Public Finance

Public finance

is the study of the role of the government in the

economy.
according to Dalton “It is concerned with the
income and expenditure of public authorities and
with the adjustment of one to another”
 Four major divisions in the study of public finance

 1. Public Revenue, which deals with the method of

raising funds and the principles of taxation. Thus, within the
purview of public revenue, we take up the classification of
public revenue, canons and justification of taxation, the
problem of incidence and shifting of taxes, effects of taxation,
etc.

 2. Public Expenditure, which deals with the

principles and problems relating to the allocation of public
spending. Here we study the fundamental principles
governing the flow of public funds into different channels;
classification and justification of public expenditure;
expenditure policies of the government and the measures
adopted for general welfare.
 Four major divisions in the study of public finance

.
 3 Public Debt, which deals with the study of the
causes and methods of public loans as well as public debt
management.

 4. Financial Administration, under this the

problem of how the financial machinery is
organized and administered is dealt with.
 Issues and Problems

Obstacles to mobilization of domestic

financial resources
Regressive Taxation
Inefficient tax administration-Inefficiency
Limited external sources of public financing
 Tax incentives
Borrowing
 Significance
 Taxation
 Protection of Infant Industries
 Provision Public Goods
 Side effects of a Market Economy
 Redistribute of Income
 Equity
 Subsidies and grants
 Optimum utilization of resources
 Economic Planning
 Providing employment opportunities
 Market failures
 Contributions to economy

 Efficient allocation of resources

 Distribution of income

 Macroeconomics stabilization
 Fiscal Policy

is the national government policy that involves

raising and disbursement of public funds.
Government uses fiscal policy as a stabilizing tool to
level off fluctuations in the economy, maintain high
employment, and keep inlfation low.
 Fiscal Policy operates this way :
If the buying and selling of goods and services is
slow :
*Fiscal Policy will move to raise aggregate
demand and perk up the economy

If the buying and selling of goods and services is

too fast :
*Fiscal policy will move to deccelerate demand
to a sustainable rate
Expansionary Fiscal Policy

Contractionary Fiscal Policy

Scenario: Consumer demand keeps on decreasing
Sales Drop
Huge volume of unsold stock
Firms will layoff workers
Workers will join the ranks of the unemployed
The worker’s demand will eventually drop
 Overall business futher weaken
Recession
a general slowdown of economy.
*The slowdown is noted from macroeconomics
indicators GDP and GNP.

Depression
deeper than recession
 Expansionary Fiscal Policy

the government usually cut taxes and/or

increase spending.
for the business sector, a tax cut means
automatic savings and increased profitability.
Scenario : Consumer demand rising fast

Prices will shoot up

People will not be able to buy what they used before
Economy will lapse to recession
 Contractionary Fiscal Policy

the opposite of expansionary fiscal policy. The

government usually increase taxes or decrease its
spending to contract or dampen demand to prevent
economy from overheating.
 FOREIGN
BORROWINGS
DEFINITION

Amount a country owes to

other countries, either directly
as result of government-to-
government loans or indirectly because
of a negative balance of trade.
HISTORY

In 1961, departing from the nationalist policies of predecessor

Carlos Garcia, Diosdado Macapagal embraced the virtues of
free enterprise, and opened the door to foreign investment,
gearing up the economy for global competition. In return, the
United States, the International Monetary Fund (IMF) and the
World Bank (WB) offered the government huge loans. It was
thought that foreign capital could be a catalyst of
development. That embrace, however, was probably our entry
into the debt trap. The pressure of the IMF and the WB was
already being felt. When he became president in 1965,
Ferdinand Marcos continued Macapagal’s economic
liberalization policies. The outcome was that the total
external debt rose from $277.7 million at the beginning of
Macapagal’s presidency in 1961 to $840.2 million at the end of
Marcos’ first term in 1969.
Philippines Total Gross
External Debt
 EFFECTS OF FOREIGN
BORROWINGS TO THE
COUNTRY
• the infrastructure development in the country from the period 1968 to the
present was mostly funded by the foreign loans
• the Philippine peso was devalued to control inflation in compliance with
the regulatory measures of the IMF
• goods for people’s daily needs seem to be controlled by the peso ratio with
the dollar
• moderates income tax rates to guarantee the solvency of external loans
• households having the patience to substitute consumption between
different periods can domestic government finance fiscal deficits by
borrowing abroad, and thereby enhance investment and economic growth
•additional foreign borrowing is associated with higher indebtedness and
slower economic growth
 Public
Public
Expenditures
Expenditures
• is spending made by the government of a
country

• spending by central government, local

authorities, and public corporations

Public
Public
Expenditures
Expenditures
• Raises Aggregate Demand.

• Direct the allocation of resources in the desired lines

and to influence the composition of national product.

• Generate and accelerate economic growth and to promote

employment opportunities.
Classification of Public
Expenditure
 Government Expenditure
Expenditure

Revenue Expenditure Capital Expenditure

• Incurred on civil • Incurred on building durable

administration (i.e., police, jails assets like building
and judiciary), defense forces, multipurpose river projects,
public health and education. highways, steel plants etc., and
buying machinery and
equipment
 Transfer payments Expenditure on Goods and
Services
• Expenditure against which • Government receives goods or
there is no corresponding service.
transfer of real resources (i.e.,
goods and services) to the
Government.

Transfer
Transfer Payments
Payments and
Expenditure
Expenditure on
on Goods and
Services
Services
 Developmental
Developmental and
and
Non-Development
Non-Development
Expenditure
Expenditure
Developmental Expenditure Non-Development Expenditure

• Expenditures which promote • Expenditure on defense, civil

economic growth.
administration (i.e., police,
jails and judiciary), interest on
public debt etc., are put into
the category of non-
development expenditure.
 40.00% 35.34%
34.21% 35.72%
35.00% 31.99%
30.00% Economic Services
24.48%
25.00% 22.20% 21.91% 18.58% 16.87% Social Services
20.00% 17.67% 17.87% 17.55%
Defense
15.00%
7.86% General Public Services
10.00% 6.22% 4.52% Debt Burden
5.00%
0.00%
2011 2012 2013

National
National Gov’t
Gov’t
Expenditures
Expenditures
http://data.gov.ph/infographics/budget
Taxation
Taxation
 Taxation
• Taxation is the imposition of financial charges or other levies,
upon a taxpayer by a state such that failure to pay is punishable
by law.
• It is a mode by which government make exactions for revenue in
order to support their existence and carry out their legitimate
objectives (Tax Law and Jurisprudence by Justice Vitug,
2000).
• Taxes are the lifeblood of the government, without which, it
cannot subsist.
History
• Ancient Egypt
• Bible
• Rome
• England
History
Buwis is paid for protection given by the Datus, Only Cheiftains
are exempted. Non-payment is punishable.

Tributo is a payment to the king of Spain by the early Filipinos.

Payment of rice, chickens, gold, textile or forced labor, Servicio Y
Polo.

Cedula is a certificate identifying a tax payer.

Bandala is one of the taxes collected from the Filipinos. It comes

from the Tagalog word mandala, which is a round stock of rice
stalks to be threshed
 Four R’s of Taxation

Revenue-Taxes earned by the government are used to fund

different projects.
Redistribution-The transferring of wealth from rich
section to the poor section.
Re-pricing-Taxes are levied to address externalities.
Representation-rulers tax citizens, and citizens demand
accountability from their rulers.
R.A. 8424
The principal taxes levied include: taxes on income and gains, taxes on
transactions, and taxes on property.

The laws governing taxation in the Philippines are contained within the
National Internal Revenue Code. This code underwent substantial revision
with passage of the Tax Reform Act of 1997. This law took effect on January
1, 1998.

Taxation is administered through the Bureau of Internal Revenue which comes

under the Department of Finance.

The chief executive of the Bureau of Internal Revenue is the Commissioner

who has exclusive and original jurisdiction to interpret the provisions of the code
and other tax laws. The commissioner also has the powers to decide disputed
assessments, grant refunds of taxes, fees and other charges and penalties, modify
payment of any internal revenue tax and abate or cancel a tax liability. Taxpayers
can appeal decisions by the Commissioner directly to the Court of Tax Appeals.
 Taxes
Capital Gains Tax is a tax imposed on the gains presumed to have been realized
by the seller from capital assets located in the Philippines.

Documentary Stamp Tax is a tax on documents, instruments, loan agreements

and papers evidencing the acceptance, assignment, sale or transfer of an obligation,
rights, or property incident thereto.

Donor's Tax is a tax on a donation or gift, and is imposed on the gratuitous

transfer of property between two or more persons who are living at the time of the
transfer.

Estate Tax is a tax on the right of the deceased person to transmit his/her estate
to his/her lawful heirs and beneficiaries at the time of death and on certain
transfers which are made by law as equivalent to testamentary disposition.

Income Tax is a tax on all yearly profits arising from property, profession,
trades or offices or as a tax on a person’s income, emoluments, profits and the
like.
Percentage Tax is a tax imposed on persons or entities who sell or lease goods,
properties or services in the course of trade or business whose gross annual
sales or receipts do not exceed P550,000 and are not VAT-registered.

Value-Added Tax is a business tax imposed and collected from the seller in the
course of trade or business on every sale of properties (real or personal) lease of
goods or properties (real or personal) or vendors of services. It is an indirect tax,
thus, it can be passed on to the buyer.

Withholding Tax Income tax withheld from employees' wages and paid directly
to the government by the employer. A tax levied on income (interest and dividends)
from securitie.
 Powers of the Commissioner

1. To interpret tax laws and decide tax cases;

2. To obtain information, and to summon, examine and take testimony of
persons;
3. To make assessments and prescribe additional requirements for tax
administration and enforcement;
4. To conduct inventory - taking, surveillance and to prescribe presumptive
gross sales and receipts;
5. To terminate taxable period;
6. To prescribe real property values;
7. To inquire into bank deposit accounts;
8. To accredit and register tax agents;
9. To prescribe additional procedural or documentary requirements; and
10. To delegate power to subordinates. (Sec. 4 to 8, NIRC)
 Kim S. Jacinto-Henares
Commissioner of Internal Revenue
Room 511, BIR National Office Building, BIR Road,
Diliman, Quezon City
kim.jacinto-henares@bir.gov.ph
922-3293/981-7121/981-7124