release (ABM) and individually via
Special Allotment Release
Orders (SAROs).
 BUDGET EXECUTION
(ALLOTMENT RELEASE)
Agency Budget Matrix (ABM)
- This document disaggregates all
programmed appropriations for
each agency into two main
expenditure categories: “not
needing clearance” and “needing
clearance.”
- The ABM is the comprehensive
allotment release document for
appropriations which do not need
clearance, or those which have
already been itemized and fleshed
out in the GAA.
Special Allotment Release
Orders (SAROs)
- Items identified as “needing
clearance” are those which require the
approval of the DBM or the President,
as the case may be (for instance, lump
sum funds and confidential and
intelligence funds).
- For such items, an agency needs to
submit a Special Budget Request to the
DBM with supporting documents.
Once approved, a SARO is issued.
BUDGET EXECUTION
• In implementing programs,
activities and projects, agencies
incur liabilities on behalf of the
government. Obligations are
liabilities legally incurred, which
Incurring the government will pay for.
Obligation • There are various ways that an
s agency “obligates:” for example,
when it hires staff (an obligation
to pay salaries), receives billings
for the use of utilities, or enters
into a contract with an entity for
the supply of goods or services.
BUDGET EXECUTION
• This is the final step of the budget
execution phase, where government
monies are actually spent. The
Modified Disbursement Scheme is
Disburseme mostly used, where disbursements of
nt national government agencies
chargeable against the Treasury are
made through government servicing
banks, such as the Land Bank of the
Philippines.
GOVERNMENT
ACCOUNTING

64
GOVERNMENT ACCOUNTING
Encompasses the processes of analyzing, recording, classifying,
summarizing and communicating all transactions involving the
receipt and disposition of government funds and property, and
interpreting the results thereof (Section 109 of PD 1445).

65
LEGAL
FRAMEWORK:
 1987 CONSTITUTION
 PRESIDENTIAL DECREE NO.
1445- GOVERNMENT AUDITING
CODE OF THE PHILIPINES,
promulgated on June 11, 1978
 EXECUTIVE ORDER NO. 292-
ADMINISTRATIVE CODE OF
1987
OBJECTIVES OF GOVERNMENT ACCOUNTING:
Produce information concerning past operations and
present conditions;
Provide a basis for guidance for future operations;
Provide for control of the acts of public bodies and officers
in the receipt, disposition and utilization of funds and
property; and
Report on the financial position and the results of
operations of government agencies for the information of
all persons concerned. 67
 PURPOSES OF
GOVERNMENT ACCOUNTING:

ACCOUNTABILITY MANAGEMENT
REQUIREMENT

68
FUNDAMENTAL PRINCIPLES: Section 4 of PD
1445)
No money shall be paid out of any public treasury or depository
except in pursuance of an appropriation law or other specific statutory
authority.
Government funds or property shall be spent or used solely for public
purposes.
Trust funds shall be available and may be spent only for the specific
purpose for which the trust was created, or the funds received.
Fiscal responsibility shall, to the greatest extent, be shared by all
those exercising authority over the financial affairs, transactions, and
operations of the government agency.

69
Disbursement or disposition of government funds
or property shall invariably bear the approval of
the proper officials.
Claims against government funds shall be
supported with complete documentation.
All laws and regulations applicable to financial
transactions shall be faithfully adhered to.
Generally accepted principles and practices of
accounting as well as of sound management and
fiscal administration shall be observed, provided
that they do not contravene existing laws and
regulations. 70
THE THREE TYPE OF GOVERNMENT
ACCOUNTING SYSTEMS IN THE PHILIPPINE:

1.) GOVERNMENT ACCOUNTING

SYSTEM FOR NATIONAL
GOVERNMENT AGENCIES.
- This is used by the different departments,
bureaus, offices, and the regional offices and
operating units or field offices of these agencies.
71
2. ) GOVERNMENT ACCOUNTING
SYSTEM FOR LOCAL
GOVERNMENT UNITS.
- This is used by the provinces, cities
and municipalities.

72
3. ) GOVERNMENT ACCOUNTING
SYSTEM FOR GOVERNMENT
OWNED AND/OR CONTROLLED
CORPORATIONS.
- This system strictly follows the
commercial accounting system adopted by
private corporations.

73
IN ALL COUNTRIES, REGARDLESS OF THE OVERALL APPROACH, THE
ACCOUNTING PRACTICES USED, AND THE DATA DEVELOPED SHOULD SATISFY
THE FOLLOWING CRITERIA:

SIMPLICITY.

TIMELY, ACCURATE, RELIABLE AND MENINGFUL DATA IN RELATION TO AN IDENTIFIED

NEED.

USEFULNESS OF FINANCIAL DATA.

74
Accounting Responsibility
Under PD1445, accounting responsibility
for all government funds and property is
entrusted, immediately and primarily, to the
head of the government agency or office.

75
It is the duty of the head of the agency to
take reasonable steps to minimize, if not
to avoid the risk of losses, defalcations
and other types of irregularities in the
utilization of all government resources (to
safeguard the resources of the
government under his custody) and
periodic reporting to concern authorities.

76
The Head of the agency is made
immediately and primarily responsible on
all government funds and property
pertaining to his agency. Is made to rest
on the persons entrusted with the actual
possession or custody of the funds or
property.

77
 78

The government officers

that are mandated to discharge
the above-stated Accounting
responsibilities:

The Commission on Audit

- Serves as the external auditor
of the government agencies.
 THE DBM
- Is responsible for the design,
preparation, and approval of the
accounting systems of government
agencies, determines the accounting
and other item of information needed
to monitor budget performance and
assess effectiveness of the agency
operation. It prescribes the forms;
schedules of submission and other
component of reporting system needed
to accomplish and submit the required
information.
The Bureau of Treasury (BTr)
- Performs banking function for the national government. It receives
and keeps government funds, controls the disbursements thereof and
maintain accounts of the financial transactions of national government
agencies.
80
Government borrowings
 PUBLIC DEBTS
• The borrowing or taking loans by the government is known as
Public Debt.
• Public debt refers to the loans raised by government from
within or outside the country.
• Every government has to borrow when its expenditure exceeds
its revenue (Budgetary Deficits).
NEED FOR PUBLIC DEBTS

1. Budget Deficits

2. To finance war

3. Natural calamities

4. Economic development
NEED FOR PUBLIC DEBTS

5. To finance Public enterprise

6. To check economic stability

7. To provide foreign exchange

8. Soft Revenue option

SOURCES OF PUBLIC DEBT

Internal Debt - It refers to government loans floated in capital

markets within the political boundaries of the country.
The main sources of internal borrowing are:
i) Individuals.
ii) Banking & non-banking institutions.
iii) Central Bank.
SOURCES OF PUBLIC DEBT
External Debts - It refers to government loans floated in
foreign capital market.
The main sources are :
i) Foreign governments.
ii) International Monetary agency like World Bank IMF,
International finance corporation international development
association.
STRUCTURE OR CLASSIFICATION OF
PUBLIC DEBT
1. Internal & external debt 4. Short term and long term
2. Productive & unproductive debt.
debt 5. Funded and Unfunded debt
3. Redeemable & Irredeemable 6. Voluntary & compulsory
debt debt
 DEBT REDEMPTION
- Redemption of public debt means repayment of debt.
The various methods of debt redemption are:
1) Repudiation of debt - it means refusal to pay a debt all together.
2) Debt conversion - In this method the debt with high interest rate is converted into
new debt when the market rate of interest falls.
3) Budgetary surplus - A policy of surplus budget may be followed annually for
clearing of public debt gradually instead of creating a fund for its repayment on
maturity.
4) Terminal annuities - under this method the physical authorities clear off. Part of
public debt on the basis of terminal annuities into equal annual installments including
interest along with the principle amount.
 DEBT REDEMPTION
5) Refunding - In this method, there is issue of new bonds and securities by the
government in order to repay the matured loans. refunding is the process by which the
maturing bonds are replaced by new bonds.
6) Sinking fund - In this system the government establishes a separate fund known as
sinking fund. A fixed amount of money is credited by the government to this fund
every year. By the time one debt matures. There is enough amount in fund to pay off
loans along with the rate of interest.
7) Capital levy - It refers to a very heavy tax on property and wealth. It is a once for all
taxes imposed on the capital assets above the certain value. in fact capital levy is
advocated immediately after the war to repay the unproductive war debts.
 DEBT REDEMPTION

8) Reduction of rate of interest - sometimes the government takes statuary decision to

reduce the rate of interest payable on its public debt.
9) Additional provision of taxation - In this method new taxes are imposed to collect
revenue. It is a method of redistribution of income by transferring it from the tax
payer into the hands of bonds holders.
DEBT TRAP

It refers to a phenomenon where the government of a country

has to raise fresh loan just in order to pay the interest charged
on the earlier loan borrowed by govt. and it is very difficult
to repay to the amount. The government is trapped in vicious
circle of borrowing.
 BURDEN OF PUBLIC DEBT
The burden of public debt may be direct or indirect.

Direct burden is the total sacrifice made by the people in terms of money
whereas indirect burden represents the side effects of public debts on
economic and social conditions of the people.
.
.
 BURDEN OF PUBLIC DEBT

i. Direct Money Burden - It refers to the amount of money to be raised to meet the
revenue requirements. In case of internal public debt there is no direct money burden
because in this case money changes hands only. But in case of external debt money
burden is heavy.
ii. Indirect money burden – When the government spends the loans, it result in the
creation demand for certain commodities. As a consequences the prices of goods and
services rise imposing additional burden on the society.
 BURDEN OF PUBLIC DEBT

iii. Direct Real burden - It is in the form of reduction in economic welfare and this
strains and stresses tax payers.
iv. Indirect Real burden - The indirect real burden of a debt is also felt through the
ultimate effects on production when the government imposes taxes to repay loans and
interest, it discourages the willingness of the tax payers to work more & save more, thus
it adversely affect the production in a country and the indirect real burden of a tax will be
heavy.
 POSITIVE EFFECTS OF PUBLIC DEBTS
1. Mobilization of resources - Public borrowing is very helpful in implementing 5 year
plans and various other projects. with the help of borrowing govt. can easily make
various types of plans to mobilizes the resources efficiently.
2. Increase in the productive capacity - With increase in barrowing productive
capacity of a country can easily be increased. Borrowing is very much helpful in
using capital intensive techniques to increase the productive capacity of a country.
3. To promote Investments - Public borrowing helps in promoting investments,
borrower fund can be utilized for strengthening infrastructure and promoting
economic development of country.
 POSITIVE EFFECTS OF PUBLIC DEBTS
4. Developmental expenditure - Borrowing can be used to meet the
developmental expenditure like roads, communication system, railways
telecom, finance etc.
5. Obtaining foreign exchange- Borrowing in the form of foreign
exchange can be used to meet developmental activities. For
development purpose govt. tries to acquire money capital, raw material
from foreign countries. It can then only be possible if we have good
stock of foreign exchanges with us.
 ADVERSE EFFECTS OF PUBLIC DEBT
1. Inflationary impact - With increase in the public borrowing money
supply in the market also increases which increases the prices of the
commodity.
2. Additional tax burden - To repay the old loans. Government has to
impose new taxes on people which will be extra tax burden on the
people and it pinches a lot.
3. Adverse effect on saving and investment - for the repayment of loan
when government imposes new taxes on the people there will be
adverse effect on saving and investment because more saving & more
investment means more tax.
 ADVERSE EFFECTS OF PUBLIC DEBT
4. Effects on distribution of income - Public debt may sometime effect distribution of
income among people. Government raises loans from higher income group people
and the return of it is also given to them only. Thus rich becomes richer and poor
becomes poorer.
5. Unproductive debt - a part of the loan taken by the government is used to meet the
non developmental expenditure which never helps in increasing the production in the
country. Thus it is called dead weight debt which is very difficult to repay.
6. Debt servicing burden - The annual interest paid by the government in lieu of debt
increase is known as debt servicing burden. There is very large increase in debt
servicing burden in every country in modern times which has very dangerous
consequences.
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