President Ramon Magsaysay State University

(Formerly Ramon Magsaysay Technological University)

College of Accountancy and Business
Administration Iba, Zambales, Philippines
Tel/Fax No.: (047) 811-1683

Government Subsidies and Income Support for the Poor (Module 6)

In Partial Fulfillment for the Subject of MAJOR ELEC C Public

Finance By:

Agustin, Bea Marie B.

Edusada, Andrea Gem

D. Efe, Cristelle Mae L.

Monato, Eloisa Karen N.

San Juan, Audra Joy R.

BSBA Major in Financial Management

To:

Mr. Armando Lorenzo Robles

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 PUBLIC FINANCE
Government Subsidies and Income Support for the
Poor Module 6

After reading this module, student should be able to:

1. Discuss the poverty in the Philippines.
2. Understand the basis for government assistance to the poor.
3. Explain the difference between cash assistance, price-distorting subsidies, and in-kind
allotments of benefits.
4. Learn the impact of government assistance and the economic analysis of their effect.

Poverty
It is about not having enough money to meet basic needs including food, clothing and
shelter.
Is a state or condition in which a person or community lacks the financial resources and
essentials for a minimum standard of living.
Poverty in the Philippines

How Poverty affects the Philippines?

With poverty plaguing the country and employment opportunities being scarce, many
Filipinos are unable to afford housing, which puts them in danger of turning to the streets for
accommodation.
The Philippines has a fairly high poverty rate with more than 16% of the population
living below the poverty line. From 2015 to 2020, the rate of poverty declined from 21.6% to
16.6%. Philippine President Rodrigo Duterte aims to reduce the rate of poverty to 14% by 2022.

The main characteristics of the poor include the following:

 The majority live in rural areas and work in the agriculture sector, mostly as farmers and
fishers.
 In the urban areas, such as Metro Manila, they are found in slums and the informal sector.
 They have large families (six members or more).
 In two-thirds of poor families, the head of household has only an elementary education or
below.
 They have no or few assets and minimal access to credit.

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Effects of Poverty in the Philippines
Poverty has proven to be one of the most significant challenges facing this country and its
citizens. Filipinos are having a hard time surviving in such difficult conditions, and more and
more are falling into extreme poverty.

1. Inability to Afford Housing

With poverty plaguing the country and employment opportunities being scarce, many Filipinos
are unable to afford housing, which puts them in danger of turning to the streets for
accommodation. In 2012, extreme poverty within the Philippines affected 19.2 percent of the
population or around 18.4 million people.
2. Malnutrition in the Philippines

Hunger is one of the extreme effects of poverty in the Philippines. With little money to buy food,
Filipinos are having to survive on very limited food; even when food supplies are stable, they are
most accessible in other areas where people have enough income to purchase the food.
3. Child Labor

With poverty taking a toll on Filipinos, parents often can’t make enough money to support their
families; children then have to be taken out of school to work in harsh conditions. Statistics show
that around 3.6 million children, from ages 5-17, are child laborers in the Philippines. This is
15.9 percent of the entire population.

4. Crime and Thievery

With conditions so troublesome, people often resort to crime and thievery to survive. Research
found that one of the overwhelming reasons to steal is due to difficulties caused by poverty.
Without proper employment, people turn to stealing, especially since family sizes are rather
large, and there are a lot of people to provide for.

Combating Poverty in the Philippines

1. Greater Access to Education

A factor of systemic poverty is a lack of access to education in impoverished
areas.
2. Greater Access to Healthcare

In an effort to improve the healthcare system, President Duterte signed the

Universal Healthcare Act in February 2019.

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 3. Family Aid
To further efforts to support citizens, the government implemented the Pantawid
Pamilyang Pilipino Program (4Ps) in 2007.
4. Economic Improvement

With the goal of reducing poverty by strengthening economics, President Duterte

signed the Rice Tariffication Law in February 2019, amending the Agricultural
Tariffication Act of 1996.
5. Build, Build, Build

Additionally, the Duterte administration created the “Build, Build, Build”

infrastructure plan in 2017.

Government Programs to Aid the Poor: The Basis and the Trade-Offs

Needs versus Earnings and the Equity-Efficiency Trade-Off

Government programs to aid the poor establish minimum standards of living for those
eligible for assistance. A common justification for establishing minimum standards of well-being
through transfers is that market outcomes can result in households earning less than the
minimum level required for survival. The result is low-income families who cannot earn enough
to support their children and otherwise meet their needs. Such outcomes are viewed as
unacceptable by many citizens and provide a basis of support for a program of “safety-net”
measures to prevent citizens’ incomes from falling below minimally acceptable levels.

Collective Benefits Resulting from Aid to the Poor: Social Stability and Safety Nets
Changes in the distribution of income that reduce the incidence of poverty can result in
benefits that are collectively enjoyed. From this perspective, income redistribution to the poor
can be viewed as a public good. Many people who support government efforts to redistribute
income do so because they believe that they, and other non-poor citizens, will benefit when
poverty is reduced. They might also believe that government programs that establish a safety net
to prevent personal income from falling below certain levels provide the non-poor with
insurance; that is, if individuals should suffer a financial or health-related catastrophe,
government policies would prevent them from becoming destitute.

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Government Programs of Assistance to the Poor in the United States
Eligibility

One of the crucial concerns in the development of programs to aid the poor in the United
States has been the effect of transfers on the work incentive of the recipients. As a result, the
major welfare programs for the poor in the United States have mainly assisted those who, for one
reason or other, cannot work. These groups include the disabled, the aged, and families of needy
children headed mainly by women. Those falling into these demographic categories satisfy the
status test for public assistance.
The status test provides only a crude indication of the extent to which candidates for
public assistance are capable of working. Use of health, age, or other arbitrary criteria to
determine whether a person is able to work provides only an imperfect indication of the actual
capacity to work.
Under the reformed system of income support for the poor in the United States, the status
test for eligibility has been revised. Depending on individual state policy, most recipients of
welfare are required to work or seek work training and are eligible for income support only for a
limited time.
To be eligible for cash and other forms of assistance in the United States, recipients also
must pass a means test, which establishes that those passing the status test also have incomes and
asset levels that are below the minimally required amounts to be eligible for aid. Those meeting
both the means test and the status test are automatically entitled to the transfers.

Cash Assistance to the Poor in the United States: Temporary Assistance to Needy Families
and Supplemental Security Income
Two major programs provide welfare assistance in the form of cash transfer to the poor in the
United States:
1. Temporary Assistance to Needy Families (TANF)
Provides family support payments on a temporary and limited basis through grants to
state governments, which in turn determine eligibility by income and conditions for receiving
welfare payments.

TANF replaces three programs of support to the poor that existed prior to 1996:

 Aid to Families with Dependent Children (AFDC)

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 Which provided income support to families with children deprived of potential support.

 JOBS
An employment and training program for AFDC recipients; and

 Emergency Assistance
Which provided short-term emergency services and benefits to needy families.

2. Supplemental Security Income

SSI is a federally funded and operated program that provides cash transfers to the aged,
the blind, and the disabled who pass a means test.

The federal government provides additional assistance to the poor through the:
Earned Income Tax Credit (EITC)

A program for families who work and have children that provides assistance in the form
of supplements to earnings that are transfers paid out when eligible recipients file appropriate
federal income tax forms.

TANF, Work, and Public Assistance: Welfare reform in the United States

Under the old system, a female head of a family eligible for cash transfers under AFDC
would also have been eligible for food stamps, Medicaid, and possibly other programs such as
housing subsidies. If a mother receiving income support began working, her welfare benefits
would be phased out beyond allowances for basic child care expenses and other work-related
expenses.
The Personal Responsibility and Work Opportunity Act of 1996 was a fundamental
change in the system of income support to the poor in the United States that requires most
welfare recipients to work.

Provisions of TANF designed to achieve these objectives:

1. Means-tested cash transfers are limited to five years to any family over their lifetime.

2. To enable heads of families with dependent children to work, each state to receive a grant
subsidize child care services to the poor.

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3. To reduce future caseloads and the number of welfare recipients, TANF includes policies to
reduce the number of non-marital births.
4. A parent with a child over the age of five who refuses an offer of work applied by social
service caseloads will lose benefits.

The Impact of Welfare Reform in the United States: TANF, Declining Caseloads, and
Increased Labor Force Participation of the Poor
State programs have focused on providing job preparation skills to those enrolled in
TANF. Relatively small amounts are actually spent on training for specific jobs. State
governments have greatly increased their spending for work support including child care
subsidies and transportation subsidies. State also assist those enrolled in TANF with job search
expenses and some cases, subsidize wages.

Recessions and TANF

A booming job market and tight markets in many larger cities made it relatively easy to
find job for those on the new temporary assistance program. A major concern with the reformed
welfare program was how well it would hold up under the pressure of the rising unemployment
rates that accompany a recession.

In-Kind Aid to the Poor: Supplemental Nutrition Assistance, Medicaid, Housing

Assistance, and Other Programs
In-Kind Aid/ In-Kind Benefits

 Noncash benefits that increase the quantities of certain goods and services that will be
consumed by the recipients.
 In-kind benefits are those received in some form other than money that improve the well-
being of recipients.
 Aid provided in the form of goods or services rather than in the form of money.
 Example of in-kind benefits are medical services, food, and housing.
 Some poor people also receive subsidies that lower the prices they pay for services such
as housing they purchase in the marketplace.
Nutrition Assistance

 In kind food commodities that are shipped from the United States to places in most need.
 Food/nutrition assistance is a broader term that refers to both in-kind food commodities
as well as market-based activities that ultimately combat hunger and malnutrition.

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  SNAP provides nutrition benefits to supplement the food budget of needy families so
they can purchase healthy food and move towards self-sufficiency.
Supplemental Nutrition Assistance Program (formerly called the food stamp program)

Is a federally financed subsidy program that began in 1971. Under this program administered by
state governments, recipients receive electronic benefits transfer (EBT) cards that can be
redeemed for food and related items at stores. An eligible recipient must pass a means test. The
actual amount of stamps received per month varies with a person’s earned income, less allowable
deductions. The benefits received by recipients decline as earned income increases. Total federal
government outlays for the Supplemental Nutrition Assistance Program in 2008 were $39
billion.
WHO ARE ELIGIBLE FOR STAMP

 Are working for low wages, part-time or unemployed.

 A resident or green card holder of the US for more than 5 years.
 Living with a child who is a citizen or US resident.
 Receiving welfare or other public assistance.
 Homeless
 Are elderly or living with a disability.

Medicaid

 Refers to a public health insurance program that provides health care coverage to low-
income families and individuals in the United States.
 It was enacted by Congress in 1965 to provide, at government expense, medical care
services for the poor.
 This program is jointly financed by the federal and state governments but administered
by state governments.
 It provides benefits for most of those eligible for TANF and SSI cash subsidies and
others who pass a means test.
 Service provider fees are billed directly to the various state governments.
Medical Assistance Program (MAP)
A program of the Department of Health intended to provide medical assistance to patients
seeking consultation, rehabilitation, examination or otherwise confined in government hospitals.

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Housing Assistance

 Regional Resettlement Program

It addresses resettlement requirements of Local Government Units (LGUs) outside Metro
Manila involving families living along danger areas, those affected by government
infrastructure projects, indigenous people and former rebels.
 Housing Assistance for Calamity Victims
This program is intended to respond to the housing need of low and marginal income
and/or informal settler families for permanent shelter affected by calamities such as
typhoons, landslides, earthquake, and fires for relocation to safe areas.

Various other programs, including those for social services (such as foster care, child nutrition,
and state children’s health insurance) are available through state and local governments for
those who meet both means and status tests.

In-Kind Versus Cash Transfers

In-Kind- Something other than money.
Cash Transfers- Is plain money the government provides to those in need.

SUBSIDIES TO HOUSING AND FOOD

Public Housing

 Housing provided for people with low incomes, subsidized by public funds.
 This housing is usually rented to eligible citizens at rates considerably below those
prevailing in the market.

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 Figure 7.5: A person eligible for a standardized three-room apartment at a subsidized rent,
whose indifference curves are shown in the graph, reduces consumption of housing from four to
three rooms per month. If the person were given the monthly cash value of the in-kind subsidy,
$210, he would increase housing consumption.

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 Figure 7.6: The person whose indifference curves are drawn is better off remaining in his
four-room apartment than moving into the three-room public housing at point G. This person
does not accept the offer of subsidized public housing.

The Housing and Community Development Act of 1987

Authorized a new voucher program that gives low-income households funds that can only be
used to rent housing. These vouchers provide subsidies to rent privately owned housing units
instead of limiting the subsidy to public housing.

Supplemental Nutrition Assistance: A Fixed Allotment Subsidy

Fixed allotment subsidies give eligible recipients the right to consume a certain amount of a
good or service each month either through direct allotment of the item or the issuance of
vouchers that can be used only to buy a specific item.

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 Figure 7.7: In A, a food grant in the form of an electronic benefit transfer that allows the
purchase of QF units of food per month have the same effect as a cash grant of F. In B, the food
grant results in more consumption of food than would be the case if the recipient received an
equivalent cash grant of F.

Subsidies and Transfers to Individuals: Economic Analysis of Their Effects

The Impact of Government Assistance

A major concern about all transfer programs is their effect on resource allocation.

 In-kind programs of assistance can distort the behavior of the recipients in ways that
cause losses in efficiency.

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  The programs can result in consumption of goods or services by recipients beyond the
point at which the marginal benefit of the item to the consumer falls to equal its marginal
social cost.
 In addition, the availability of the programs themselves could result in changes in the
behavior of those who would take advantage of eligibility requirements.
 Finally, those who are already receiving government assistance might lose their incentive
to work if earning income results in a loss of cash and in-kind benefits.
 The effects of government assistance programs to the poor on resource allocation
highlight the realities of the equity-efficiency trade-off.
All forms of assistance to the poor can be regarded as subsidies. In effect, subsidies are
the opposite of taxes. They are payments to individuals, usually from governing authorities,
subject to certain terms and conditions. Economic analysis of in-kind and cash subsidies helps to
isolate their impact on efficiency.
Price-Distorting Subsidies
Subsidies that reduce prices to consumers below the market price are called Price-
distorting subsidies, which (other things being equal) are likely to result in losses in efficiency
as individuals act to substitute the subsidized good for other goods in their annual budgets.

For example, poor people often are eligible for housing subsidies that allow them to rent
apartments at monthly rents below the market equilibrium rent for similar housing. The
government then pays the difference between the actual rent and the amount that the tenant pays.
The difference between the market rent paid to the landlord and the tenant’s rent is the subsidy.
Some government programs subsidize payments on mortgage loans to enable low-income
individuals to buy their own homes. Similarly, some poor people also receive subsidies that
reduce the price of energy and other services.

A price-distorting
subsidy to housing services
moves the recipient from
equilibrium at point E1 to
equilibrium at E2, as the
price that must be paid for
such services declines.
If instead the recipient were
given N2S per year as a cash
subsidy, she would be in
equilibrium at point E3. The
person is better off at E3 than
at E2 because she achieves
utility level U3 U2.

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The Excess Burden of a Price-Distorting Subsidy: Market Effect
The cost of a subsidy to low-income
tenants to taxpayers is represented by
the rectangular area BAE C. The net
benefits to recipients of the subsidy
are represented by the area BEE’ FC.
The excess burden of the subsidy is
the difference between its costs to
taxpayers and the benefits to
recipients, represented by the
triangular area EAE’. The subsidy
causes more than the efficient amount
of resources to be devoted to housing
because the marginal social cost of
housing after the subsidy exceeds the
marginal social benefit received by
tenants.

A Price-Distorting Subsidy That Lowers the Price to Zero

A full subsidy
reduces the price of
the subsidized good
to zero for
consumers, who
continue consuming
the good until its
marginal benefit is
zero.

THE IMPACT OF GOVERNMENT ASSISTANCE PROGRAMS FOR THE POOR ON

THE WORK INCENTIVE OF RECIPIENTS
Welfare benefits in cash or in kind assure the recipient of a minimum level of real income
independent of work. The more generous the grant, the greater is the disincentive to work. In
other words, a transfer results in an income effect that is unfavorable to work.

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 If leisure is a normal good, an
increase in income caused by a transfer
increases leisure hours per day. The
income effect of the transfer therefore is
unfavorable to work. A transfer of BG
dollars per day will reduce hours worked
per day to zero for the person whose
indifference curves are illustrated.

Transfer income per

day declines as the recipient’s
earned income per day
increases. At point C, the
subsidy per day would be
zero. The subsidy reduces the
net wage if the person takes
more than L* hours of leisure
per day. This transfer reduces
the incentive to work because
it generates both income and
substitution effects
unfavorable to work.

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REVIEW QUESTIONS:
I. IDENTIFICATION

1. Housing provided for people with low incomes, subsidized by public funds.
2. Is a state or condition in which a person or community lacks the financial
resources and essentials for a minimum standard of living.
3. Is plain money the government provides to those in need.

4. Which provided short-term emergency services and benefits to needy families.

5. is a federally funded and operated program that provides cash transfers to the
aged, the blind, and the disabled who pass a means test.
6. Noncash benefits that increase the quantities of certain goods and services that
will be consumed by the recipients.
7. Subsidies that reduce prices to consumers below the market price

8. Provides nutrition benefits to supplement the food budget of needy families so

they can purchase healthy food and move towards self-sufficiency.
9. It refers to a public health insurance program that provides health care coverage
to low-income families and individuals in the United States.
10. Give eligible recipients the right to consume a certain amount of a good or
service each month either through direct allotment of the item or the issuance of vouchers that
can be used only to buy a specific item.

II. ESSAY

1. What is the difference between In-Kind and Cash Transfers? If you are eligible to receive one
of those, what would you choose?
2. Is Price-distorting subsidy helpful to the poor or it is sometimes the reason why people do not
go to work? Why?
3. What causes poverty in the Philippines? Explain.

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RESOURCE AND ADDITIONAL RESOURCES
https://www.investopedia.com/terms/p/poverty.asp

https://borgenproject.org/tag/poverty-in-the-philippines/
https://www.oxfordreference.com/view/10.1093/acref/9780198759430.001.0001/acref-
9780198759430-e-3998 https://www.usaid.gov/food-assistance/faq
https://www.benefits.gov/benefit/361 https://www.investopedia.com/terms/m/medicaid.asp
https://www.google.com/url?sa=t&source=web&rct=j&url=https://www.dswd.gov.ph/issuances/
MCs/MC_2016-
014.pdf&ved=2ahUKEwjnyL70pZ_1AhWKNZQKHUV5BVEQFnoECAQQBg&usg=AOvVaw
1JJFYWwVP5OY-e9oxbBh1L https://nha.gov.ph/programs/
https://www.google.com/url?sa=t&source=web&rct=j&url=https://quizlet.com/26241775/econo
mics-ch-3-flash-
cards/&ved=2ahUKEwiakIeErZ_1AhXMLqYKHdBFBl4QFnoECDQQBQ&usg=AOvVaw1rkL
jxBxG31z-lSynRYAQl

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