PUBLIC FINANCE

Group 7

Mimi Ann TsengJestin LavalleNneko Jun TanMa. Radela EclarinalMeljomar Belen

Public Finance Defined

Public finance is about the taxing and spending activities of the government.

Also known as “public sector economics” or “public economics.”

Focus is on microeconomic functions of government – polices that affect overall unemployment or price levels are left for macroeconomics.

Scope of public finance unclear – government has role in many activities, but focus will be on taxes and spending.

Public Finance and Ideology

How should a government function in economic sphere?

Organic view – community stressed above individual. Goals of society set by the state.

Mechanistic view – government is a contrivance created by individuals to better achieve their individual goals. Individual, not group, is at center stage.

Government at a Glance

Legal frameworkFederal governmentNo real constraints on spending in ConstitutionTaxes must come originate in House of

Representatives. Equal tax rates across states.

Can run budget deficitsState and local governmentCan impose spending / taxing restrictions on

itself.Many states cannot run budget deficits.

SCOPE of

PUBLIC FINANCE

The SCOPE OF PUBLIC FINANCE

is not just to study the composition of public revenue and public expenditure. It covers a full discussion of the influence of government fiscal operations on the level of overall activity, employment, prices and growth process of the economic system as a whole.

According to Musgrave ,

the Scope of Public Financeembraces three functions of the government’s

budgetary policy confined to the fiscal department: 

(i) The Allocation Branch,(ii) The Distribution Branch, and(iii) The Stabilisation Branch.

These refer to three objectives of budget policy, i. e., the use of

fiscal instruments:

(i) To secure adjustments in the allocation of resources,(ii) To secure adjustments in the distribution of income and

wealth, and(iii) To secure economic stabilisation.

THE SCOPE OF PUBLIC FINANCE MAY BE DIVIDED INTO FOUR PARTS:

•Public Debt•Public Revenue•Public Expenditure•Financial Administration

PUBLIC DEBT deals with the study of the causes and

methods of public loans as well as public debt management.

The problems related to the raising and repayment of public loans are studied under this part.

It is in this division where we examine the borrowing policy of the government and indicate the directions in which improvements could be made.

PUBLIC REVENUE deals with the

method of raisingfunds 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 impact of taxation, and shifting of taxes, effects of taxation, etc.

Taxation is the main body of this division.

PUBLIC EXPENDITURE is the end and aim of the

collection of state revenues

deals with the principles and problems relating to the allocation of public spendings.

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.

FINANCIAL ADMINISTRATION Concerned with the organisation and functioning of the

government machinery responsible for performing the various financial function of the state.

Budget is the master financial plan of the government.

It brings together the estimates of anticipated annual revenues and expenditures, implying the schedule of government activities to be undertaken and the means of financing these activities.

SIGNIFICANCE of

PUBLIC FINANCE

SIGNIFICANCE OF PUBLIC FINANCEa. Taxation

b. Protection of Infant Industries

c. Provision of Public Goods

d. Side Effects of a Market Economy

e. Redistribute of Income

f. Equity

g. Subsidies and grants

h. Optimum Utilization

i. Economic Planning

j. Providing Employment Opportunities

k. Market failures

SIGNIFICANCE OF FINANCIAL OPERATIONS OF THE GOVERNMENT

The financial operations of public finance can be effectivelyutilised to achieve various social and economic goals:

a. Public finance can serve the interests of economic policy. Government spending can stimulate private sector, e.g. expenditure on industrial estates.

b. Public finance is designed to bring out an appropriate allocation of productive resources so that national product is maximized and income distributed equitably.

c. Public finance can be instrument of social policy. Through fiscal operation, if national income is equitably distributed, harmony between different classes of people can be achieved.

d. Financial operations can improve general welfare if major public spending is used for welfare projects.

e. Government’s financial operations have a unique significance in developing economies like India where public expenditure is devoted to promote capital formation and investment.

SIGNIFICANCE OF FINANCIAL OPERATIONS OF THE GOVERNMENT

The financial operations of public finance can be effectivelyutilised to achieve various social and economic goals:

f. Policy of taxation and public expenditure can affect the growth and pattern of production.g. If appropriately designed, fiscal operations can break the vicious circle of poverty in a developing economy or poverty in the midst of plenty in a develop economy.h. Fiscal operations can check trade cycles and lead to economic stabilization.

Issues and Problems of

Public Finance

A tax that takes a larger percentage from low-income people than from high-income people. A regressive tax is generally a tax that is applied uniformly. This means that it hits lower-income individuals harder.

Regressive Taxation

Public borrowing is the total amount of

money that has been borrowed by the government. 

Public Borrowing

Domestic resource mobilization generation of savings from domestic resources and their allocation to socially productive investments.

Hindrance to mobilization of domestic financial resources

Tax administration should be effective in the sense of ensuring high compliance by taxpayers, and efficient in the sense that administrative costs are low relative to revenue collected.

Inefficient tax-administration

Deduction , exclusion, or exemption from a tax liability, offered as an enticement to engage in a specified activity (such as investment in capital goods) for a certain period.

tax incentives are defined as all measures that provide for a more favorable tax treatment of certain activities or sectors compared to what is granted to general industry

Tax Incentives

Funds that firms obtain from outside of the firm.

trade credit is also considered external financing as are accounts payable, and taxes owed to the government. 

Limited external sources of public financing

Is an encompassing concept that refers to a dual – focused, holistic, systematic, ecologically oriented approach to seeking social advancement of individuals as well as broad-scale societal institutions and maintains that it is a process of planned social change designed to promote the well-being of the population as a whole

Understanding on social development

Public Finance

The FORMULATION OF FISCAL POLICY lies at the dead center of the democratic government.

-E. Pendleton Herring, 1938

Fiscal PolicyFiscal policy refers to policies on

taxation, and other revenue, expenditure, and borrowings which is intended to promote the stabilization and development of the economy.

Now a days, “FISCAL AND MONETARY POLICY” is used as a single concept though it has a different aspect of economic policy but have related impact.

Fiscal PolicyFiscal and monetary policy have been

crafted in response to requirements of stabilization, and subsequently, and in accordance with the structural adjustment programs (SAPs) negotiated by the International Monetary Fund (IMF).

On the other hand, monetary policy is generally understood to be that which influences the level of money supply in the economy.

Fiscal PolicyThe formulation of fiscal and

monetary policy made a huge part of economic and social development but not limited to socio-cultural and political.

Philippine Policy of Public Finance

FIELDS OF PUBLIC FINANCE

I. TaxationII. Government ExpenditureIII. Budget ProcessIV. Public Debt

I. TAXATION

- act of a taxing authority actually levying tax.

PURPOSE OF TAXATION

Revenue purposesRegulatory purposesCompensatory purposes

PROCESS OF TAXATION

LEVY- determination of certain amount or of certain percentage to be imposed on persons, property, or acts.

ASSESSMENT- computation of the sum due, giving of notice, making of the demand.

COLLECTION- taking or getting by proper governmental agencies if taxes imposed

CLASSIFICATION OF TAXES

1.As to subject matter or object:

a. Personal, poll, or capitation

b. Property c. Excise2. As to who bears the

burden: a. Direct b. Indirect3. As to determination of

amount: a. Specific b. Ad Valorem

4. As to purpose: a. General, Fiscal, or

Revenue b. Special or Regulatory5. As to scope: a. National b. Municipal6. As to graduation or rate: a. Proportional b. Progressive c. Regressive

AGENCENCIES INVOLVED IN TAXATION

Bureau of Internal Revenue Bureau of Customs Bureau of Treasury Bureau of Local Government Finance Insurance Commission

II. Government Expenditure

EXPENDITURE – the act of spending money.

1.) Economic Development Expenditures2.) Social Development Expenditures3.) National Defense Expenditures4.) General Public Services Expenditure5.) Debt Services

5 Categories of Government Expenditure:

ECONOMIC DEVELOPMENT EXPENDITURES

Include expenditures on agriculture and natural resources, on transportation and communications, on commerce and industry and on other economic development efforts.

SOCIAL DEVELOPMENT EXPENDITURES Consist of government outlay on

education, on public health and medicare, on labor and welfare and others.

NATIONAL DEFENSE EXPENDITURE

can be subdivided into national security expenditure and expenditures for the maintenance of peace and order.

GENERAL PUBLIC SERVICES EXPENDITURE

spending for the general government, for legislative services, for the administration of justice and for pensions and gratuitions.

DEBT SERVICES

III. BUDGET SYSTEM

BUDGET OF THE GOVERNEMENT – is a summary or plan of the intended revenues and expenditures of that government.

FOUR BUDGET STEPS OR PROCESS

AGENCIES INVOLVED IN THE BUDGET SYSTEM

Development Budget Coordination Committee

- Department of Budget and Managemen

- Department of Finance - National Economic and

Development Authority - Bangko Sentral ng Pilipinas - Office of the President of the

Philippines

IV. PUBLIC DEBT

PUBLIC DEBT: ACCDG. TO SOURCE

1.Internal or Domestic2.External or Foreign

PUBLIC BORROWING CATEGORIZED AS:

1. Direct borrowings of both the national and local governments

2. guaranteed and non-gauranteed debt of government corporations

3. debt of monetary constitutions

PUBLIC DEBT: ACCDG. TO MATURITY

1. Short-term debt – payable within one year.

2. Medium-term debt – payable after one year but not beyond five years.

3. Long-term debt – payable beyond the period of five years.