2 – MEASURING PUBLIC SECTOR SIZE

A Presentation of Juhaira G. Sampulna, 4th Year BS-ECON

PART I
What or Who is the Government?

• All public officials – agencies – and other organizations belonging to or under the
control of state – local – or federal governments (Economics Dictionary).
• The body of persons that constitutes the governing authority of a political unit or
organization (Webster).

What distinguishes that we have labeled as “government” from private

institutions?
• First, in a democracy, the individuals who are responsible for running public
institutions are elected, or are appointed by someone who is elected.
• Second, the government is endowed with certain rights of compulsion that private
institutions do not have such as:
- Right to force you to pay taxes.
- Right to seize your property for public use, provided it pays you just compensation
(right of eminent domain).
Also, the government actually restricts the rights of individuals to give to others similar
powers of compulsion.
1. Types of Government Activity

Providing a Legal System

It is the establishment of legal framework within which firms and individuals can engage
in economic interactions. These are the law and regulations.
Government Production
- Some production in the economy is undertaken directly by governments or various kinds
of government agencies in order to meet public needs. Much of this is similar to
corresponding activities carried out by private firms.
- The line between public (government) and private production shifts over time. The
process of privatization and nationalization happen depending on the fluctuations
happening to an economy.

For technical reasons, the best way to measure the size of government production is
to look at employment level.

From October 2020 to February 2020, based on the preliminary data, employment level
increased from approximately 39.8 million to 43.2 million, and the unemployment level
also grew from approximately 3.8 million to 4.2 million.
2. Government Influence on private production

Subsidies and Taxes

Government subsidizes private production in three broadways:
Direct Payments to producers
Indirect payments through the tax system
and other hidden expenditures

Government Credit
A special type of subsidy is government provision of credit below market interest rates, in
the form of low-interest loans and loan guarantees. Government subsidies tend to lead to
the expansion of the subsidized industry, by lowering its cost of doing business. Other
government programs affect the allocation of credit, and thus of productive resources.

Regulating Business
Government regulates business activity in an attempt to protect workers, consumers, and
the environment; to prevent anti-competitive practices, and to prevent discrimination.
Examples:
- Occupational Safety and Health Administration
- Department of Environment and Natural Resources
- Food and Drug Administration

3. Government purchases of goods and services

- What we characterize as government purchases are amounts spent for goods and
services made available to the public, such as national defence, public schools,
and highways.

4. Government redistribution of income

Government takes money away from some individuals and give it to others through
explicit redistribution programs in the form of transfer payments. These programs
are:
 * Public Assistance Programs
They are assistance programs that provide either cash assistance or
in-kind benefits to people in need. Funds can be used to pay for basic
living expenses such as food, rent, utilities, and medications.
* Social Insurance Programs
It differs from public assistance in that an individual’s entitlements are partly
dependent on his or her contributions, which can be varied as insurance premiums. The
leading social insurance programs in the country are:
• Government Service Insurance System
• Social Security System
• Employees Compensation Commission
• PhilHealth

5. Overview of Government Expenditures

Economic Performance of the Philippines in the 2nd Quarter 2021 Changes in Major
Expenditures in % (Source: Philippine Statistics Authority)

Household Final Government Final

Consumption, 7.2 Consumption, -4.9

Imports, 37.8

Gross Capital Formation,

Exports, 27 75.5

Household Final Consumption Government Final Consumption Gross Capita Formation

Exports Imports
 Among the major expenditures in the economy, the government final consumption
expenditure as a share of GDP declined into 4.9% during the second quarter of 2021.

PART II
Gauging the Size of the Public Sector

Gross Domestic Product (GDP)

A standard measure of the size of the total economy, which is a measure of the
value of all the goods and services produced in the economy during a given year.

1. Growth in Expenditures & Their changing composition

According to the Philippine Statistics Authority:

GDP Growth in the Second Quarter of 2021: 11.8 % (This was the highest since the fourth
quarter of 1988 which posted a growth of 12 %)
The Main Contributors are,
Manufacturing: 22.3 %
Construction: 25.7 %
Wholesale & Retail Trade; Repair of motor vehicles & motorcycles: 5.4%

DEFENSE EXPENDITURE

Based from the data of Stockholm International Peace Research Institute (SIPRI),
from 2016 to 2017, the ratio of military spending as a share of GDP in our country made
an increase from 1.05% to 1.25%. This is due to the 3.35 trillion peso budget signed by
the president in order to boost the aerial and maritime capabilities in the West Philippine
Sea. However, in 2018, it declined to 0.82%, one of the reasons is the growth in inflation
so the amount to improve defence became insufficient. In 2019, with the growth of the
economy, it posted a growth of 0.92% and then rose to 1.01% in 2020 amidst the Covid-
19 pandemic. This is to establish at least a credible defence posture amid China’s
incursions in the West Philippine Sea.
FISCAL EXPENDITURE

From October 2020 to August 2021, the fiscal expenditure increased to a total of
approximately 380.19 million peso. One of the main contributors for the increase in
expenditures is the purchase of Covid-19 vaccines and the recovering of the economy
cause by the pandemic.

INTEREST RATE
 Based from the data presented by the central bank, from 2017 to 2018, the interest
rate remained stable at 3%. In 2019, the interest rate increased to 4.7%. During lock down
in 2020 due to pandemic, the interest rate was reduced to 4%. However, after the lock
down, the interest rate declined further until 2021. Within this year, the interest rate from
May to September stayed stable at 2%.

2. Comparison of Expenditures across countries

In 2020, Philippines got the largest decline of GDP at -7.6% among ASEAN
economies. However, in 2021, it is second to Vietnam with the largest bounce back at
8.4%.

PART III
Government Revenues

• The national government of the Philippines major sources of revenue are Payroll tax,
Corporate Income tax, and Customs and Excise taxes.
• The Local Government Units (LGUs) main source of revenue is the real property tax.
• Bureau of Internal Revenue (BIR) collects taxes imposed at the national level, while a
local treasurer’s office collects taxes imposed at the national level.
• Article VI, Section 28 of the constitution states that “the rule of taxation shall be uniform
and equitable”. Moreover, the “congress shall evolve a progressive system of
taxation”.

Comparison of taxation across countries

Around 2017, Philippines has the highest taxation rate in Corporate Income Tax among
ASEAN.

PART IV
Deficit Financing

Deficit financing is a method used by a government to finance its budget deficit,

that is, to cover the difference between its tax receipts and its expenditures. The
government will either issue bonds (borrow) or to print money.
- In 2020, the government’s budget deficit was 107% more than the Php 660.2 billion
shortfall in 2019, and the government spending on goods and services climbed by 11.3%
to Php 4.33 trillion due to the programs addressing the impact of the pandemic. However,
these deficit and expenditures are still below what the government intended to be. The
spending was lower by 2.49% than the target (Rappler, 2021).
- In the first half of 2021, the budget deficit costs Php 716.1 billion, a 27.78% growth from
the last year’s level. However, the bureau of treasury noted that it is 29.66% short of the
government’s Php 1.01 trillion target (CNN, 2021).
REFERENCES

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budget-under-duterte/
CNN Philippines. (2020). Increased military spending, minimum credible defense pushed
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