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. A good credit card can save you money. Follow these tips to find the best credit card for you. 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!!