Public Finance April 2015

UNIVERSITY OF CEBU

UNDERSTANDING PUBLIC FINANCE

THE ROLE AND SCOPE OF PUBLIC FINANCE

Public Finance is a field of study in economics that deals with the revenue and expenditure patterns of the government and their various effects on the economy. It arises from the operations of the public budget.

The basic goal of both the private and public economy is the satisfaction of human wants since both engaged in the production, distribution and consumption of goods and services. However, distinction is made in the how financial needs are made available, what those needs are and the budgetary procedures practiced.

The Difference between Private and Public Finance

The workings of an economy are geared to solve the problem of choice in a world where resources are scarce to human wants or desires. The basic goal in both the private and public economy is the same the satisfaction of human wants. Public and private economic units are engaged in production, distribution, and consumption of goods and services.

Private finance relates to the sources and uses of funds of private individuals to meet their needs and wants. These are satisfied through mechanism of the market because their enjoyment is subject to the price they have to pay. Public finance deals with the sources and uses of funds to meet the basic human requirement of the general public or the populace.

According to Leveriza (1998), the following are major distinction between public and private finance.

A. Public Finance relates to income generation & allocation to satisfy the public wants / needs of people or group of people living within the scope of territorial limits of the state, while Private Finance deals with income generation & allocation of private wants and needs of individuals.

Private wants are those that can be satisfied through the mechanism of the market, because their enjoyment can be made subject to price payment. If an individual consumer wants to satisfy his need for a product or a service, all he has to do is to pay the stipulated price of that service or product and his need is already satisfied.

Public wants are those that can not be satisfied through the workings of the market because its enjoyment is independent of his contribution or payment. Whether an individual paid for its services to satisfy his want or need, or not, it can still afford to enjoy it because those are being provided for by the state. Public wants are classified into Social and Merit wants. Social wants are those whose satisfactions are subject to the principle of consumer sovereignty, that is, resources are allocated in response to the effective demand of consumers. Merit wants are those that are satisfied by the market within the limits of effective demand. These wants may become merit wants should government budget provide for its services over and above what is provided for through the market and paid for by private buyers. Examples are free education, and low-cost housing.

B. Both differ in its financial means available to generate resources.

Government generates resources through:

Taxation

Borrowings / Indenture

Sales of assets & services

Printing of money

Private corporations generate resources through:

Issuance of Bonds ( evidence of indebtedness)

Issuance of Stocks (evidence of ownership)

Utilize its income from operation

Sales of its assets

Borrowings / Corporate Financing

C. Both differ in the budgeting procedures practiced.

Government determines its expenditure needs first and then looks for possible ways of financing them. Private Corporation determines its income and additional resources from borrowing, and then proceeds to identifying individual expenditure items.

The Changing Role of GovernmentAll forms of government establish bureaucracies to administer the government and deal with the public welfare. There are agencies that collect taxes, provide for defense, give police protection, administer welfare and social security programs, operate school systems, and manage public transportation.

The executive branches of government, from the local to the national level, are empowered to administer laws for the welfare of society. To accomplish this end, agencies, departments, bureaus, and commissions are set up as part of an executive branch. These administrative bodies are created by legislative bodies to carry out a wide variety of functions both on behalf of government and for the public. These functions include the overseeing of education, traffic control, tax collecting, and defense, highway and bridge construction, quality control of consumer goods, slum clearance, and public transportation, among others.

Present day public finance focuses on three separate but interdependent functions:

Allocation,

Distribution and

Stabilization.

The allocation function is being done through the accepted objective of budget policy.

Allocation Function: The Budgetary SystemSound financial administration is a basic requirement to national development. Practically, every government decision has financial implications which influence all sectors of the economy, both public and private. Moreover, greater demands for government services due to increased population have deepened the interest of financial administration.

Efficient financial organization requires a budget system for the planning of balanced expenditures and revenues, and a system of control and audit for proper custody of funds. This means a controllers office (frequently under the executive jurisdiction) to check disbursements and an auditors office (frequently under legislative jurisdiction) to examine the accounts of administrative agencies.

In the Philippines, the Department of Budget and Management, which is under the direct supervision of the Office of the President, may be considered as the controllers office and the Commission on Audit (COA) as the auditors office. The Commission on Audit, however, by virtue of its being a constitutional office, is not under the legislative jurisdiction or the control of the executive.

The Distribution FunctionThe provision of public services is bound to produce social and economic effects. Hence, the revenue-expenditure process of the government must consider the distribution aspects. This function relates to determination and attainment of a proper state of income distribution.

The Stabilization FunctionThese concerns with maintaining a high level of resource utilization, that is, full employment of all factors of production and a stable value of money. Through its budget policy, the stabilization function has increasingly played an important role in government activities.

EXERCISE NAME:______________________________ DATE: ________ SCORE: _______

Test IMultiple Choice.1) Finance that relates to income generation & allocation to satisfy the public wants / needs of people or group of people living within the scope of territorial limits of the state.

A) Private FinanceB) Corporate Finance

C) Public FinanceD) International Finance

2) Finance that deals with income generation & allocation of private wants and needs of individuals.

A) Private FinanceB) Corporate Finance

C) Public FinanceD) International Finance

3) Agencies that government establish to collect taxes, provide for defense, give police protection, administer welfare and social security programs, operate school systems, and manage public transportation.

A) DepartmentsB) Local Government Units

C) BureaucracyD) Regional Coordinating Council

4) In the Philippines, this office is under the direct supervision of the Office of the President and may be considered as the controllers office and as the auditors office.

A) Commission on AuditC) Regional Development Council

B) Constitutional CommissionD) Department of Budget & Mgt

5) Wants that are satisfied by the market within the limits of effective demand.

A) Personal WantsB) Merit Wants

C) Psychological WantsD) Social Wants

6) Wants whose satisfactions are subject to the principle of consumer sovereignty, that is, resources are allocated in response to the effective demand of consumers.

A) Personal WantsB) Merit Wants

C) Psychological WantsD) Social Wants

7) The branch of government empowered to administer laws for the welfare of society.

A) Executive BranchB) Judiciary

C) Legislative BranchD) All of the above

8) An office frequently under the executive jurisdiction tasked to check disbursements.

A) Controllers OfficeB) Agencies

C) Auditors OfficeD) bureaus

9) A function of Public Finance that relates to the determination & attainment of a proper state of income distribution.

A) Budgetary FunctionB) The Distribution Function

C) Allocation FunctionD) The Stabilization Function

10) A function of Public Finance that concerns with maintaining a high level of resource utilization, that is, full employment of all factors of production and a stable value of money.

A) Budgetary FunctionB) The Distribution Function

C) Allocation FunctionD) The Stabilization Function

Test IIEnumeration.1-3Distinction between Public & Private Finance

4-7Financial means by which government generate resources.

8-12Financial means by which private corporation generate resources.

13-15Function of Public Finance

Test IIEssay.1. What is the role of public finance in the Philippine Economy and how does it affects the lives of the Filipino People?2. Identify examples of government services doing Public Finance functions.

THE DEVELOPMENT OF PUBLIC FINANCE

Two factors stand out in the development of public finance:

Warfare

In the early stage of political development, warfare was almost the only cause for public expenditures. The expansive and adventurous exploits of a ruler were expensive such as that he had to get financial support other than from his personal treasury. In modern times, expenditures connected with the preparation, conduct, and aftermath of war never fail to claim a large portion of public funds.

Growing scope of government activities

The growing scope of governmental functions has similarly influenced the nature and direction of public finance. Presently, the huge expenditures of the government, arising from its extensive and intensive activities in almost all quarters of the economy, have contributed to their increasing importance in the economys total spending.

The History and Growth.A. RevenuePublic finance, especially the tax aspect, can be considered to have first developed in the course of the fifteenth century in Italian city-republics and in the German free towns. However, public affairs were then considered as affairs of the territorial rulers. To govern his estate, the ruler relied on feudal income from his own lands and a number of rights that went with his lordship, such as tolls, customs duties, fees for safe conduct of travelers and merchandise, and a wide variety of fees from communities over which he extended protection.

Tax history for more than 2,500 years has focused on two significant issues: who pays and what is taxed. For most of human history, taxes were paid by the poor peasants, slaves, colonists, or conquered peoples to support the government and the wealthy classes. Taxation as the responsibility of free citizens is a modern concept that originated with the emergence of constitutional governments first in England and later in the United States and Western Europe.

In the ancient world to the end of the Roman Empire in the West in about AD 476, governments owned so much of the wealth within their territories that taxes were not heavily relied on for revenue. Income from mines, tributes from ruled peoples, and gifts often required from wealthy citizens made up the greatest portion of a government's income. Taxes on trade and consumption were added to meet government needs. Direct taxes such as the modern income tax were virtually unknown, though Rome had an inheritance tax and a capitalization tax. The capitalization, or head, tax is one imposed on each individual in a society. An example is the poll tax, once required of voters in state and local elections in the United States. In the time of Julius Caesar in the 1st century BC, Rome instituted a 1 percent sales tax, and in the Roman provinces land was often subject to taxation.

Taxes of any kind except those imposed by the church had little place in the rural, feudal system of the Middle Ages. Kings and nobles made their livings from land held directly or through payments from those who worked the land (Feudalism). As the social system of the Middle Ages broke up, land became the primary source of wealth and therefore of taxation. In France the annual taille was a tax levied on estimated farm income. In England land taxes were first based on area but later on annual rental value. In the British North American colonies, the English land tax system was broadened into a property tax whose base included land, houses, personal property, and the earning capacity of the individuals who owned the land.

Rebellion against oppressive tax systems played a major role in both the American and French revolutions. The subsequent establishment of representative democracies along with the modern ideal of social justice helped to bring about the reform of tax systems.

The emergence of the modern economic system with all of its varied sources of income and wealth also led to the more uniform system of taxing income directly. The first modern income tax was adopted in England in 1799 but was abolished from 1816 to 1842. In the United States an income tax was used as a temporary measure during the American Civil War. In 1894 the income tax was again enacted, but it was later declared unconstitutional, necessitating an amendment, which was adopted in 1913.

In the Philippines, early Filipino has a monarchial form of government known as the barangay. Each barangay was a state in itself, composed of coherent groups, and consisting of 30 to 100 families. The barangays were independent and governed by rulers called datus or rajahs, who enjoyed the unconditional loyalty of the people. The relationship between the datu and his subjects was direct. The subjects paid a tribute, called buiz, from the crops that they gathered or raised. They also rendered personal services to the ruler by assisting him with his wars, exploits and various miscellaneous services, such as cultivating the rulers land. In return, the ruler maintained peace and order and assisted his subjects in obtaining the necessities of life. Some members of the barangay, the nobles and the freemen, were exempt from paying tributes and from rendering services to the ruler except in case of war.

During the Spanish period, Spain imposed tributes or taxes upon Filipinos for its survival and benefit. A survey of taxes imposed and collected during the Spanish regime which were in effect prior to the coming of the Americans in 1898 would reveal a fairly comprehensive network of revenue sources. The tariff duties consisted of (1) specific duties on all imports, (2) surtaxes for harbor improvements (3) ad valorem taxes on imports (4) consumption taxes on certain imports, (5) miscellaneous charges and (6) export duties. Internal revenue taxes were derived from the following sources: (1) industrial taxes (2) Urbana taxes (3) stamp taxes (4) the sale of certificates of registration (cedilla personals) and (5) the public domain.

The Americans introduced income taxation in the Philippines. The Philippine Income Tax Law embodied the rates and exemptions of the 1916 United States income tax law. Sales and luxury taxes and license fees were imposed by the Japanese authorities during the Japanese regime. It is worthwhile to note that the National Assembly of the Japanese sponsored Philippine Republic authorized the creation of a central bank which did not actually come into being.

B. Expenditure The Development of Budgeting in the Philippines

During the early years of American sovereignty, the Philippine Commission approved the annual budget of the government. A real budgetary system patterned after the English system, was introduced for the first time in the Philippines in 1917. Under the Jones Law, the governor general was to submit to the Philippine Legislature, within 10 days after its regular session, a budget of receipts and expenditures to be used as the basis of the annual appropriation bill for the national government. The secretary of finance prepared the budget based on the estimates of income and expenditures submitted to him by the different department secretaries. These estimates are, in turn, based on those submitted by the chiefs of bureaus and offices under each department. After the budget had been approved by the Governor General and his Cabinet, it was submitted to the Philippine Legislature.

The present budgetary system of the national government is governed by the Constitution.

EXERCISE Test IMultiple Choice.1) Tax levied on estimated farm income.

A) TailleB) Capitalization Tax

C) Land TaxD) Personal Property Tax

2) System where kings and nobles made their livings from land held directly or through payments from those who worked the land.

A) FeudalismB) Industrialism

C) CapitalismD) Barter

3) Monarchial form of government in the early Philippines.

A) Hacienda SystemB) Datu System

C) BarangayD) Rajah

4) Tribute subjects in a barangay, pay from the crops that they gathered or raised.

A) TailleB) Capitalization Tax

C) Land TaxD) Buiz

5) A real budgetary system patterned after the English system was first introduced in this year.

A) 1920B) 1898

C) 1917D) 1918

Test IIEnumeration.1-2Factors that gave way to the development of Public Finance

3-6Feudal income from territorial rulers lands and the number of rights that went with his lordship.

7-12Composition of Tariff duties during the Spanish regime.

13-17Sources of Internal revenue taxes during Spanish regime.

18-19Tax imposed by the Japanese authorities during the Japanese regime.

20Who governed the present budgetary system of the national government.

Test IIIEssay.1. What is the difference of the services extended by the government during the Aquino, Ramos, Estrada and Arroyo Administration?

THEORIES ON GOVERNMENT SPENDING

THE CONCEPT OF FULL EMPLOYMENT

The United States Congress, in passing the Employment Act of 1946, committed the federal government to policies designed to achieve full employment. This was in accordance with the economic theories John Maynard Keynes developed in his 'General Theory of Employment, Interest and Money' (1936). Keynes insisted that government could, by manipulating the money supply and spending policies, achieve a stable level of employment.

The Keynesian recommendations have proved to be flawed. Only by injecting large amounts of money into the economy can government induce employment. This works for a time, but it causes inflation. Eventually the inflation will bring on a recession and high unemployment, as the economy tries to squeeze out the distortions caused by government spending. By contrast, an economy freed from excessive government intervention will normally have a high and stable level of employment.

The concept of full employment refers to a state in which the number of vacant jobs is always greater than the number of unemployed men. Consequently, the normal lag between losing one job and finding another will be very short.

Types of Unemployment.

A. Frictional Unemployment is a condition in which an individual can not find a job not because there is no job vacancy available in the market, but they are unemployed because they are not qualified for the vacancy at hand. The skill required for a particular vacant job does not jibe with the skill and qualification that an applicant has.B. Seasonal Unemployment is a condition in which unemployment is brought about by climatic conditions or change in fashion that does not afford employment in a particular industry affected by such seasonal variations in their business activities.C. Structural Unemployment is a condition in which unemployment is a result of slow or no activity in the production of goods and services.D. Cyclical Unemployment means lack of work caused by business cycle changes in the volume of work available.Public Spending is a key instrument employed by governments of various countries in mitigating the adverse effects of economic fluctuations one of which is employment.

The two variants of Public Expenditures are:

1. Short-run public spending policy ( pump-priming )

2. Long-run compensatory spending policy

The above are both intended to cushion the undesirable effects of economic fluctuations and are both devices designed to attain full employment.

The Concept of Pump-Priming

The basic premise of fiscal policy and public spending is that production depends upon the total effective demand of goods and services currently produced (aggregate expenditure on consumption and investment) as long as there are available unemployed productive resources of every type and output is highly elastic.

The less the availability of unemployed productive resources, the less elastic the output is and the greater the tendency for increases in effective demand will be, will eventually lead to inflation. However, when there are available unemployed productive resources of every type, an increase in effective demand tends to increase output, employment and real income. In such a situation, the primary goal of government spending is to raise aggregate consumption. With higher level of government spending, the income of consumers expands and consequently increases consumption expenditures.

Pump-priming refers to the injection of government funds into the income stream in sufficient quantities and under proper circumstances in order to reverse the trend of anticipations and to generate recovery. This emergency tool is by its nature a temporary device to restart or stimulate the balance in the economic system during the cyclical downturn, after which the system is expected to operate under its own power. Expected results are primary employment in public works operation as shown in directly hiring of employee for a government project and secondary employment created in the production of the necessary materials that goes with the utilization of resources financed by the government funds.

Deficit Spending means incurring expenditures in excess of revenue. Such excess may result from a reduction in tax receipts at a time when expenditures remain the same. It indicates an unbalanced budget wherein the proceeds from taxation fall short of budgetary requirements. It refers to government spending on public investment like hospital, highways, bridges and or subsidy to mass consumption to keep prices of commodities down and all of these expenditures are financed by borrowing.

Justification for Deficit Financing.

A. Deficit Financing for Offsetting depression.B. Deficit Financing for compensating inadequacy of private investmentC. Deficit Financing for defense expenditureD. Deficit Financing for financing economic developmentSomers Principles of Government ExpendituresProfessor Somer suggested four principles that could serve as a guide in handling government expenditures:

Principle of Minimum Expenditure

It reiterates the belief on a large school of thought that states, that government should spend the least it possibly can, consistent with the protection of its citizenry.

Principle of Minimum interference with the Private Enterprise.

This simply means that services provided by the public works representing government, should not compete with established private enterprises.

Principle of Maximum Employment

One of the aims of government expenditure is to raise the level of employment as high as possible to achieve maximum social security, maximum national income, & maximum standard of living.

Principle of Maximum Advantage

This proposes that maximum advantage be achieved in all cases as an implication of government spending and that it shall be spent where the marginal social utility is the greatest.

exercise NAME:________________________________ DATE: ________ SCORE: _______

Test IMultiple Choice.

1) A condition in which an individual can not find a job not because there is no job vacancy available in the market, but they are unemployed because they are not qualified for the vacancy at hand.

2) A) Cyclical UnemploymentB) Seasonal Unemployment

3) C) Structural UnemploymentD) Frictional Unemployment

4) A condition in which unemployment is brought about by climatic conditions or change in fashion that does not afford employment in a particular industry affected by such seasonal variations in their business activities



7) A condition in which unemployment is a result of slow or no activity in the production of goods and services.



10) Lack of work caused by business cycle changes in the volume of work available.



13) Key instrument employed by governments of various countries in mitigating the adverse effects of economic fluctuations one of which is employment.


15) C) Structural UnemploymentD) Public Spending

16) A concept that refers to a state in which the number of vacant jobs is always greater than the number of unemployed men.

17) A) Full EmploymentB) Temporary Employment

18) C) Partial EmploymentD) Employment Supply & Demand

19) An act of the US Congress committed to formulate policies to achieve full employment

20) A) Employment Act of 1945B) Employment Act of 1947

21) C) Employment Act of 1946D) Employment Act of 1948

22) Developed the General Theory of Employment, Interest & Money

23) A) John Maynard KeynesB) US Congress

24) C) Jones LawD) John Dewey

25) Example of primary employment in an economy

26) A) Employment resulting from production of necessary materials that goes with the utilization of resources financed by government funds.

27) B) Direct hiring of employee in public works operation

28) Example of Secondary employment in an economy

29) A) Employment resulting from production of necessary materials that goes with the utilization of resources financed by government funds.

30) B) Direct hiring of employee in public works operation

31) Incurring expenditures in excess of revenue.

32) A) Deficit Spending

33) B) Government Spending

34) Refers to the injection of government funds into the income stream in sufficient quantities and under proper circumstances in order to reverse the trend of anticipations and to generate recovery.

A) Pump-priming

B) Deficit Financing

Test IIEnumeration.1-4Types of unemployment

5-6Variants of Public Expenditures

7-8According to the Keynesian theory, inflation as a result of injecting large money into the economy will bring in these results as the economy tries to squeeze out distortions caused by government spending.

9-10Factors that could be manipulated to achieve a stable level of employment according to Keynes.

11-14Justification of Deficit Financing

15-16Expected results of pump-priming that affects employment.

17-19When there are available unemployed productive resources of every type, an increase in effective demand tends of increase 3 economic variables. What are these economic variables?

20-25Examples of government spending on public investments that are financed by borrowing.

26-29Principles that could serve as a guide in handling government expenditures

30-33Give at least one example of each of the principles asked in question # 1

34-35The level of employment is one of the aims of government expenditure because of the belief that through it, these 3 economic indicators can be maximized. Give at least 2 of the 3 given.

Test IIIEssay.1. How does the government project in your provinces affect the lives of your relatives who are employed in those projects?

THE PRESENT PHILIPPINE BUDGETARY SYSTEM

The present budgetary system of the national government is governed by the constitution. The contents and procedures in the preparation of the budget are provided for in the Budget Act of 1937, Commonwealth Act of No. 246 and the Revised Budget Act of 1954, or the Republic Act No. 992.

Recent developments gave rise to the innovations introduced in P.D. No. 1177, otherwise known as the Budget Reform Decree of 1977. These covers the Zero-base budget analysis, the Long-term and medium term budgets, the national resource budget, which are but approaches that have been developed to achieve a more effective allocation of resources. In short, basically, the budgeting system in the Philippines follows the performance budgeting approach.

The Budget and the Budgeting SystemA budget is a detailed financial program in which anticipated expenditures and anticipated revenues (including receipts from borrowings) are itemized and exactly balanced. A budget is prepared in advance of the fiscal year to which it applies.

Budgeting, on the other hand, is the process of systematically relating the expenditure of funds to the accomplishment of planned objectives.

Basically, the budgeting system in the Philippines follows the performance budgeting approach. The innovations introduced in P.D. No. 1177, otherwise known as the Budget Reform Decree of 1977, such as zero-base budget analysis, long-term and medium-term budgets, national resource budget, etc., are the approaches that have been developed to achieve a more effective allocation of resources.

Performance budgeting is a management-oriented system of budgeting which measures actual or estimated results, in terms of benefits accruing to the public and their unit costs. Zero-Based Budgeting, on the other hand, is a process which requires the budget estimates to be evaluated on a zero-base approach rather on the incremental approach, as was customarily done, where only new activities and additional outlays have to be justified.

Although performance budgeting was introduced in the Philippines as early as 1957, the government has not been able to fully implement it. The budget documents of the past years contained many features which belonged to the line budget system. The 1978 budget is the first purely performance budget of the national government.

The national government of the Philippines operated on a legally established fiscal year. It operated on the fiscal year beginning July 1 and ending June 30 from 1946 to 1976. The change in the budget year was effected after 30 years through P.D. No. 777, enacted on August 24, 1975. The new budget year coincides with the calendar year beginning January 1 and ending December 31. Also, every budget process carries with it the elements of planning, management and control.

Planning is the process of deciding on the objectives of the government and organization, on changes in these objectives and the policies that are to govern the acquisition of disposition of these resources.

Management is the programming of approved goals into specific project and activities, the design of organizational units to carry out the program, staffing of these units and the procurement of resources. The management process is spread over the entire budget cycle. Ideally, it is the link between the goals made and activities undertaken.

Control is the process of binding operating officials to the policies and plans set by the organization. Control is predominant during the execution and accountability stages although the form of budget estimates and appropriations are often determined by control consideration.

Good budget practice underestimates anticipated receipts to safeguard against possible decline in revenues during the year. It plans its expenditures to conform to that under-estimation. The ultimate goal of budgeting is to produce a financial plan that would achieve increasing development of the country with the optimum use of its available resources.

If estimated revenue is insufficient to achieve a balanced budget, proposed revenue measures sufficient to a balanced budget should be included in the proposed budget.

Balance budgeting works favorably in more developed economies like the United States, England, and Japan. Its application to the developing countries, like the Philippines, is expected to experience rough sailing.

The Philippines would find it difficult to use the traditional approach of balancing the budget. It should be noted that the country is economically poor because its vast natural resources remain untapped. To develop these resources, there is a need to accelerate capital formation. Its developmental projects requiring sizable investments can never be implemented if it will continue to rely mainly on its limited national income.

To accelerate capital formation, there is a need to invite foreign investors or to borrow money from foreign sources. Undoubtedly, foreign investors will be wary putting large investments in the country unless a favorable climate for investment exists. Creating a favorable climate for investment, however, needs financing and in this particular instance, borrowing from foreign countries is advisable since funds will be injected into the mainstream of the economy. This fund will have a multiplier effect on the national income meaning the money borrowed from abroad will generate a multiplied increase in level with the countrys income in terms of employment generation, capital formation, etc., thereby increasing the capability of the government to generate higher revenue.

Borrowing from outside sources is good for a developing country, provided that the borrowed money will be used strictly to finance development projects. It is a better alternative to increase revenue than taxation measures.

If taxes are raised to finance development projects, the purchasing power of the people is lessened, resulting in a decline in their consumption expenditures. With low consumption demand, no investors would be willing to invest since it may not be profitable. As such, investment will go down. With the decrease in investment, national income will decline. The process would only lead to the perpetuation of the vicious cycle leading further to the stagnation of the national economy. If no funds will be injected from outside sources, the nations economy will certainly remain stagnant and at most depressed.

Public Administrators are prevented from making expenditures that exceed the national income, they continue to increase the public debt for the purpose of promoting the economic development of the country. Hence, they are authorized to prepare an unbalanced budget meaning; they can put up a program in which expenditures exceed ordinary revenues for development purposes. Thus, they resort to heavy borrowing, not only when there is an emergency, but also to support the countrys development efforts.

Concepts of National Budgeting System

The concepts of national budgeting system in the country are as follows:

1) Concept of Balance. Expenditures shall not exceed receipts or resources.

2) Concept of Fiscal Control. No money shall be paid out of the treasury except in pursuance of an appropriation. This is covered by a provision in the countrys constitution. There are other provisions which govern the budget authorization. The specifics are established by P.D. No. 1177.

3) Concept of Obligation. This is analogous to private law of obligation and written contract. An obligation is a legal act of a duly authorized official or representative which binds the government to an immediate or future payment from funds of the government for specific purposes.

4) Concept of Appropriation. An appropriation is a legislature authorization for a department or agency to obligate the government for specified purposes.

Appropriations are made for a single fiscal year. However, program planning and financing must be made on a different time basis.

Types of BudgetsBased on governmental system, there are two types of budgets:

1. Presidential Budgets

2. Congressional Budgets

The Presidential budget is based on the principle of separation of government powers. It is a budget in which initiative and responsibility in the preparation is vested on the President, while the approval of the fiscal measures of the government is given to Congress. This system is generally followed in the presidential form of government. The greatest objection of this type of budget is the difficulty of locating the responsibility for the success or failure of the budgetary administration.

The Congressional budget, also known as the Parliamentary budget, is based on the principle of Cabinet or responsible government. A Parliamentary government is one where the political power resides in the Parliamentary as a whole, like that of the government of Great Britain and Italy, Japan and India among others. In a parliamentary system, the Cabinet is headed by the Premier or Prime Minister. The members of the Cabinet, normally elected members of the Parliament, are appointed heads of the different ministries of the government. Under this system, the initiative in preparing the fiscal plan of the government rests with the Prime Minister who is responsible for the nations financial policy. The Parliament merely analyzes, discusses, or criticizes the budget as initiated by the head of government.

In both government systems, while the legislature can decrease the proposed budget prepared by the executive, it can not increase it. It is, therefore, a system in which responsibility can easily be determined, because a definite body, which is the head of government, is responsible for the making or the initialization of the budget as well as for its successful operation.

Considering the strengths and weaknesses of the two types of budgets, the Philippines, based on its own experience, has the presidential budgetary system in character, form and substance.

ASSIGNMENT1. Research on the Budgetary System practiced in other countries and evaluate by contrasting it with the Philippine Budgetary System.

THE BUDGET PROCESS

On budget preparation, some experts on fiscal management observe that Budgets are best prepared under the personal responsibility of the chief executive and then submitting to the legislature for amendments, approval and the voting of necessary taxes.

A distinction should be made between budget and budgeting system. The budgeting system includes the all-comprehensive process as well as the laws, rules and practices observed by government in planning and carrying out its financial program.

In the final stage, a budgetary system involves an audit of all fiscal accounts. The aim of such audit is to determine with what outlays previous appropriations have been spent. The preparation of estimates, their authorization by law, and their audit comprise the cycle to be found in every efficient budgetary system.

All branches of government, including the legislature, should observe a common budgetary procedure. As a procedure, the budget comprehends four definite and consecutive stages as follows:

1) Budget Preparation

2) Legislative Authorization

3) Budget Execution

4) Budget Accountability

Figure 1 shows the flow chart of the budget process.

Stage 1 Involves the various steps in preparing the budget estimates and framing the financial plan

Stage 2 The legislative authorization of the plan

Stage 3 The carrying out of the plan as authorized

Stage 4 The accounting and audit & review of the financial operation.

If the legislature disapproves the proposed budget, it goes back to the executive who prepared it. Also, in budget accountability, if it is the end of the program, the cycle for the particular program will be terminated at that point.

In the case of the national government of the Philippines, the legislature being referred is the Congress and the executive is the countrys President.

The Budget system may consist of three elements:

1. Financial Plan

2. Procedure for formulating a budget system

3. Governmental authority responsible for its successful operation.

LEGEND :

TERMINAL BOX

DECISION BOX

NO

FLOW DIRECTION

(A)

YES

STOP

YES

(A)

YES

END OF PROGRAM

NO ( A )

Figure 1. Flow chart of Budget Process

in the national government within the department/agency

1. Budget Preparation

(preparation of budget estimates)1. Planning: Establishing

performance objectives within specified guides & limits.

A. Department of

Budget & Management2. Estimating: Determining amount of personnel, mate-rials, services, & facilities required to pay for them.

B. Departments/agencies3. Reviewing: Ascertaining that basic objectives, resources requirements and peso amounts are accurate and conforms to over-all guides & limits.

2. Budget Authorization

(legislative authorization of the budget)

3. Budget Execution

(Allotment of appropriations & incurrence of obligations)

4. Budget Accountability

(Reporting on actual performance vs. plans )

Figure 2. The Budget Process as Applied in the Phil.

The Budget Preparation

The Constitution provides: No money shall be paid out of the Treasury except in pursuance of an appropriation made by law.

The Budget power is vested on the President of the Philippines. He is entrusted by the Constitution with the task of preparing the national budget based on existing and proposed revenue measures and submitting it to the congress within thirty days from the opening of each regular session.

According to Leveriza (998), the following are the steps outlined for budget preparation:

First, the budget is not intended to establish priorities only, rather the budget, is intended to look at the priorities and to translate these priorities into operational terms, in terms of pesos and centavos, capital outlays, equipment purchased, supplies and materials, and in terms of the nuts & bolts of financial execution. The starting point is the need for the improvement of the quality of life of the worker or the common tao.

Second, in the formulation of the budget, the matter of sectoral presentation should be considered as an improvement. The traditional presentations are used by agencies, a particular bureau or office. The new approach attempts to arrive at some type of further review so that the budget of more than one department is reviewed as part of an overall sectoral presentation.

Third, budgeting shall be on a regional level in order to be responsive to regional development strategies, to differentiate in regional implementation, regional needs and requirements.

Fourth, there is a need for the long-term planning in order to provide for government services that will be necessitated by the increase in population.

As practiced in the Philippines, budget preparation has two phases: the budget policy formulation phase & the preparation of estimates, review & consolidation into the budget document for submission to Congress.

The starting point of the budget policy formulation is the Presidents pronouncement of the principal budget thrust for the budget year. This is followed by the estimates of government revenues and establishments of the levels of expenditures, the determination of budgetary priorities and activities into budgetary estimates.

The preparation of budget estimates involves all departments and agencies of the national government, including local government units and government-owned and controlled corporations. All estimates of expenditures are incorporated in the agency budget estimates, whether these are directly supported by the General Fund in the form of regular appropriations, supported from foreign or domestic borrowings, or funded by the department and/or agency income.

Under the administrative system (in the Philippines), the executive power is vested on the countrys President. He shall have control of the executive departments, bureaus and offices. He shall ensure that the laws be faithfully executed.

The President, with the assistance of the members of the Cabinet who are the heads of departments, is primarily responsible for the program of government. As such, the President sets forth program and policy decisions for the preparation of the national budget. On this basis, the Department of Budget & Management issues the Budget Call. This is a procedural guideline for the preparation and submission of the budgetary estimates. It also prescribes fiscal policies, standard methods, procedures, budget thrusts and priorities, and schedule of budget hearings.

With the policy decisions of the President, the departments of the national government prepare supplementary policies and guides in preparing the detailed requirements and estimates of the department and the various bureaus and offices placed under its administrative umbrella.

Here, the responsibility of the Department of Budget and Management is to coordinate the executive and legislative activities. It is responsible for the articulation of the Presidents national policy guidelines in the proposed legislation.

Among the detailed requirements of the departments in the preparation of the budget are as follows:

1. Identification of priority activities for each budgetary program & projects.

2. Identification of work measurement units or output indicators.

3. Quantification in financial terms of physical resources requirements.

4. Preparation of estimates in prescribed budget formats.

The budget estimates of the department and agencies are then submitted to the DBM (Department of Budget & Management) in accordance with a time schedule prepared by it for its review and consolidation.

The DBM, as mandated by law, reviews all estimates submitted by the different departments based on their estimated revenues, the soundness of the proposals, and their conformance to the policy adapted by the President. At this stage, it conducts budget hearings.

After the reviews, the DBM consolidates the approved estimates, develops numerous analysis and statements. It then recommends actions to the President who makes the final decisions as to the content of the Presidents Budget.

The approved estimates, collated by the DBM, are then forwarded by the President to Congress as appropriation requests. This is submitted with detailed line-item reviews of agency proposals.

Regional budgeting of agency and administration and of agency budgeting has been directed by the President under LOI Nos. 447 and 448.

Starting 1978, P.D. No. 1177 provides that the budget of the national government shall be prepared on the basis of budgetary proposals of the different regional offices of the national government agencies.

These proposals are discussed by the Regional Development Councils on a regional basis before submission to the departments and/or agencies central offices. The Central Offices, in turn, review and finalize the proposals and submit these to the DBM, which conducts technical budget hearings.

The 1978 national budget maybe considered as the first purely performance budget of the national government.

From the DBM the proposals go to the President for approval, and are then submitted to the Congress where they are discussed, and are finally enacted as the General Appropriations Law.

How Congress discusses and finally approves the national budget into Law is discussed in Budget Authorization.

Budget Authorization

The second phase of the budget process is Budget Authorization. It is the legislative authorization of the budget. The legislative consideration of the appropriations law is governed by Section 22 of Article VII of the Constitution.

This phase involves a detailed review of the budget proposals in accordance with the Rules of the Congress. The review will be made by the standing committees of the congress with jurisdiction in the particular field of legislation and their eventual inclusion in the appropriations bill to be sponsored by the Committee on Appropriations of the House of Representatives and the Committee on Finance of the Senate.

In conformity with the constitutional mandate, the legislative powers of the government are vested in the Congress which shall consist of a Senate and a House of Representatives, except to the extent reserved to the people by the provision of initiative and referendum.

The President is responsible to Congress for the program of government. His principal duty is to formulate the guidelines of national policies in accordance with the Constitution.

These policies will be carried out by the President, who shall be elected by the direct vote of the people, for a term of six years. The Presidents approval is not required before a bill passed by Congress becomes a law.

After the legislative action on the Presidents Budget Message, the DBM prepares the following related documents:

1. Appropriations Law setting forth authorized appropriations by departments or agencies;

2. National Governments Program of Expenditures showing approved programs and projects of departments and agencies, description of activities, target activities in terms of work units, unit costs, number of man-years, rate of production, etc.;

3. Itemized of Personal Services listing of authorized itemized positions and their corresponding classifications and authorized salaries;

4. Salary Tables;

5. Budget in Brief; and

6. Special Analysis

The budget is presented as a General Appropriation Bill in congress. If considered desirable, the Committee on Appropriation of the House of Representatives holds formal hearings on the proposed budget. These hearings enable department and agency heads and other officials to defend their respective appropriation requests and to furnish such information as the Committee may need.

Under the present legislative system, the Congress can lower but not raise the appropriations bills and can not pass an appropriation bill without the National Treasurer certifying to the availability of funds or without revenue measures in the bill itself.

Upon its approval by Congress, it is sent to the President for approval or veto within thirty days after he receives it. If the President does not act on the bill within this period, it shall automatically become a law without his signature. Thus, the law becomes the legislative authorization for the departments and agencies to execute their respective budgets.

Unlike in some foreign governments, the legislative authorizations in the Philippines are made directly to the administrative agencies. However, the DBM controls the release of funds to the departments and agencies.

Budget Execution

The third phase of the budget process is the Budget Execution, which covers the operational phase of budgeting. It is concerned with control of releases, allotment of the appropriations and incurrence of obligations.

At this stage, fixed plans for the use of appropriated funds are adopted and budgetary controls put in force to direct and limit the spending of funds according to plans. Control over expenditures is exercised by the President. In this function, he is assisted by the DBM, as provided by the law. It is at this point that budgeting serves as one of the principal tools of management.

It should be pointed out; however, that control over expenditures is exercised by the Commission on Audit, as a constitutional mandate.

Budget is a system of management control. However, it can not serve as a standard of control unless it reflects plans. Although a budget implements program, it is actually a program itself. It encompasses also the entire program of an organization with all other programs reflected in it.

If the budget is, therefore, to serve its purpose of control, it should be flexible. It should be adjusted and revised whenever there is a change in the basic conditions upon which it has been predicted.

The elements of control should be observed. If the change in conditions upon which the budget was developed is such that operations are materially affected, the amount of adverse effect can be measured and remedial action taken to cushion the effect of the flaw. The budget, therefore, must be revised so that it reflects the extension projection of current conditions and future operations.

Plans and programs envisioned during the preparation step are now given effect as modified by the action of Congress. To secure planned performance through the sound use of the resources, the DBM releases the funds in accordance with the agencys approved work and financial plan. As a result, unauthorized, unplanned, and excessive expenditures are avoided.

During the budget execution phase, the following activities are undertaken:

1. The Department of Budget & Management prepares the program of expenditure and obligation ceilings of departments/agencies observing current fiscal policies and guidelines.

2. The DBM notifies agencies of obligation ceilings. From receipt of obligation ceiling from the DBM, department/agencies allocate ceiling to each budgetary program/project.

3. Agencies prepared & submit work and financial plans to the DBM on the basis of activity in terms of work units, resources in physical terms and financial requirements.

4. Submit other required documents necessary for advice and allotment such as Equipment Procurement Program, Justifications for Key Budgetary Inclusions (KBIs) or special budget, if necessary, etc. The DBM reviews work and financial plans of departments/agencies.

5. The DBM releases Comprehensive Advice of Allotment and the corresponding Cash Disbursement Ceiling.

6. The DBM approves modification in the original Work and Financial Plan.

Budget Accountability

The fourth phase of the budget process is budget accountability. In the exercise of the executive power, the President controls all the executive departments, bureaus and offices. The President is immediately and legally accountable to Congress for the program of government, responsible to Congress for all he does in more important issues, like the National Budget.

Budget accountability concerns the reporting of actual performance against planned performance. More specifically, it consists of the preparation and submission of the following requirements:

a. Financial and physical reports of operations. It is the periodic reporting by the agencies of performance under their approved budgets.

b. Actual cash disbursement & unpaid obligations. It serves as basis for management review of government activities and the fiscal and policy implications thereof from the standpoint of department/agency management, of the DBM and the President.

c. Actions of the Commission on Audit. Such actions assure the fidelity of officials and employees in regard to their handling of government receipts and expenditures.

While the emphasis in the action of the Commission on Audit is on the legality of actions taken during the budget execution, management review is concerned primarily with programs and performances. Thus, the techniques of budget accountability are those concerned with reporting and interpreting meaning and significance of data reported. Through periodic reports, each official entrusted with public funds can account to the government not only his management of the funds but also for the effectiveness of the program under his jurisdiction.

Through a process of critical self-appraisal, government executives can redirect budgetary efforts whenever such action is necessary.

In the final analysis, budget accountability affords the President and the Members of the Cabinet, as well as the Congress, a means of evaluating progress and determining the future directions of government activities.

The fourth phase of the budget process, that is accountability, is spread through the various stages of the budget process, starting with the budget preparation up to the budget accountability itself.

ExerciseASSIGNMENTDivide the class into groups. Let each group report on the following :1. Compare the budget process of a private corporation and the government.2. Give insight as to the effectiveness of each process.

NATIONAL GOVERNMENT BUDGETING

Budget Process in the National Government

Since most budget activities tend to recur annually, they become part of the Budget Process, which is a cycle of sequential and interrelated budget activities regularly recurring within a specified time frame called the fiscal year. In the Philippines, the fiscal year coincides with the calendar year.

The Budget process is complex not only because new government activities are complex in themselves but also because new fiscal objectives are established each year requiring several fiscal years to work out properly.

Presidential Decree No. 1177, revises the budget process to institutionalize the budgetary innovations developed by the national government since September 21, 1972.

It requires the following:

1. The formulation of the budget that supports the national development plan and reflects the objectives and strategies of the Plan;

2. The preparation of the budget within the context of the total resources of the government, including revenues and receipts, expenditures and borrowings of national and local government units, including government-owned and controlled corporations;

3. The preparation of the annual budget as an integral part of a long-term plan and long-term budget program;

4. The specification of multi-year requirements in each stage of the budget process;

5. The preparation of the budget at the regional level, consolidation and review at the departmental level, taking into consideration the goals, plans and requirements of the regional offices in the interest of full government response to local thinking and initiative; and

6. The implementation and timing of major development projects which may affect the infrastructure program, debt ceilings, domestics credit, Balance of International Payments (BOP), and the determination of expenditure levels to ensure the observance of established fiscal, monetary, international payment and other constraints.

The Budget Process, as applied in the national government of the Philippines, consists of four major steps:

1. Budget Preparation3. Budget Execution

2. Budget Authorization4. Budget Accountability

General Provisions as provided for in the Local Government Code of the PhilippinesConstitutional Policies on the Budget(1) All appropriations, revenue or tariff bills, bills authorizing increase of the public debt, bills of local application, and private bills shall originate exclusively in the House of Representatives but the Senate may propose or concur with amendments.

(2)The Congress may not increase the appropriations recommended by the President for the operation of the Government as specified in the budget. The form, content and manner of preparation of the budget shall be prescribed by law.

(3)No provision or enactment shall be embraced in the general appropriations bill unless it relates specifically to some particular appropriation to which it relates.

(4)The procedures in approving appropriations for the Congress shall strictly follow the procedure for approving appropriations for other departments and agencies.

(5)A special appropriations bill shall specify the purpose for which it is intended, and shall be supported by funds actually available as certified by the National Treasurer or to be raised by a corresponding revenue proposal therein.

(6)No law shall be passed authorizing any transfer of appropriations. However, the President, the President of the Senate, the Speaker of the House of Representatives, the Chief Justice of the Supreme Court and the heads of Constitutional Commissions may, by law, be authorized to augment any item in the general appropriations laws for their respective offices from savings in other items of their respective appropriations.

(7)Discretionary funds appropriated for particular official shall be disbursed only for public purposes to be supported by appropriate vouchers and subject to such guidelines as may be prescribed by law.

(8)If, by the end of any fiscal year, the Congress shall have failed to pass the general appropriations bill for the ensuing fiscal year, the general appropriations law for the preceding fiscal year shall be deemed reenacted and shall remain in force and effect until the general appropriations bill is passed by the Congress.

(9)Fiscal autonomy shall be enjoyed by the Judiciary, Constitutional Commissions, Office of the Ombudsman, Local Government and Commission on Human Rights.

Definition of Terms(1)"Appropriation" refers to an authorization made by law or other legislative enactment, directing payment out of government funds under specified conditions or for specified purposes.

(2)"Allotment" refers to an authorization issued by the Department of the Budget to an agency, which allows it to incur obligation for specified amounts contained in a legislative appropriation.

(3)"Budget" refers to a financial plan required to be prepared pursuant to Section 16 (1), Article VIII of the Constitution, reflective of national objectives, strategies and programs.

(4)"Current operating expenditures" refers to appropriations for the purchase of goods and services for current consumption or for benefits expected to terminate within the fiscal year.

(5)"Capital outlay" or "capital expenditures" refers to an appropriation for the purchase of goods and services, the benefits of which extend beyond the fiscal year and which add to the assets of the Government, including investments in the capital of government-owned or controlled corporations and their subsidiaries.

(6)"Continuing appropriation" refers to an appropriation available to support obligations for a specified purpose or project, even when these obligations are incurred beyond the budget year.

(7)"Expected result" means service, product, or benefit that will accrue to the public, estimated in terms of performance measures or targets.

(8)"Fiscal year" refers to the period beginning with the first day of January and ending with the thirty-first day of December of each calendar year.

(9)The "Government" means the National Government, including the Executive, the Legislative and the Judicial Branches, and the Constitutional Commissions.

(10)"Department and agency" and "department or agency" include all departments, bureaus, offices, boards, commissions, courts, tribunals, councils, authorities, administrations, centers, institutes, state colleges and universities, and all other establishments and instrumentalities of the National Government as defined in the preceding paragraph.

(11)"Obligation" refers to an amount committed to be paid by the Government for any lawful act made by an authorized officer for and in behalf of the Government.

(12)"Program" refers to the functions and activities necessary for the performance of a major purpose for which a government agency is established.

(13)"Project" means a component of a program covering a homogenous group of activities those results in the accomplishment of an identifiable output.

It is declared in the policy of the State to formulate and implement a national budget that is an instrument of national development, reflective of national objectives, strategies and plans. The budget shall be supportive of and consistent with the socio-economic development plan and shall be oriented towards the achievement of explicit objectives and expected results, to ensure that funds are utilized and operations are conducted effectively, economically and efficiently. The national budget shall be formulated within the context of a regionalized government structure and borrowings of all levels of government and of government-owned or controlled corporations. The budget shall likewise be prepared within the context of the national long-term plan and of a long-term budget program.

The budget shall be formulated as an instrument for the attainment of national development goals and as part of the planning-programming-budgeting continuum. Levels of revenue, expenditure and debt shall be established in relation to macro-economic targets of growth, employment levels, and price level change, and shall be developed consistent with domestic and foreign debt, domestic credit and balance of payments objectives for the budget period. The aggregate magnitudes of the budget shall be determined in close consultation among the planning and fiscal agencies of government. Budgetary priorities shall be those specified in the approved national plans, keeping in mind the capability and performance of the implementing agencies concerned. Agency budget proposals shall explicitly state linkage to approved agency plans.

The finances of government shall be analyzed and determined as the aggregate of revenue, expenditure and debt of all units of government, including the national government and its agencies and instrumentalities, local government units and government-owned or controlled corporations. The national government budget shall be evolved within the framework of the total impact of government activity on the national economy. The budgets of government corporations and local governments shall be consistent in form and timing with that of the national government, to facilitate comprehensive evaluation.

The budgets of national government agencies shall take into full and explicit consideration the goals, plans and requirements of their respective regional offices, in the interest of full government response to local thinking and initiative. The budget preparation process shall originate at regional and local levels, and shall be consolidated and reviewed by the central offices of the various national agencies. The regional development strategies and plans, including physical framework and resource-use plans, shall be considered in the preparation of the budget.

The annual budgets of the national government shall be prepared as an integral part of a long-term budget picture. The long-term economic and physical framework plans of government, multi-year requirements of approved programs and projects, organizational and personnel development strategies, and other commitments entered into or otherwise assumed by government shall be specified in the budget process.

The development process requires the implementation of major development projects of such size as to significantly affect the infrastructure program, debt ceilings, the balance of payments, domestic credit, and government expenditure levels. The budget process shall formally consider the timing of major national projects, in order to ensure the observance of established fiscal, monetary, international payments, and other constraints.

The analysis of agency operating performance, the evaluation of performance, the evaluation of performance relative to costs incurred and the review of agency operating systems and procedures are inherent parts of the budget process. Agencies shall therefore design and implement (1) management information systems yielding both performance and financial information which will adequately monitor and control budget implementation, and (2) improvements in operating systems, procedures and practices, so as to ensure that the targets approved in budget authorization are in fact attained at minimum cost.

The extent of personnel services expenditures relative to the total budget and the number of agencies and personnel in government call for an effective national compensation and position classification policy. The Constitutional principle of a single compensation scheme for the government and its instrumentalities is one of the bases of the government budget process.

Budget PreparationThe President shall, in accordance with Section 22 (1), article VII of the Constitution, submit within thirty (30) days from the opening of each regular session of the Congress as the basis for the preparation of the General Appropriations Act, a national government budget estimated receipts based on existing and proposed revenue measures, and of estimated expenditures. The President shall include in the budget submission the proposed expenditure level of the Legislative and Judicial Branches and of Constitutional bodies, which shall have undergone the same process of evaluation and which shall have been subject to the same budgetary policies and standards applicable to agencies in the Executive Branch.

The President may transmit to the Congress from time to time, such proposed supplemental or deficiency appropriations as are, in his judgment, (1) necessary on account of laws that were enacted after the transmission of the Budget, or (2) otherwise needed in the public interest.

The budget proposal of the President shall include current operating expenditures and capital outlays. It shall comprise such funds as may be necessary for the operation of the programs, projects and activities of the various departments and agencies. The proposed General Appropriations Act and other Appropriations Acts necessary to cover the budget proposals shall be submitted to the Congress to accompany the President's budget submission.

The budget shall be presented to the Congress in such form and content as may be approved by the President and may include the following:

(1)A budget message setting forth in brief the government's budgetary thrusts for the budget year, including their impact on development goals, monetary and fiscal objectives, and generally on the implications of the revenue, expenditure and debt-proposals; and

(2)Summary financial statements setting forth:

(a)Estimated expenditures and proposed appropriations necessary for the support of the Government for the ensuing fiscal year, including those financed from operating revenues and from domestic and foreign borrowings;

(b)Estimated receipts during the ensuing fiscal year under laws existing at the time the budget is transmitted and under the revenue proposals, if any, forming part of the year's financing program;

(c)Actual appropriations, expenditures, and receipts during the last completed fiscal year;

(d)Estimated expenditures and receipts and actual or proposed appropriations during the fiscal year in progress;

(e)Statements of the condition of the National Treasury at the end of the last completed fiscal year, the estimated condition of the Treasury at the end of the fiscal year in progress and the estimated condition of the Treasury at the end of the ensuing fiscal year, taking into account the adoption of financial proposals contained in the budget and showing, at the same time, the unencumbered and un-obligated cash resources;

(f)Essential facts regarding the bonded and other long-term obligations and indebtedness of the Government, both domestic and foreign, including identification of recipients of loan proceeds; and

(g) Such other financial statements and data as are deemed necessary or desirable in order to make known in reasonable detail the financial condition of the government.

Budget Levels. The ordinary income of government shall be used primarily to provide appropriations for current operations, except in case of a national emergency or serious financial stress, the existence of which has been duly proclaimed by the President.

The level of aggregate revenue expenditure and debt shall be jointly recommended to the President by the Department of Budget and Management, the Department of Finance, the National Economic and Development Authority and the Central Bank of the Philippines, acting within the Development Budget Coordination Committee of the National Economic and Development Authority.

No appropriations for current operations and capital outlays of the Government shall be proposed unless the amount involved is covered by the ordinary income, or unless it is supported by a proposal creating additional sources of funds or revenue, including those generated from domestic and foreign borrowings, sufficient to cover the same. Likewise, no appropriation for any expenditure, the amount of which is not covered by the estimated income from the existing sources of revenue or available current surplus, may be proposed, unless it is supported by a proposal creating an additional source of funds sufficient to cover the same.

Proposals creating additional sources of funds shall be prepared in the form of revenue bills. The provisions of this section shall not be construed as impairing in any way the power of the Congress to enact revenue and appropriation bills, nor the authority of the President to propose special revenue and appropriation bills after the submission of the budget.

Budget Estimates. Each head of department, office or agency of the National Government, including the Legislative and Judicial Branches, and including government owned or controlled corporations, shall submit his request for appropriations to the Department of Budget in accordance with the budget calendar, format, and such rules and regulations as may be issued in implementation of this Decree.

The budget estimates of agencies shall include the following information:

(1)Objectives, functions, activities, programs and projects showing the general character and relative importance of the work to be accomplished or the services to be rendered, and the principal elements of cost involved;

(2)Linkage of the work and financial proposals to approved development plans;

(3)Estimated current operating expenditures and capital outlays, with comparative data for the preceding and current budget years;

(4)Identification by region, pursuant to policies on the regionalization of government operations;

(5)Financial sources, reflecting all revenues, proceeds of foreign and domestic borrowings, and other sources, particularly those which accrue to the General Funds;

(6)Contingent liabilities, including national government guarantees of obligations of government-owned or controlled corporations and their subsidiaries;

(7)Brief description of the major thrusts and priority programs and projects for the budget year, results expected for each budgetary program and project, the nature of work to be performed, estimated costs per unit of work measurement, including the various objects of expenditure for each project;

(8)Organization charts and staffing patterns indicating the list of existing and proposed positions with corresponding salaries, and proposals for position classification and salary changes, duly supported by adequate justification.

Regional Budget. The Budgets of national government agencies shall be prepared taking into full and careful consideration the opportunities and requirements specific to the various regions of the country. Where they are organized, regional offices shall originate agency budget proposals, in accordance with approved priorities and guidelines.

Agencies which are not regionalized shall nonetheless estimate the amounts planned to be spent for each region of the country.

The Secretary shall identify by region the expenditure programs of the national government agencies in the national government budget, and release funds to national government agencies in accordance with the approved regional distribution of expenditures, specifying the region of destination.

Departments and agencies shall sub-allot in full and without the imposition of reserves, the approved budget allocation of their various regional offices, except as may be authorized by the Secretary, in case realignment of expenditures prove to be necessary in the course of budget execution. The Secretary shall issue the rules and regulations needed to implement the provisions of this section.

Budget Evaluation. Agency proposals shall be reviewed on the basis of their own merits and not on the basis of a given percentage or peso increase or decrease from a prior year's budget level, or other similar rule of thumb that is not based on specific justification. Proposed activities, whether new or ongoing, shall be evaluated using a zero-base approach and on the basis of (1) relationship with the approved development plan, (2) agency capability as demonstrated by past performance, (3) complemental role with related activities of other agencies, and (4) other similar criteria. The realization of savings in a given budget year and the consequent non-utilization of funds appropriated or released to a given agency shall not be a negative factor in the budget evaluation for a subsequent year.

The budgetary implications of foreign-assisted projects shall be explicitly considered at the time of project design and financing negotiation. The project study shall specify the cash flow requirements of the project, among others, for (1) payment of principal and interest, (2) peso component of capital costs and project preparation, (3) infrastructure and support facilities needed to be directly financed by government, (4) operating and other expenditures which will be ultimately required for General Fund support when the project is implemented, and (5) peso requirements needed as counterpart. The concurrence of the Department of Budget and Management shall be obtained with respect to peso requirements and implication on expenditure ceilings.

The budgets of coordinating agencies, councils, task forces, authorities, committees, or other similar bodies shall be limited to and used to fund only such planning, coordinating and monitoring functions as are assigned to it. Funds for implementation shall be budgeted and released to the line implementing agencies concerned; provided, that the budgets of coordinating bodies may include a lump-sum for purposes related to their assigned functions, which lump-sum shall be sub-allotted to implementing agencies and not used by the agency for its own operations: provided, further, that funds budgeted for a given agency falling within the jurisdiction of a coordinating body, may be subject to release upon approval by the coordinating agency of such release or of the agency's work program.

The internal operating budgets of government-owned or controlled corporations and of chartered institutions shall be approved by their respective governing boards in accordance with a budget calendar and format as may be approved by the President: Provided, that such budgets shall be subject to review and approval as part of the budget process in cases where national government budgetary support is needed, in terms of (a) capital or equity inputs, (b) operating contributions to support specific activities undertaken by the institution as part of its regular functions, and (c) guarantee of the national government for obligations or contracts entered into by the corporations: provided, further, that the submission of interim financial statements may be required by the Secretary.

All units of government, including government-owned or controlled corporations, shall pay income taxes, customs duties and other taxes and fees as are imposed under revenue law: provided, that organizations otherwise exempted by law for the payment of such taxes/duties may ask for a subsidy from the General Fund in the exact amount of taxes/duties due: Provided, further, that a procedure shall be established by the Secretary of Finance and the Secretary of the Budget, whereby such subsidies shall automatically be considered as both revenue and expenditure of the General Fund.

Appropriations for personal services shall be considered as included in the amount specified for each budgetary program and project of each department, Bureau, office or agency, and shall not be itemized. The itemization of personal services shall be prepared by the Secretary for consideration and approval of the President as provided in Section 23 hereof: Provided, That itemization of personal services shall be prepared for all agencies of the Legislative, Executive and Judicial Branches and the Constitutional bodies, except as may be otherwise approved by the President for positions concerned with national security matters.

No legislative proposal which, if enacted, would authorized subsequent appropriations, shall be transmitted to the President by any bureau or agency without the prior approval of the Head of the Department concerned or by the Chairman or Chief Executive Officer of a Cabinet level body which coordinates the multi-sectoral formulation and implementation of a particular program of expenditure involving one or more departments. No legislative proposal involving the appropriation of funds shall be transmitted to the Congress without the approval of the President.

Budget Authorization

The General Appropriations Act shall be presented in the form of budgetary programs and projects for each agency of the government, with the corresponding appropriations for each program and project, including statutory provisions of specific agency or general applicability. The General Appropriations Act shall not contain any itemization of personal services, which shall be prepared by the Secretary after enactment of the General Appropriations Act, for consideration and approval of the President.

The Congress shall in no case increase the appropriation of any project or program of any department, bureau, agency or office of the Government over the amount submitted by the President in his budget proposal. In case of any reduction in the proposed appropriation for a project or program, a corresponding reduction shall be made in the total appropriation of the department, office or agency concerned and in the total of the General Appropriations Bill.

Prohibition Against Enactment of Additional Special

The Congress shall not add special provisions in the budget earmarking the use of appropriations for specific programs or activities nor shall it increase the amounts specified in special provisions beyond those proposed by the President.

All expenditures for (1) personnel retirement premiums, government service insurance, and other similar fixed expenditures, (2) principal and interest on public debt, (3) national government guarantees of obligations which are drawn upon, are automatically appropriated: provided, that no obligations shall be incurred or payments made from funds thus automatically appropriated except as issued in the form of regular budgetary allotments.

All appropriation proposals shall be included and considered in the budget preparation process. After the President shall have submitted the Budget, no supplemental appropriation measure supported from existing revenue measures shall be passed by the Congress. However, supplemental or deficiency appropriations involving the creation of new offices, programs or activities may be enacted if accompanied and supported by new revenue sources.

Unexpended balances of appropriations authorized in the General Appropriation Act shall revert to the un-appropriated surplus of the General Fund at the end of the fiscal year and shall not thereafter be available for expenditure except by subsequent legislative enactment: Provided, that appropriations for capital outlays shall remain valid until fully spent or reverted: provided, further, that continuing appropriations for current operating expenditures may be specifically recommended and approved as such in support of projects whose effective implementation calls for multi-year expenditure commitments: provided, finally, that the President may authorize the use of savings realized by an agency during given year to meet non-recurring expenditures in a subsequent year.

The balances of continuing appropriations shall be reviewed as part of the annual budget preparation process and the preparation process and the President may approve upon recommendation of the Secretary, the reversion of funds no longer needed in connection with the activities funded by said continuing appropriations.

Expenditures funded by foreign and domestic borrowings shall be included within the expenditure program of the agency concerned. Loan proceeds, whether in cash or in kind, shall not be used without the corresponding release of funds through a Special Budget as herein provided.

Government agencies, particularly government-owned or controlled corporations, shall periodically report to the Secretary of Finance and the Secretary of Budget on the status of obligations they have entered into and which are the subject of government guarantees.

It shall be unlawful for any person to make any unauthorized revision of any figure, text or provision in the General Appropriations Act and in the other budget documents during or in the process of the printing. Any unauthorized change made either by addition, modification or deletion, shall be null and void.

Persons, who, in violation of the provision of the law, make any unauthorized revision in the budget documents, shall be criminally liable for falsification of legislative documents under the Revised Penal Code. When the offender is a government official or employee, he shall, in addition to criminal prosecution, be dismissed from the service.

Budget Execution

All moneys appropriated for functions, activities, projects and programs shall be available solely for the specific purposes for which these are appropriated.

Authorized appropriations shall be allotted in accordance with the procedure outlined hereunder:

(1)Appropriations authorized for any Department or agency of the Government may be made available for expenditure when the head of each Department or agency submits to the Secretary a request for allotment of funds showing the estimated amounts needed for each function, activity or purpose for which the funds are to be expended during the applicable allotment period. The form and the time of submission of the request for allotment showing the proposed quarterly allotments of the whole authorized appropriation for the department or agency, shall be prescribed by the Secretary.

(2)In the administration of the allotment system herein provided, each calendar year shall be divided into four quarterly allotment periods beginning, respectively, on the first day of January, April, July and October. In any case where the quarterly allotment period is found to be impractical or otherwise undesirable, the Secretary may prescribe a different period suited to the circumstances.

(3)Request for allotment shall be approved by the Secretary who shall ensure that expenditures are covered by appropriations both as to amount and purpose and who shall consider the probable needs of the department or agency for the remainder of the fiscal year or period for which the appropriation was made.

(4)At the end of every quarter, each department or agency shall report to the Secretary the current status of its appropriations, the cumulative allotments, obligations incurred or liquidated, total disbursements,

Public Finance April 2015

Documents

Transcript of Public Finance April 2015