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MIDTERM NOTES 01

Fiscal Institutions
The economic rationale for fiscal policy is one thing, and its fiscal institutions and structure is
another. These institutional structures like any other social and political institutions are products of
current and historical factors. Though not suited perfectly to perform its task but should be drawn
upon to do its job and be adapted to its changing tasks.
The whole of public sector includes all levels of government: National, provincial,
municipalities/cities, and barangays.

Levels of government
With different levels of government, expenditures and revenues are divided and apportioned
among the various levels. With expenditures, the different levels of government specialize in
particular expenditure functions as such the changing role of various functions has brought
changes in the distribution of expenditures among levels of government. Same as with taxation,
different levels of government specialize in different taxes and changes have also affected the
changing composition of the overall tax structure.

Expenditures
National appropriation funds show programs of government that includes military and civilian that
includes national defense, education, infrastructure, government services, and others. Such budget
also shows whether the spending agents are national, provincial, municipalities/cities, or
barangays. Most of it exhibit the importance of welfare as the goal.

Revenue
By levels of government, taxes are levied among households, individuals, and businesses such as
poll tax, income taxes both individual and business, excise and sales taxes, estate and property tax,
and others. Collecting agents could either be the national or local levels of government.

Grants/Transfers
The expenditures to and revenue from the public includes the intergovernmental transfer and
grants which are important in understanding the fiscal structure of the levels of the government.

The powers and limitations by levels of government were laid down in the constitutions, statutes
and other laws legislated both in national and local levels that includes the provision on
1. Taxing and expenditures functions
2. Uniformity rule – taxes are applied to all like poll tax
3. Apportionment rule – tax rate varies among the different levels of government like
property taxes
4. Foreign taxes – that includes both import and export taxes.

Three groups are involved in fiscal system or process:

1. Voters
2. The President and the Executive branch
3. The Congress

In expenditure policy, the budget is the core instrument. The steps involved in the decision-making
and administrative process of budget are
1. Formulation of the budget President’s budget by the executive branch
2. Appraisal of the President’s budget by congress and budget legislation
3. Execution of this legislation by the executive branch
4. Auditing by national accounting office (Commission on Audit, COA)

Budget preparation
Though budget is a continuing process the lengthiness of preparation is noticeable and expected.
The preparation begins at the Office of Budget Management which has the responsibility for the
budget preparation. It coordinates the presentation of budget requests from different government
departments and agencies and determine if each of the budget request is in line with the
President’s Program, then formulate tentative budget. The President considers and studies the
tentative budget with appraisals of the economic outlook and of revenue projections coming from
different government agencies then establishes fiscal policy and budgetary guidelines. During the
preparations, deliberations on the budget ceiling for different agencies and department may lead
to another round of budget plans.

The budget has three parts

1. The President’s budget message
2. Detailed estimates of the amount which provides basis for the congressional appraisal.
3. Analyses of selected aspects of the total program.

Basic requirements for good budgeting

1. Comprehensiveness- setting of expenditure priorities and the weighing of alternatives. The
comprehensive view of the government’s expenditure program (budget) is essential to
assure congressional control and to assess the impact of budget operations upon economic
activity.
2. Budgetary Balance- Budgetary balance, deficit and surplus for stabilization policy, is
important to assess and measure the impact of the budget on economic activity.
3. Two ways to present budgetary balance
a. Estimated actual state of balance
b. Full-employment balance (the state of balance as it would be if the economy were at
full employment) with given expenditure programs and tax laws.
4. Expenditure categories-the budget should present two classifications:
a. Departments and agencies classification – these are the units to which congressional
appropriations are made and which are responsible for the administration of
expenditure programs.
b. Functional classification- to measure the costs and benefits of the entire programs. It is
necessary for cost-benefit analysis to evaluate expenditure programs. It is like an idea
of about program and performance budgeting.

Budgeting Techniques
The task of budgeting involves a decision (1) of how much should be spent (involves balancing the
importance of alternative uses in the public and private sector), and how the total should be
allocated among the uses (involves the balancing the importance of alternative public uses).
Because of complexities and the mass of detail that should be decided upon about the budget,
there has been a continuing search for systems and techniques that will contribute to an efficient
procedure.

Controllability- Flexibility in budget planning is limited, since budgeting is an ongoing process. Most
of expenditures are made in line with statutes enacted in the past, so that many outlays are not
controllable on a year-to -year basis. Flexibility increases if a longer period is considered. In the
long run legislative changes can be made must be honored. A longer-time horizon permits greatly
increased flexibility. Budgets do contain several years of projections showing the longer-run costs
of existing and proposed programs.

Program budgeting – a procedure referred to as planning-programming-budgeting (PBB). Emphasis

was on evaluation of entire program areas, rather than on appropriations for particular
departments of the government. Principle of program analysis and of project evaluation remain an
important feature of budget planning.

Zero-based Budgeting – an idea of to consider the budget as a whole, rather than to examine
incremental change only. Each department is required to justify its budget request from the
bottom up, evaluating alternative program packages and ranking programs so as to indicate what
would be included and excluded at various budget level.

Congressional budget approach

Congress does not legislate the budget as a whole, but deals with particular sections of it. The bills
take two forms: (1) congress authorizes (basic authorization) agencies to undertake particular
programs, often with a limit on the amount that may be appropriated for the program; (2)
Congress grants appropriations or authorization to spend. The legislative process involves both the
determination of new programs and the financing of current outlays under previously determined
programs.

The President must either sign or veto budget bills within the prescribed number of days.

After an agency or department has received its appropriation or authorization to spend, it may
proceed to do so however the execution of the program remains under the supervision of Budget
department with periodic financial reporting. The Budget dept. apportions the amounts
expendable in particular time periods and may establish reserves against appropriations.

The final stage of budget cycle is the accounting and auditing. The office involve, like COA, is task
to certify that funds have been expended for the purposes designated by Congress and to perform
the auditor’s function of certifying that the accounts truthfully reflect the underlying fiscal
operations.

Tax Policy

While expenditure legislation is required annually to provide appropriations, be it for new or

existing programs, not in the case with tax policy. The existing tax structure provides a continuous
flow of revenue for years without further legislative action taken. Action may be taken, however,
to improve the equity of its burden distribution, to adjust overall revenue to changing expenditure
requirements, and to adjust tax policy for stabilization purposes, where prompt measures to raise
taxes or to reduce them may be needed.

The major concern of tax policy makers is the improvement of the equity of the tax structure so as
to make it comply with views on fair distribution of the tax burden or tax incidence (who will carry
the tax burden)

Tax policy proposals originate at both the executive and congressional levels. Depending on the
nature of proposal, different agencies are involved. The equity-oriented reforms of the tax
structure are the primary responsibility of the treasury.

Tax policy proposal for short-run stabilization aspects of tax policy involve a wider range of
agencies that includes the central bank, the council of economic advisers, and office of budget and
management.

After the preparation and program identified, it will be presented to the president for
consideration. As soon as the presidential decision has been reached, the final program is
formulated and presented to the congress in a tax message.

Legislation
The congress committee handling the tax proposal will deliberate and discussed the proposal, then
present it to the house body then, it is passed by the House.
The passed House Bill is then sent to the Finance committee of the senate who will also discussed
and deliberate the bill. The Senate committee is free to make changes or substitute its own
proposal then sent it to the Senate Floor for discussion. After the Senate voted on the tax
proposal, the bill then is sent to conference committee for consolidation and ironing out of
differences, thereafter the bill is sent to both Houses, passed, then sent to the president for
signature.

The President will either sign or exercise his veto power to accommodate the inclusion of
presidential amendments or recommendations. However, the congress has the power to sustain
the bill by a vote to override the veto power, the sustained bill then will be considered as law. If
the president failed to sign the Tax Bill within the prescribed period and did not exercise his veto
power, then the bill will become a law after the prescribed period.

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