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Chapter 1. Fiscal Management Roles, Objectives and Policy

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Fiscal Management:
Roles, Policy and Objectives
Reported By: Harwin Francis C. Ramos
Objectives of Study
The meaning and instruments of fiscal policy
Budgetary policy, taxation, public expenditure and
public debts
The objectives of and main functions of fiscal
policy
The role of fiscal policy in developing economies
Contra-cyclical fiscal policy
Lags in fiscal policy
Limitations of fiscal policy
2
Abraham Lincoln
While speaking about the role of government and
government policy, observed that whatever the
individuals or firms could do very well, the government
should not interfere with. The purpose of government
should be to accomplish such activities, which individual
or firms cannot perform so efficiently with their own
efforts.
3
Introduction
Our activities are influenced by what the government does.
GOVERNMENT IMPOSES TAXESON
INCOME
COMMODITIES THAT WE CONSUME.
Reduce disposal income
Taxes on income
Reduce our overall expenditure on goods
and services.
Taxes on commodities
Reduce our purchasing power
Alter the relative prices of commodities
GOVERNMENTALSO IMPOSES TAXES ON
COMMODITIES PRODUCED AND USED BYTHEMAS
PROFITS OF CORPORATES
INPUTS
Taxes on Profit
Reduce directly the profit which is available for distribution to shareholders or for investment
purpose.
Taxes on commodities affect the corporate profit indirectly either by
Reducing the demand for their products
Increasing their cost of product.
4
Role of Government
Imposes taxes but
also Incurs
expenditure
Incurs expenditure
on physical
infrastructure to
support productive
activities
Defense
Building ports
Subsidies
Roads
Wages
Rail tracks
Scholarships
5
Telephone
Networks
Incurs expenditure
to strengthen
human capital
Influence
economic activities
directly or
indirectly
On hospitals to
provide medical
facilities
Enhancing
demand, output
On schools to
impart education
to under
privileged &
weaker society
Creating
employment
opportunities
Modern Societies:
Supportive role played by
Government
Mixed
Economy
System
Private sector
play central role
Provision of
Social
Infrastructure
Physical
Infrastructure
Education
Airports
Health
Roads
Parks
Government
supports
market
mechanism
6
Entertainment
Social Security
Water
Sewage System
Capitalist Societies:
Oppose Government Intervention
Government
interventions
Distort
relative
prices
Harm
the
society
Envisaged
minimum role to
governments
Restrict their
interventions in
areas such as
National
defense
7
Domestic
law and
order
After Great Depression
following Second World War,
Government role is important
Boost
level of
employmen
t
Controllin
g inflation
Stabilizin
g
business
activities
What is Fiscal Policy?
The budgetary instrument of government policy is known
as fiscal policy.
It is the policy relating to change in government
expenditure and tax payment
Fiscal policy means a policy under which the government
uses its expenditure and revenue programmes
• To produce desirable efforts and to avoid undesirable effects on the
national income, production and employment.
It influences employment, output and income mainly
through taxation, government spending and borrowing.
8
Fiscal Policy affects Economy
Micro Level
Macro-Level
Making distribution of
wealth and income
more equitable
The balance of tax revenue and expenditure
influences the aggregate demand
Providing equitable
access to social
services & meeting the
basic needs of poor
In turn influences
Influencing relative
prices and cost
conditions in order
to discouragesome
activities and
encourageothers
9
Enhancing the
efficiency of
production and
competitivenessof
domestically
producedoutput.
Output
Employme
nt
Overall
Price
Level
Inflation
Rate of
interest
Objectives of Fiscal Policy
MOBILISATIONAND
EFFICIENT
ALLOCATION OF
RESOURCES
MINIMISATION OF
INEQUALITIESOF
INCOME AND
WEALTH
• Redistribution of income in favour of the poor & taxingrich
• Spending revenue on various social welfare activities Education, Health,
Water,Sanitation
INCREASING
EMPLOYMENT
OPPORTUNITIES
• Influencing the aggregate output and income
INCREASING
OUTPUT AND
ACCELERATING
ECONOMIC GROWTH
• Directs the resources to socially desired channels with high yield
• Boost output and accelerate economicgrowth
• Moderate business fluctuations or cycles [employment andprice stability]
ECONOMIC
STABILITY
• Increase taxes to finance government expenditure duringinflation
• Decreases taxes in a recessionary phase to boost up the level of demand
PRICE STABILITY
10
• Through taxes and borrowings
• Investing the limited resources in efficientways
• Creates conducive environment for production, output and employment
• Reducing price fluctuations and maintaining stable price level by
containing inflationary and deflationarytendencies
Main functions of fiscal policy
Allocation of
resources
Capital formation and
economic growth
Stabilisation –
checking inflation and
correcting other
disturbing forces
11
Distribution of income
and wealth
Stabilisation of income
and wealth
Types of Budget
Annualy balancedbudget
• There should be a balance in income and expenditure of government
• Balanced budget will not lead to a boom or depression
• A balanced budget is needed to check excessive expenditure of
politician
• It creates a situation of full employment without inflation
• The state should increase taxes to get more money and reduce
expenditure to bring budget into balance
Cyclically balanced budget
• This budget has stabilizing effect on economic system
• This policy maintains the basic charector of a balanced budget
• It stabilise the level of businessactivity
Fully managed compensatorybudget
• This budget deliberate change in tax , expenditure, revenues and borrowing with
aim of achieving full employment without inflation
• It secures stability in economicsystem
• The growth of public debt and problems on interest and principal payment are
avoided
12
Taxation
Inequalities in distribution of income are greater in
underdeveloped countries
Rich people spend lavishly on luxury goods, which is
not favourable for economic growth
Hence, taxation on higher income groups will provide
funds for economic development
A government should adopt appropriate tax policy,
which is suitable for that country.
The tax structure should be based on the principle of
mobilisation of resources
Tax helps in controlling inflationary pressure in the
economy.
13
Public Expenditure
A planned public expenditure is required to increase
income output and employment
There are two types of public expenditure
• Pump priming
• It helps to initiate and revive economic activity in depressed
economy
• The objective of this policy is to stimulate private investment
• Compensatory spending
• It involves relief expenditure, social insurance payment, public
works and subsidies.
• It raises the level of income, output and employment through its
multiplier and acceleration effects.
14
Public Debts
This involves the borrowings and repayments
This policy is adopted to fight inflation and to bring full
employment into the economy
It can take many forms as follows
Borrowing from banks
During depression the government may borrow from banking
institutions
Borrowing from non bank public
The government can borrow money by selling bonds to non bank
public
Borrowing from treasury
The government may borrow from the treasury at the time of deficit
Printing of money
For financing public expenditure , the government may print
currency notes & gets additional resources for financing its
expenditure.
15
During inflation public debt should be used to reduce
supply of money and curtail credit
Contra Cyclical Fiscal Policy
A contra cyclical policy occupies a central place in
stabilizing government budget
It aims at eliminating or reducing the cyclical
fluctuations in income, employment, and real output
It ensures stabilization for maintaining full employment
without inflationary and deflationary gap.
16
Fiscal Policy During Depression
During depression govt. takes measures to
increase
•
•
•
•
•
Demand
Investment
Income
Output
employment
Adopt Compensatory tax policy
• Takes less money from people
as taxes so that disposable
income becomes larger
• It increases investment in private
sector or entrepreneurs
• Tax should be progressive it
means greater redistribution of
income
17
Fiscal Measures
• Purchase securities
• Increase expenditure with
constant taxes
• Reduce taxes and public
expenditure or increase
transfer payments
• Inject additional money into
the economy by pump priming
• Indulge in deficit financing
• Undertake public works
programme
• Repay loan and issue fresh
loans to different sections of
the population.
Fiscal Policy to remove
Unemployment
Alternative
s
1
2
18
Government Spending
Taxation
Increased government
spending
Constant taxation
Increased government
spending
Lowered taxation
3
An increase in government
expenditure
Financed by an equal
amount of tax relative to
spending (balanced budget
multiplier)
4
Government spending may
be kept constant
Taxation may be reduced
Fiscal Policy during Inflation and
Boom
Two forces which govern the inflationary pressure
• Demand pull influences
• Cost push influences
Fiscal Measures
• Reduction of expenditure with taxes constant
• Increase in taxation or reduction in transfer payment
• Combination of the aforementioned two measures, that is both
expenditure and taxes may be lowered and there may be
reduction in transfer payment
• Increase in borrowing and repayment of public debts
• Making budget surplus and selling of securities by the
government
19
Types of Fiscal Policy
Contractionary fiscal policy
Expansionary policy
If the policy aims at reducing the If is aims at enhancing aggregate
aggregate economic activities it is economic activities it is described as the
known as Contractionary fiscal policy.
Expansionary policy.
If the fiscal balance is surplus
(government spending is lower than
the government revenue); the extent of
surplus is increasing or the extent of
deficit is decreasing compared to
previous period then fiscal policy is
contractionary.
If the fiscal balance is deficit (government
spending is higher than the government
revenue); the extent of deficit is increasing
or the extent of surplus is decreasing
compared to previous period then fiscal
policy is expansionary.
It is implemented at by increasing It is implemented at by lowering taxes and
taxes and decreasing government expanding government spending.
spending.
It reduces the inflation rate in an It increase the aggregate demand and n
economy.
consequently raise the overall price level
and inflation rate.
20
Business Environment, School ofMa
agement NIT Rourkela © N. M. Leepsa
07-Dec-17
Lags in Fiscal policy
There are two types of
lags of fiscal policy
Policy lag
Recognition
lag
Operation Lag
Administration
lag
21
Inside
lags
(recognition
and
administrative lags)
Outside lags
The total fiscal policy
lag may extend up to
a period of two years.
Because of existence
of such a long time
lag, many challenged
the efficiency of fisal
policy
Policy Lag
Unless the fiscal measures are properly timed, the
counter cyclical effect of fiscal policy cannot be
obtained.
Policy lag consists of the time period between the
fiscal action needed and its impact.
The duration of this time determines the extent to
which a fiscal measure is effective.
22
Recognition Lag
Some time is required to recognise a problem
Recognition lag of fiscal policy is the time period
between the needed action and its recognition
This type of lag may extend from two to six
months.
The extent of such lag, of course, may be bought
down, provided the projection is timely and is
more or less accurate.
23
Administrative Lag
This is the time lag between recognition of a
problem and the actual fiscal action taken to
tackle the problem.
Such a lag many vary between six and nine
months
This is the most difficult lag.
24
Operational lag
This lag between the fiscal action taken and its
impact on income, output and employment.
It is estimated that operational lag may extend
from three to four months.
Ranlett , however, pointed out that the operational
lag of the US fiscal policy in the 1960s was about
three to nine months
25
Instruments
of Fiscal
Policy
Public
Revenue
26
Public
Expenditure
Sources of Government Own
Revenue
Direct
Tax revenue
Indirect
Revenue
receipts
Commercial
Non-Tax
revenue
Government’s
own receipts
Administrative
Grants
Capital
receipts
Public Sector
Disinvestment
Recovery of
Loans
27
Annual Financial Statements
(Budget of GOI: Expenditure Categories)
Revenue Budget
Revenue
receipts: tax
and non tax
receipts
Expenditure
on revenue
a/c
Interest and
dividend on
investment
made of
government
Interest
charges on
debt incurred
by government
Fees and other
receipts for
services
rendered by
government
28
Subsidies and
grants given to
state
governments &
other parties
Capital Budget
Capital
receipts
Loans raised by
government from
public (marketloans)
Capital
payment
Borrowing by govt.
From RBI & other
financial institutions
Capital
expenditure on
assets suchas
land , building,
equipment
Loans from foreign
government and
bodies
Recovery of loans
granted by central
government tostate
government, union
territories & other
parties
Investment in
shares, loans and
advances granted
by central govt to
state government,
union territories ,
government
companies
Annual Financial Statements
(Budget of GOI: Sub-heads)
Consolidated
Funds of India
29
Contingency
Funds of India
PublicAccount
Funds of India
Inflow of funds: all
tax & non Tax
sources
Utilization of fund;
Approval from
President of India
Does not belong to
govt.
Fresh borrowing &
recovery of loans
Urgent &
unforeseen
expenditure
(amount of fund
Rs 500 crore)
It acts as banker of
public funds such
as provident funds,
small savings,
collections, other
deposits
Principles of Good Tax Policy
Certainty
Convenience
of Payment
Economic
Growth and
Efficiency
Economy of
Collections
Equity and
Fairness
Flexibility
Minimum Tax
Gap
Neutrality
Simplicity
30
Stability and
Predictability
Transparency
Nature of Taxes
Progressive tax system
• a tax where lower-income entities pay a lower fractionof
their income in taxes than do higher-income entities.
Regressive tax system
• a tax where lower-income entities pay a higher fraction
of their income in taxes than do higher-income entities
Proportional tax system
• a tax where everyone, regardless of income, pays the
same fraction of income in taxes.
31
Types of Taxes
Direct Tax
Capital Gains Tax
Countervailing Duties
Corporate Tax
Custom Duties or Tariffs
Inheritance Tax
Excise Duty
Personal Income Tax
Sales Tax
Poll Tax
Stamp Duty
Property Tax
Value AddedTax
Retirement Tax
Wealth Tax
32
Indirect Tax
VAT Liability: Method of
Estimation
Value AddedTax
• It is a percentage tax on the value added in
each stage of production or distribution of a
good or service.
Method to compute VAT
• Cost subtraction method
• Tax credit method
• Cash flow method
33
Tax Avoidance Vs Tax Evasion
TaxAvoidance
TaxEvasion
• The use of legal methods to modify
an individual's financial situation in
order to lower the amount of income
tax owed.
• This is generally accomplished by
claiming the permissible deductions
and credits.
• Individuals use deductions like
donation made by him; interest paid
for loan, rebate on interest income
• Corporations rebate by using part of
profit in R&D activity ; using provision
for depreciation allowances, setting
up units in backward areas and
forming charitable trusts.
• An illegal practice where a person,
organization or corporation
intentionally avoids paying his/her/its
true tax liability.
• Those caught evading taxes are
generally subject to criminal charges
and substantial penalties.
• Corporate falsely claim invested Rs 1
cr in R&D activities .
• Individuals Falsely report income
come from agricultural sources or
gifts from elderly
• Tax evasion is treated as a crime and
involves fines and even
imprisionment
34
Non Tax Revenue
Commercial
Revenue
Administrative
revenue
Sales from
government
produced
commodities &
services
Fines and penalties
License fee
Own Capital
Receipts
Disinvestments of
PSUs
Forfetures
Recoveries of loans
Revenues from
postage, tolls,
electricity charges ,
railway fare and
telephone tariff
35
Escheat
Special assessment
Grants
Gifts and grants
Tax Impact
Revenue impact of tax rate changes
& Economic effects of taxation
• Effect on production ; Effect on distribution;
Effect on Inflation
• Impact on production through ability and
willingness to work, save and invest
• Impact on production through diversion of
economic of economic resources between
difference uses and localities
36
Public Expenditure
Effects on production and growth
• PE is used for creating physical , social and economic infrastructure
and developing key industries
• It improves productive capacity, reduce cost of production and
removes bottlenecks for private producers
Effect on distribution of income & wealth
• PE used for poor people in form of free education, health, water
sanitation, unemployment benefits, old age pensions, medical
benefits, subsidized food bring equitable distribution
Economic stability
• In booming phase , there us excess demand over production and in
recession phase there is less demand more idle capacity. PE in
downturn adds to effective demand and helps to overcome
downturns
37
Classification of Public
Expenditure
Category
1
Category
2
Category
3
Category
4
Category
5
38
Functional & Economic Expenditure
Productive Expenditure
Unproductive Expenditure
Transfer Expenditure
Non-Transfer Expenditure
Revenue Expenditure
Capital Expenditure
Plan Expenditure
Non Planned Expenditure
Canon of Expenditure
(Laid down by Prof. Findlay)
Canon of benefit
• Every public
spending must
ultimately be used
for the cause of
social benefit —
general well-being
of the common
people.
• State spending
should confer
benefits on the
community at large
rather than on an
individual group or
section.
• Public funds should
be spent in such
directions which
pursue common
interest,
and
promote
general welfare
Canon of economy
•Public expenditure
should be incurred
carefully and
economically.
• Economy here
means avoidance of
extravagance and
wastages in public
spending.
•Public expenditure
must be productive
and efficient.
• Incurred only on
very essential items
of common benefit,
without duplication
involves minimum
cost.
•An efficient system
of financial
Canon of sanction
Canon of surplus
•No public spending
should be made
without the approval
of proper authority.
•The procedure for
sanction in public
expenditure is
required for the
enforcement of
economy as well as
for the prevention of
misuse of public
funds.
•Money must be
spent on the
purpose for which it
is sanctioned by the
highest authority and
accounts be properly
audited.
• Saving is a virtue
even for the
government
• so an ideal budget
is one which
contains an
element of surplus
by keeping public
expenditure below
public revenue.
• Government
should avoid deficit
budgeting in the
interest of its own
creditworthiness.
Measurement of Government Deficit:
Various Concepts
Concepts of deficit estimated from
budget documents
Revenue Capital
account account
deficit
deficit
40
Fiscal
deficit
Primary
deficit
Gross
deficit
Net
deficit
At a glance
Revenue
account
deficit
• =Revenue Expenditure-Revenue Receipts
Capital
account
deficit
• =Capital expenditure –Own Capital Receipts
Fiscal
deficit
41
• =(Revenue Expenditure + Capital expenditure)- (Revenue Receipts +
Own Capital Receipts )=BORROWINGS
Primary
deficit
• =Gross fiscal deficit –interest payment= Revenue expenditure + capital
grants + recovery of loans +disinvestment proceeds)- (interest
payments)
Gross vs
net
deficit
• Net fiscal deficit=gross fiscal deficit –net domestic lending + recoveries
• Net primary deficit=gross primary deficit-net loans and advances=
gross primary deficit –loans and advances +recoveries
Measurement of Government Deficit:
Various Concepts
Concepts of Deficit Estimated
Independently
Monetized
Deficit
42
Cultural and
Structural
Deficit
FINANCING FISCAL
DEFICIT
Domestic
Borrowing
43
Central Bank
Market
Participants
Money
Financed by
RBI
Bond Financed
by investors
External
Borrowing
Trade
Financed by
other countries
Implications for Bank Managers
44
Watch Budget
Announcements
and Fiscal
Deficits
• Trend in the ratio of fiscal deficit to GDP
• Proportion of revenue deficit in total deficit
• Share of interest payments in total
expenditure of government
• Share of capital expenditure in total
expenditure
• Debt to GDP ratio
To Make
Strategic
Decisions
• Expansion and launching of new products
• Diversification of product lines
The Limitations of Fiscal Policy
It may conflict with the objectives of price stability and full
employment.
An expansionary fiscal policy in the matter of allocation of
resources may be self defeating. The tendency of interest rates to
fall would set in motion some corrective forces, which may
ultimately raise it again.
In an economy as liquid as that of USA , growth rates may be
hampered by a sudden increase in taxation.
Any growth rate takes the theoretical assumption of particular
consumer behaviour.
Political pressure and structural problems are a hindrance to
effective utilization of fiscal machinery.
45
Fiscal Policy
in the Philippines
What is Fiscal Policy?
Fiscal policy refers to the "measures employed by governments
to stabilize the economy, specifically by manipulating the levels
and allocations of taxes and government expenditures.
Fiscal measures are frequently used in tandem with monetary
policy to achieve certain goals. In the Philippines, this is
characterized by continuous and increasing levels of debt and
budget deficits, though there have been improvements in the last
few years.
The Philippine government’s main source of revenue are taxes,
with some non-tax revenue also being collected. To finance
fiscal deficit and debt, the Philippines relies on both domestic
and external sources.
History of Fiscal Management on the
Government
Fiscal policy during the Marcos administration was primarily focused
on indirect tax collection and on government spending on economic
services and infrastructure development.
The first Aquino administration inherited a large fiscal deficit from the
previous administration, but managed to reduce fiscal imbalance and
improve tax collection through the introduction of the 1986 Tax
Reform Program and the value added tax.
The Ramos administration experienced budget surpluses due to
substantial gains from the massive sale of government assets and
strong foreign investment in its early years. However, the
implementation of the 1997 Comprehensive Tax Reform Program
and the onset of the Asian financial crisis resulted to a deteriorating
fiscal position in the succeeding years and administrations.
History of Fiscal Management on the
Government
The Estrada administration faced a large fiscal
deficit due to the decrease in tax effort and the
repayment of the Ramos administration’s debt to
contractors and suppliers.
During the Arroyo administration, the Expanded
Value Added Tax Law was enacted, national
debt-to-GDP ratio peaked, and under spending on
public
infrastructure
and
other
capital
expenditures was observed.
The Philippine government generates revenues
mainly through personal and income tax collection,
but a small portion of non-tax revenue is also
collected through fees and licenses, privatization
proceeds and income from other government
operations and state-owned enterprises.
Tax Revenue
Tax collections comprise the biggest percentage of
revenue collected. Its biggest contributor is the
Bureau of Internal Revenue (BIR), followed by the
Bureau of Customs (BOC). Tax effort as a
percentage of GDP has averaged at roughly 13%
for the years 2001-2010.
Income Taxes
Income tax is a tax on a person's income, wages, profits arising from property,
practice of profession, conduct of trade or business or any stipulated in the
National Internal Revenue Code of 1997 (NIRC), less any deductions granted.
Income tax in the Philippines is a progressive tax, as people with higher
incomes pay more than people with lower incomes. Personal income tax rates
vary as such:
Annual Taxable Income
Income Tax Rate
Less than P10,000
5%
Over P10,000 but not over P30,000
P500 + 10% of the excess over P10,000
Over P30,000 but not over P70,000
P2,500 + 15% of the excess over P30,000
Over P70,000 but not over P140,000
P8,500 + 20% of the excess over P70,000
Over P140,000 but not over P250,000
P22,500 + 25% of the excess over P140,000
Over P250,000 but not over P500,000
P50,000 + 30% of the excess over P250,000
Over P500,000
P125,000 + 32% of the excess over P500,000
In 2008, Republic Act No. 9504 (passed by then-President
Gloria Macapagal-Arroyo) exempted minimum wage earners
from paying income taxes.
E-VAT
The Expanded Value Added Tax (E-VAT), is a form of sales
tax that is imposed on the sale of goods and services and on
the import of goods into the Philippines. It is a consumption tax
(those who consume more are taxed more) and an indirect tax,
which can be passed on to the buyer. The current E-VAT rate
is 12% of transactions. Some items which are subject to E-VAT
include petroleum, natural gases, indigenous fuels, coals,
medical services, legal services, electricity, non-basic
commodities, clothing, non-food agricultural products, domestic
travel by air and sea.
The E-VAT has exemptions which include basic
commodities and socially sensitive products. Exemptible
from the E-VAT are:
1.Agricultural and marine products in their original state
(e.g. vegetables, meat, fish, fruits, eggs and rice), including
those which have undergone preservation processes (e.g.
freezing, drying, salting, broiling, roasting, smoking or
stripping);
2.Educational services rendered by both public and private
educational institutions;
3.Books, newspapers and magazines;
4.Lease of residential houses not exceeding P10,000
monthly;
5.Sale of low-cost house and lot not exceeding P2.5 million
6.Sales of persons and establishments earning not more
than P1.5 million annually.
Tariffs and Duties
Second to the BIR in terms of revenue
collection, the Bureau of Customs (BOC)
imposes tariffs and duties on all items
imported into the Philippines. According to
Executive Order 206, returning residents,
Overseas Filipino Workers (OFW’s) and
former Filipino citizens are exempted from
paying duties and tariffs.
Non-Tax Revenue
Non-tax revenue makes up a small
percentage of total government revenue
(roughly less than 20%), and consists of
collections
of
fees
and
licenses,
privatization proceeds and income from
other state enterprises.
The Bureau of Treasury
The Bureau of Treasury (BTr) manages the finances of the
government, by attempting to maximize revenue collected and
minimize spending. The bulk of non-tax revenues comes from the
BTr’s income. Under Executive Order No.449, the BTr collects
revenue by issuing, servicing and redeeming government
securities, and by controlling the Securities Stabilization Fund
(which increases the liquidity and stabilizes the value of
government securities) through the purchase and sale of
government bills and bonds.
Privatization
Privatization in the Philippines occurred in
three waves: The first wave in 1986-1987,
the second during 1990 and the third stage,
which is presently taking place. The
government’s Privatization Program is
handled by the inter-agency Privatization
Council and the Privatization and
Management Office, a sub-branch of the
Department of Finance.
PAGCOR
The
Philippine
Amusement
and
Gaming
Corporation (PAGCOR) is a government-owned
corporation established in 1977 to stop illegal
casino operations. PAGCOR is mandated to
regulate and license gambling (particularly in
casinos), generate revenues for the Philippine
government through its own casinos and promote
tourism in the country.
History of Philippine Fiscal Policy
Marcos Administration (1981-1985)
The tax system under the Marcos administration was generally
regressive as it was heavily dependent on indirect taxes. Indirect taxes
and international trade taxes accounted for about 35% of total tax
revenue, while direct taxes only accounted for 25%. Government
expenditure for economic services peaked during this period, focusing
mainly on infrastructure development, with about 33% of the budget
spent on capital outlays. In response to the higher global interest rates
and to the depreciation of the peso, the government became
increasingly reliant on domestic financing to finance fiscal deficit. The
government also started liberalizing tariff policy during this period by
enacting the initial Tariff Reform Program, which narrowed the tariff
structure from a range of 100%-0% to 50%-10%, and the Import
Liberalization Program, which aimed at reducing or eliminating tariffs
and realigning indirect taxes.
Aquino Administration (1986-1992)
Faced with problems inherited from the previous administration, the most
important of which being the large fiscal deficit heightened by the low tax effort
due to a weak tax system, Aquino enacted the 1986 Tax Reform Program (TRP).
The aim of the TRP was to “simplify the tax system, make revenues more
responsive to economic activity, promote horizontal equity and promote growth by
correcting existing taxes that impaired business incentives”. One of the major
reforms enacted under the program was the introduction of the Value Added Tax
(VAT), which was set at 10%. The 1986 tax reform program resulted in reduced
fiscal imbalance and higher tax effort in the succeeding years, peaking in 1997,
before the enactment of the 1997 Comprehensive Tax Reform Program (CTRP).
The share of non-tax revenues during this period soared due to the sale of
sequestered assets of President Marcos and his cronies (totalling to about ₱20
billion), the initial efforts to deregulate the oil industry and thrust towards the
privatization of state enterprises. Public debt servicing and interest payments as a
percent of the budget peaked during this period as government focused on
making up for the debt incurred by the Marcos administration. Another important
reform enacted during the Aquino administration was the passage of the 1991
Local Government Code which enabled fiscal decentralization. This increased the
taxing and spending powers to local governments in effect increasing local
government resources.
Ramos Administration (1993-1998)
The Ramos administration had budget surpluses for four of its six years in power. The government
benefited from the massive sale of government assets (totaling to about P70 billion, the biggest
among the administrations) and continued to benefit from the 1986 TRP. The administration
invested heavily on the power sector as the country was beset by power outages. The government
utilized its emergency powers to fast-track the construction of power projects and established
contracts with independent power plants. This period also experienced a real estate boom and
strong foreign direct investment to the country during the early years of the administration, in effect
overvaluing the peso. However, with the onset of the Asian financial crisis, the peso depreciated
by almost 40%. The Ramos administration relied heavily on external borrowing to finance its fiscal
deficit but quickly switched to domestic dependence on the onset of the Asian financial crisis. The
administration has been accused of resorting to “budget trickery” during the crisis: balancing
assets through the sales of assets, building up accounts payable and delaying payment of
government premium to social security holders. In 1997, the Comprehensive Tax Reform Program
(CTRP) was enacted. Republic Act (RA) 8184 and RA 8240, which were implemented under the
program, were estimated to yield additional taxes of around P7.4 billion; however, a decline in tax
effort during the succeeding periods was observed after the CTRP was implemented. This was
attributed to the unfavorable economic climate created by the Asian fiscal crisis and the poor
implementation of the provisions of the reform. A sharp decrease in international trade tax
contribution to GDP was also observed as a consequence of the trade liberalization and
globalization efforts in the 1990s, more prominently, the establishment of the ASEAN Free Trade
Agreement (AFTA) and membership to the World Trade Organization (WTO) and the Asia-Pacific
Economic Cooperation (APEC). The Ramos administration also provided additional incentives to
export-oriented firms, the most prominent among these being RA 7227 which was instrumental to
the success of the Subic Bay Freeport Zone.
Estrada Administration (1999-2000)
President Estrada, who assumed office at the height of the
Asian financial crisis, faced a large fiscal deficit, which
was mainly attributed to the sharp deterioration in the tax
effort (as a result of the 1997 CTRP: increased tax
incentives, narrowing of VAT base and lowering of tariff
walls) and higher interest payments given the sharp
depreciation of the peso during the crisis. The
administration also had to pay P60 billion worth of
accounts payables left unpaid by the Ramos
administration to contractors and suppliers. Public
spending focused on social services, with spending on
basic education reaching its peak. To finance the fiscal
deficit, Estrada created a balance between domestic and
foreign borrowing.
Arroyo Administration (2002-2009)
The Arroyo administration’s poor fiscal position was attributed to weakening
tax effort (still resulting from the 1997 CTRP) and rising debt servicing costs
(due to peso depreciation). Large fiscal deficits and heavy losses for
monitored government corporations were observed during this period.
National debt-to-GDP ratio reached an all-time high during the Arroyo
administration, averaging at 69.2%. Investment in public infrastructure (at
only 1.9% of GDP), expenditure for economic services, health spending and
education spending all hit an historic-low during the Arroyo administration.
The government responded to its poor fiscal position by under-spending in
public infrastructure and social overhead capital (education and health care),
thus sacrificing the economy’s long-term growth. In 2005, RA 9337 was
enacted, the most significant amendments of which were the removal of
electricity and petroleum VAT exemptions and the increase in the VAT rate
from 10% to 12%.
DUTERTE ADMINISTRATION
TRAIN will lower personal income tax (PIT) for all
taxpayers except the richest.
Those with taxable income below P250,000 will be exempt
from paying PIT, while the rest of taxpayers, except the
richest, will see lower tax rates ranging from 15% to 25%
by 2020.
The personal income tax system of TRAIN will exempt
some 83% of current taxpayers.
Lowering the personal income tax
(PIT)
Lowering the personal income tax
(PIT)
Lowering the personal income tax
(PIT)
Lowering the personal income tax
(PIT)
Simplifying the estate and donor's tax
In the current system, the tax rates can reach up to 20% of the net estate value and up to 15% on
net donations. TRAIN seeks to simplify this. Estate and donor’s tax will be lowered and harmonized so
it does not matter if the person passed away, donated a property, or simply wants to transfer a property.
This will result in loss revenues but the key here is to make the land market more efficient so that the
land will go to its best use.
Estate Tax - Instead of having a complicated tax schedule
with different rates, TRAIN reduces and restructures the
estate tax to a low and single tax rate of 6% based on the
net value of the estate with a standard deduction of P5
million and exemption for the first P10 million for the family
home.
Donor Tax - TRAIN also simplifies the payment of donor’s
taxes to a single tax rate of 6% of net donations is imposed
for gifts above P250,000 yearly regardless of relationship to
the donor.
Expanding the Value-Added Tax
(VAT) base
The Philippines has one of the highest VAT rates but also the highest
number of exemptions in the Southeast Asia region.
These tax exemptions have created much confusion, complexity, and
discretion in our tax system resulting in leakages and opening doors for
negotiation, corruption, and tax evasion.
TRAIN aims to clean up the VAT system to make it fairer and simpler and
lower the cost of compliance for both the taxpayers and tax
administrators.
This is achieved by limiting VAT exemptions to necessities such as raw
agriculture food, education, and health. This does not mean that the
benefits the poor rightly deserve will be removed.
The TRAIN will direct the way to protect the poor and vulnerable
compared to the tax exemptions and blind subsidies that are inefficient
and largely beneficial to the rich since they have higher purchasing
power.
Expanding the Value-Added Tax
(VAT) base
• TRAIN repeals 54 out of 61 special laws with non-essential
VAT exemptions, thereby making the system fairer.
• Purchases of senior citizens and persons with disabilities,
however, will continue to be exempt from VAT.
• Housing that cost below P2 million will be exempt from
VAT beginning 2021
• Medicines for diabetes, high cholesterol, and hypertension
will be exempt beginning 2019.
• The reform also aims to limit the VAT zero-rating to direct
exporters who actually export goods out of the country.
This will be implemented together with an enhanced VAT
refund system that will provide timely cash refunds to
exporters.
Expanding the Value-Added Tax
(VAT) base
• The VAT threshold is increased from P1.9 million to P3 million to
protect the poor and low-income Filipinos and small and micro
businesses and for manageable administration. This effectively
exempts the sale of goods and services of marginal establishments
from VAT. Under TRAIN, VAT exempt taxpayers will have the
following options:
● PIT schedule with 40% OSD on gross receipts or gross sales
plus 3% percentage tax
● PIT schedule with itemized deductions plus 3% percentage tax,
or
● Flat tax of 8% on gross sales or gross revenues in lieu of
percentage tax and personal income tax.
Increasing fuel excise tax
Increasing Automobile Excise Tax
• TRAIN simplifies the excise tax on automobiles,
but lower-priced cars continue to be taxed at
lower rates while more expensive cars are taxed
at higher rates.
• When we consider the TRAIN as a package, the
increase in take home pay from the personal
income tax reduction will be more than enough to
offset the increase in prices resulting from
adjustments in excise taxes.
• For a typical buyer, the additional take home pay
from the PIT reform will more than fully offset the
increase in amortization.
Increasing Automobile Excise Tax
Introducing a Sugar-Sweetened
Beverages (SSB) Excise Tax
Why impose a tax on SSBs?
● Most of the sugar-sweetened beverage, with some notable
exceptions provide unnecessary or empty calories with little
or no nutrition. SSBs are not a substitute for healthy foods
such as fruits and rice.
● SSBs are relatively affordable especially to children and
the poor who are the most vulnerable to its negative effects
on health.
● SSB products are easily accessible and can be found in
almost any store, unlike other sweetened products. Most
often, the poor and the children are not aware of their
consequences.
The SSB excise tax will help promote
a healthier Philippines.
Introducing a Sugar-Sweetened
Beverages (SSB) Excise Tax
Why impose a tax on SSBs?
● Most of the sugar-sweetened beverage, with some notable
exceptions provide unnecessary or empty calories with little
or no nutrition. SSBs are not a substitute for healthy foods
such as fruits and rice.
● SSBs are relatively affordable especially to children and
the poor who are the most vulnerable to its negative effects
on health.
● SSB products are easily accessible and can be found in
almost any store, unlike other sweetened products. Most
often, the poor and the children are not aware of their
consequences.
ROLE OF FISCAL POLICY
Fiscal policy is the use of government revenue (taxes) and expenditure
(spending) to influence the economy, and meet the macroeconomic goals.
The government’s revenue and expenditure form its budget. If the revenue
collection in the form of taxes equals its expenditure, it’s a balanced budget. If
revenue exceeds expenditure, the government has a budget surplus. On the
other hand, if expenditure exceeds revenue, it’s a budget deficit.
A government follows a neutral fiscal policy when the economy is in equilibrium.
In such a case, the government’s expenditure is fully funded by the tax revenue.
A government follows expansionary fiscal policy during times of recession. It
may reduce taxes or increase expenditure in order to stimulate the economy – to
increase demand, growth and employment. The government may follow
contractionary fiscal policy to reduce fiscal deficit or pay down government debt.
To do so, it may increase taxes or decrease expenditure, which will decrease
demand, growth and employment.
ROLE OF FISCAL POLICY
Fiscal policy is based on Keynesian economics, which believes that the
government can influence the macroeconomic productivity levels by changing
the taxes and spending. Such influence can curb inflation, increase
employment rate, and stabilize the value of money. Monetarists, however,
believe that the effects of fiscal policy are only temporary, and they advocate
use of monetary policy to control inflation.
Fiscal policy can be discretionary or nondiscretionary (automatic stabilizers).
A discretionary fiscal policy refers to the deliberate changes in government
spending and taxes in order to stabilize the economy; for example, the
government decides to increase its capital expenditure on road infrastructure.
On the other hand, automatic stabilizers are the automatic changes in the tax
and spending levels because of the changes in economic conditions. They
help stabilize business cycles. For example, when the economy is expanding,
the tax revenue increases, and vice verse. There will also be lower
government spending in the form of unemployment benefits. Economists have
observed that automatic stabilizers can reduce the volatility of the economic
cycle by up to 20%.
How Fiscal Policy Works?
Fiscal policy is based on the theories of British economist John
Maynard Keynes. Also known as Keynesian economics, this theory
basically states that governments can influence macroeconomic
productivity levels by increasing or decreasing tax levels and public
spending. This influence, in turn, curbs inflation (generally considered to
be healthy when between 2-3%), increases employment and maintains
a healthy value of money. Fiscal policy is very important to the
economy. For example, in 2012 many worried that the fiscal cliff, a
simultaneous increase in tax rates and cuts in government spending set
to occur in January 2013, would send the U.S. economy back to
recession. The U.S. Congress avoided this problem by passing the
American Taxpayer Relief Act of 2012 on Jan. 1, 2013.
Balancing Act
The idea, however, is to find a balance between changing tax rates and public
spending. For example, stimulating a stagnant economy by increasing spending or
lowering taxes runs the risk of causing inflation to rise. This is because an increase
in the amount of money in the economy, followed by an increase in consumer
demand, can result in a decrease in the value of money - meaning that it would take
more money to buy something that has not changed in value.
Let's say that an economy has slowed down. Unemployment levels are up,
consumer spending is down and businesses are not making substantial profits. A
government thus decides to fuel the economy's engine by decreasing taxation,
which gives consumers more spending money, while increasing government
spending in the form of buying services from the market (such as building roads or
schools). By paying for such services, the government creates jobs and wages that
are in turn pumped into the economy. Pumping money into the economy by
decreasing taxation and increasing government spending is also known as "pump
priming." In the meantime, overall unemployment levels will fall.
Balancing Act
With more money in the economy and fewer taxes to pay, consumer
demand for goods and services increases. This, in turn, rekindles
businesses and turns the cycle around from stagnant to active.
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If, however, there are no reins on this process, the increase in
economic productivity can cross over a very fine line and lead to too
much money in the market. This excess in supply decreases the value
of money while pushing up prices (because of the increase in demand
for consumer products). Hence, inflation exceeds the reasonable
level.
For this reason, fine tuning the economy through fiscal policy alone
can be a difficult, if not improbable, means to reach economic goals. If
not closely monitored, the line between a productive economy and
one that is infected by inflation can be easily blurred.
And When the Economy Needs to Be
Curbed…
When inflation is too strong, the economy may need a
slowdown. In such a situation, a government can use
fiscal policy to increase taxes to suck money out of the
economy. Fiscal policy could also dictate a decrease in
government spending and thereby decrease the money
in circulation. Of course, the possible negative effects of
such a policy in the long run could be a sluggish
economy and high unemployment levels. Nonetheless,
the process continues as the government uses its fiscal
policy to fine-tune spending and taxation levels, with the
goal of evening out the business cycles.
Who Does Fiscal Policy Affect?
Unfortunately, the effects of any fiscal policy are not the same for
everyone. Depending on the political orientations and goals of the
policymakers, a tax cut could affect only the middle class, which is
typically the largest economic group. In times of economic decline and
rising taxation, it is this same group that may have to pay more taxes
than the wealthier upper class.
Similarly, when a government decides to adjust its spending, its policy
may affect only a specific group of people. A decision to build a new
bridge, for example, will give work and more income to hundreds of
construction workers. A decision to spend money on building a new
space shuttle, on the other hand, benefits only a small, specialized pool
of experts, which would not do much to increase aggregate employment
levels.
The Bottom Line
One of the biggest obstacles facing policymakers is
deciding how much involvement the government
should have in the economy. Indeed, there have
been various degrees of interference by the
government over the years. But for the most part, it
is accepted that a degree of government
involvement is necessary to sustain a vibrant
economy, on which the economic well-being of the
population depends.
Thank You!!
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