Module 2
Expenditures
THE DEVELOPMENT OF PUBLIC FINANCE
INTRODUCTION
The development of the state was a product of developing public finance
institution. Changes in concepts of what should be the functions and
responsibilities of the state have to a large extent shaped concepts of what
the goals of public finance ought to be. For after all, public finance raises
and spends revenue for the functions of the state. These functions have
been changing with the development of society. Thus, tracing the
development of public finance institutions necessitates an examination of
the development of organized society itself.
The history of public finance in the Philippine setting is traced from the
primitive period, that is, prior to the arrival of the Spaniards in 1521. The
era of the Spanish administration which lasted for nearly four countries,
traces the developments under a colonial ruler. The coming of the
Americans, by virtue of the Treaty of Paris of 2898, relates the start of
United States influence on Philippine public finance. The development is
then seen through the Commonwealth, the Japanese occupation, the early
period of the Republic, and contemporary developmental strides. As in the
case in the worldwide development of public finance, Philippine public
finance started from simple tributes to finance personal expenses of the
ruler and has since developed into the complex instrument designed to
attain accelerated economic development that it is today.
PRIMITIVE SOCIETIES
The origin of public finance institutions was probably start with the
beginnings of the state under the slave societies. During the primitive
stage, there was no public finance. People were living by acquiring foods
through hunting or fishing, indicating they are living on a subsistence basis,
with hardly any surplus. Whatever was acquired from hunting and fishing
was immediately consumed. Battle over territories, the capture of defeated
tribes who were turned into slaves, the development of settled agriculture
and rudimentary advances in the production of goods led to the great slave
empires of Asia, Africa and Europe.
The early public finance institutions of these slave societies served as
foundations for modern institutions and practices.
The role of public finance, became linked with function of government. To
protect and maintain the state system, the government had to perform
several vital functions. Among the most basic of these functions:
A.
1) Protection of the people, the territory and sovereignty from outside
aggression. As the state was undergoing its initial state of formation under
the slave empires, it was subjected to constant aggression within and from
outside. At the same time, it had to do evil aggression to eliminate its
neighbors expand its frontiers and consolidate its territories. Ancient public
finance was, therefore, characterized by enormous public expenditure for
defense and aggression. The provision and maintenance of armies and
navies were basic allocations of the public purse. As a matter of fact,
writers claim that public finance started with war activities. This was the
largest single item of expenditures in ancient times. Regimes were literally
driven into bankruptcy because of war expenditures. War was such a
frequent preoccupation that peace has been defined as “an uneasy period
between two wars.”
2) The preservation of internal peace and order and security and the
administration of justice. Considering the fact that a vast majority of the
population might rebel any time, peace and order for the ruling minority
was a primary concern. The administration of justice, of course, was for
the free citizens and not for the slaves. Security, within and without, can
therefore be considered as the main function of ancient governments; it
therefore followed that much of public finance was poured in its activity.
3) The maintenance of a state religion. Religion helped stabilize and
rationalize the ruling order in slave empires. It therefore played a major role
in justifying the slave system. In slave empires, as in Egypt, the rulers were
considered gods and goddesses; they were looked upon as human
manifestation of deities and were considered religious as well as temporal
leaders.
4) The maintenance of the king and his household was deemed the
inalienable right of the sovereign. It was the people’s obligation to
provide him with revenues and he, to spend such (as a divine obligation),
for anything he deemed good for the public welfare.
5) The state concerns included limited goods and services like the
distribution of free grain in times of famine as in Rome, public recreation,
and physical education.
B. Revenues
To finance its public functions: the state imposes and collect revenues
1) to the slave ordinarily limited to lootings and tributes from conquered
peoples, war chests, fines, and direct taxes imposed on non-citizens of the
State or on conquered peoples. The vassalage taxes imposed on
conquered provinces and donations or gifts from the wealthy citizens of the
state.
2) Imposes taxes in times of emergency.
3) Gifts of some citizens
4) Public domain particularly from agriculture and mines
5) Poll tax levied on Egyptians male populations and non-Roma citizens
engaged in business
6) Tax on inheritance
7) Higher tax rate for childless couples and unmarried individuals
C. BUDGETING
Budgeting was exercised because of the need to allocate public revenues
for specific purposes. Since the public budget was emerged with the king’s
purse, there was no distinction between the public and the king’s private
expenditures.
D. BORROWINGS
Public borrowings and debt management were unheard of. Although there
was already a form of money lending, the ancient state did not borrow
money even in emergencies. It only solicited gifts or levied limited taxes.
The ancient state was relatively self-sufficient and public expenditures
were usually borne by the citizens and non-citizens without recourse to
loans.
PRE-SPANISH PERIOD
The monarchial form of government during the early period is known as
barangay.
The barangays were independent and governed by rulers, called datus or
rajahs who enjoyed the unconditional loyalty of the people. The
relationship between the datu and his subjects was direct. The subjects
paid a tribute, called buiz, from the crops that they gathered or raised. They
also rendered personal services to the ruler by assisting him with his wars,
exploits, and various miscellaneous services, such as cultivating the ruler’s
land. In return the ruler-maintained peace and order and assisted his
subjects in obtaining the necessities of life. Some members of the
barangay, like the nobles and freemen were exempt from paying tributes
and from rendering services to the ruler except in case of war
SPANISH PERIOD
Spain imposed tributes or taxes upon Filipinos for its survival and
benefit. In year 1569, the fist Spanish Governor-General to the Philippines,
Miguel Lopez de Legaspi commenced the strict collection of tributes from
the Filipinos. The tribute was payable in kind or produce of the soil at the
official price. Several years, they levied a low duty of 3 percent on goods
from the orient and 2 percent on goods from Mexico purely for revenue
purpose.
With the beginning of the era of mercantilism, the direct trade with Spain
was curtailed, the volume was restricted and all goods had to be sent to
Mexico. Other trade restriction was enforced locally in the Philippine and
the result was that the Spanish treasury was obliged to make good serious
deficits in the Philippine government budget, Spain annual contribution to
the Philippine treasury was accelerated.
Prior to the coming of American in 1898, the taxes imposed and collected
during the Spanish regime were:
1. Specific duties on all imports
2. Surtaxes for harbor improvements
3. Ad valorem taxes on imports
4. Consumption taxes on certain imports
5. Miscellaneous charges, and
6. Export duties.
Internal revenue derived from the following sources:
1. Industrial taxes
2. Urbana taxes
3. Stamp taxes
4. The sale of certificates of registration (cedula)
5. The public domain
COMING OF THE AMERICAN
1. Tariff duties and internal taxes imposed by the Spanish
Government were continued for some time.
2. The enactment of a United States income tax law in 1913 brought
forth income taxation in the Philippines.
3. Phil. Income Tax Law, Act No. 2833 dated March 7, 1919,
embodied the rates and exemptions of the 1916 US income tax
law.
4. June 15, 1939, comprehensive taxation came into the Phil. With
the enactment of the National Internal Revenue Code,
Commonwealth Act. No. 466., which contribute much to the
general fund of the national government even up to present.
JAPANESE PERIOD
1. While, the Japanese authorities imposed various new or radically
increased sales and luxury taxes and license fees, the printing of
Japanese war note, was resorted to for running the government.
2. Before the Japanese occupation, total Philippine money supply,
currency and demand deposits, never exceeded P300 million, less
than 1/20th of the amount the Japanese placed in circulation, using
the lowest estimate.
3. It is of the interest to note that the National Assembly of the
Japanese-sponsored Philippine Republic authorized the creation
of a Central Bank which did not actually come into being.
EARLY YEARS OF THE REPUBLIC
1. During the Spanish period, the government had a centralized
budget. The annual budget was prepared in Manila and was sent
to Spain for approval by the Minister of the Colonies. It included the
estimated receipt and expenditures of the central, provincial, and
municipal governments for the year.
2. During the early years of American sovereignty, the Philippines
Commission approved the annual budget of the government.
Under the Phil. Bill of 1902, the Phil. Assembly and the Philippine
Commission exercised this power jointly. This law provided that in
case the 2 houses (the Senate and Congress) should disagree and
no budget was approved for a given year, the budget of the
preceding year was to be followed. This budgetary system was
patterned largely after the English System and was introduced in
the Philippines, 1917.
3. Under the Jones Law, the Governor General was required to
submit to the Philippine Legislature, within 10 days after the
opening of its regular session, a budget of receipts and
expenditures to be used as the basis of the annual appropriation
bill for the national government.
4. The budgetary system of the national government is governed by
the Constitution.
5. The contents and procedures in the preparation of the budget are
provided for in the Budget Act of 1937, Commonwealth Act No.
246, and the Revised Budget Act of 1954, Republic Act. No. 992.
6. The Bureau of the Treasury is one of the oldest bureaus of the
national government. From 1901 until the creation of the Central
Bank in 1948, The National Treasury was the depository of all the
funds of the government. It was charged with the:
(1) receiving deposits from all government offices – national,
provincial, city, and municipal,
(2) It paid all government obligation by cashing treasury
warrants drawn by the various bureaus, offices,
instrumentalities and subdivisions of the government
(3) in charged with the receiving deposits from the government
offices – national, provincial, city, and municipal, and
(4) receipt and custody of all funds pertaining to national
collections, including legal including legal disbursements,
cash management and forecasting with a view to avoiding
deficits and enabling the treasury to obtain cash under
favorable terms and conditions, and the provision of funds
for pensions, retirements and gratuities, loan repayments
and sinking fund contributions and interest payment.
7. One of the landmarks in the Philippine monetary setup and public
finance is the establishment of the Central Bank on June 15, 1948,
Section 115 of Republic Act No. 265 which states that Central Bank
shall act as the fiscal agent and banker of the Government, its
pollical subdivision and instrumentalities.
8. The period 1949-1951, various developments happened, namely,
a) Imposition of import controls to check the drain
on the international reserve and to shift the
pattern of imports from consumer to capital
goods,
b) Licensing of all imports,
c) Imposition of selective credit controls, and
d) Adoption of a flexible system of exchange
control.
9. The government sector was a major factor in the maintenance of
economic
(5) stability in 1952-1954. Changes are as follows:
• 1952, a surplus was realized
• 1953, Government had opportunities to
prosecute development projects:
a) Tax exemptions law, amending Republic Act No. 35,
providing more
(6) Effective instrument for accelerating industrial
development.
b) Creation of Tariff Commission was enacted.
c) Republic Act No. 1000 authorizing the issuance of bonds
up to
 (7) P1billion to finance public works and economic
development projects, launching a 3-yearperiod of heavy
deficit spending.
* 1954, large expenditure outlays for economic development were
provided
a) Retail Trade Nationalization Law was passed on June 19, 1954,
allowing the Filipino to engage in retail trade, except those who were
already in the business at the time the law was passed

* 1955, the Laurel-Langley Agreement which revised the 1946 Trade

Agreement with the US, known as Bell Trade Act was formalized. Under
this revised agreement, Philippine tariffs on US goods beginning January
1956 willrise rapidly than US tariffs on goods coming from the
Philippines.
* 1957 saw the adoption of various measures to curtail inflationary
pressures as well the adoption of austerity measures in the government
sector. The ceiling for domestic bond issues were reduced and the
government cut expenditures to bring down the level of total
spending to more manageable proportions
9. To consolidate the overall stabilization program was drawn up in March
1959. The most important features of the plan which subsequently
authorized by Congress was the imposition of a margin levy of not more
than 40% on the sale of foreign exchange by the Central Bank. The law
came into effect in July, 1959 with the rate set at 25%.
The tax was expected to achieve three objectives:
(1) to act on the excessive aggregate demand by reducing the disposable
income of individuals and business firms.,
(2) to stabilize fiscal operations by making available a portion of the tax
revenue to reduce the deficit, and
(3) to reduce the pressure on the international reserve by raising the cost
of imports and services purchased abroad.