LOCAL GOVERNMENT ADMINISTRATION

Presented by:

LOUIE A. MEDINACELI & DAVID GOLLA

DR. LOURDES G. BANDOYProfessor

Republic of the PhilippinesEULOGIO “AMANG” RODRIGUEZ

INSTITUTE OF SCIENCE AND TECHNOLOGYNagtahan, Sampaloc, Manila

GRADUATE PROGRAMMASTER IN PUBLIC ADMINISTRATION

TOPIC: PUBLIC FISCAL ADMINISTRATION

PUBLIC FISCAL ADMINISTRATION defined Refers to the

Formulation Implementation Evaluation

of thePolicies

andDecisions

on

TAXATION REVENUE ADMINISTRATION RESOURCE ALLOCATION BUDGETING PUBLIC EXPENDITURE BORROWING DEBT MANAGEMENT ACCOUNTING AUDITING

FISCAL = refers to

ADMINISTRATION = refers to the

Closely linked with other policy instruments of the government such as MONETARY, PRICE and TRADE POLICY, INVESTMENT

and WAGE.

FISCAL POLICIE

S

NGAsGOCCsGFIsLGUs

Government

Sector

people whom the government

serve

beneficiaries, voters,

taxpayers, youth, farmers,

urban poor

FormulationImplementati

onEvaluation

Government’s

FISCAL POLICIES

Administration of FISCAL POLICIES actually takes place within a Political System

Public Fiscal Administration and Political Process are interrelated and influence each other

ADMINISTRATIONreferring to carrying out or implementing

that collective will of the society

Formulate and recommend urgent policy

measures for congressional

deliberation and approval

POLITICSreferring to formulating of laws and policies

as expression of the collective will of the state

Legislature

Rule Making

Also engaged in POLICY implementation thru their

PORK BARREL funds

(1)Department

of Finance

Bureau of Internal Revenue

Bureau of Custom

Bureau of Treasury

Implementation of policies on TAXATION and

TARIFF

Custodian of Government Funds

(2) Department of

Budget and Management

leads the formulation of

expenditure policy as well as borrowing

central planning body

formulate, review, and assess fiscal policy

prepares / prescribes the programs, projects and activities of government and how these prioritized and finance

(3)National Economic Developme

nt Authority

(4)Bangko Sentral

Ng Pilipinas

major actor in the fiscal policy process to ensure that monetary policies are in consonance with fiscal policy decisions

(5)External Forces

International Lending Institutions both

influence the fiscal

policy adminis-tration

Government giving agencies

( e.g. IMF, WB, ADB ) give advise on fiscal and

other policies of the

government

Composition

Bangko Sentral Ng PillipinasGovernor - Member

Department of Budget and Management Secretary –

(Chairman)

Department of Finance Secretary - Member

formulates the policy framework for the National Budget determines the level of deficit establishes the priorities and the amount of allocation for the sectors

Office of the President –Representative – Member

(6)Developmen

t Budget and

Coordination Council

National Economic Development Authority

(Director – General)

The Major Functions of DBCC

1. Establishment of the level of annual government expenditure program and ceilings of government spending in economic and social development, national defense, general government and debt services;

2. Determination of the proper allocation of expenditures for each development activity between current operating expenditures (COE) and capital outlays (CO), allotting not more than 85% of total government expenditures to COE and at least 15% to capital outlays.

3. Allocation of the amount set for capital outlays under each development activity for the various capital infrastructure projects;

4. Assessment of the reliability pf revenue estimates;

5. Recommendation of appropriate tax or other revenue measures and extent and type of borrowings;

6. Conduct of periodic review and general examination of costs, accomplishment, and performance standards applied in undertaking development projects, including the review of a mid year and annual budgetary performance;

7. Approval and recommendation to the President of general policy guidelines in the preparation of the national budget; and

8. Approval and confirmation of various requests of the Ministry of Finance for bond floatation.

NGAsGeneral Appropriation Act = called the national government budget = contain subsidies, transfers, and/or allotments to GOCCs, GFIs, and LGUs

GOCCsGFIsLGUs

Have their own distinct and separate budgets

PUBLIC FISCAL ADMINISTRATION

PUBLIC FINANCE

= closely related = both talk about revenue and expendituresAlso talks about government revenues and expenditures and their impact in the economy

a subject area or branch in economics which deals with the revenues and expenditures patterns of the government and their various effects on the economy

concerned with the implementation and practicalities of these concepts

has always been considered part of economics Economics – Deals with the utilization of scarce resources that have alternative uses to satisfy human wants.

Encompasses the practical aspects of fiscal governance such as: > revenue collection > preparation of budgets > budget allocation and spending > management of debt > auditing of account

deals with certainat a rather broad conceptual level

financial issues

e.g. real problems as economic incentives , aggregate employment, & inflation

PUBLIC FISCAL ADMINISTRATION PUBLIC FINANCE

Deals with, but is not restricted to the more limited issues covered by public fiscal

In recent times, however, with the emergence of the field of public administration, much interest has been directed towards the political administrative and management aspects of formulating, implementing and evaluating fiscal policy-hence, the term public fiscal administration

Is centered on the determination and analysis of fiscal policies starting from their formulation to their implementation and evaluation.

FISCAL POLICY MONETARY POLICY refers to the combination of policies on: TAXATION EXPENDITURES adopted by the BORROWING government BUDGETING to achieve ACCOUNTING objectives AUDITING

concerned with the control of the aggregate supply of money (cash in pockets and balances in bank accounts) in the economy and is monitored and shaped primarily by the Central Bank

tight and easy money regimes are simply its effects

End product of fiscal administration its major objectives are price stabilization, full employment, and economic growth

Serves as tools to achieve general welfare objectives, and shape and influence by the POLITICAL PROCESS

its conduct is an art, involving a delicate balancing act, the use of appropriate tools, the sending of proper signals to the market on its broad intentions

Note: Have no dividing line as to the impact of fiscal and monetary policies in the economy Example: a decision to incur a budget deficit ( a matter of fiscal policy) will require domestic borrowing thru the issuance of treasury bills which affect the money supply (monetary policy).

Fiscal Policy FunctionsAllocation

It is the process by which total resource use is divided between private and social goods and which the mix of social goods is chosen.

In the performance of allocation function, fiscal policy is expected to regulate the balance in making available both private goods, merit goods, and social goods. The government intervenes through subsidies, price regulation, and direct provision of social goods.

Distribution

The distribution of income and wealth is shaped by the distribution of the factors of production. Fiscal policy is directed toward correcting this income and wealth. ex. high tax for rich, and low tax for poor; favorable public policies on agrarian reform, wages, labor and employment, among others

Fiscal Policy Functions

Stabilization

instability may be due to changes in prices of major imports, cost of foreign borrowings, and the availability of foreign borrowings which lead to huge deficits in the budget and balance of payments and trade. Using expenditure and tax policies for stabilization in developing countries may be more difficult. An increase in expenditures may entail either additional taxes or more borrowing. The low tax base and inefficient tax administration makes a case of public borrowing. A country aspiring to achieve growth and development may have to experience instabilities and suffer chronic balance of payments deficit, severe inflation, high levels of unemployment and underemployment and the like.

Development (in developing countries)

Development is an expensive endeavor. For it to be achieved by developing countries, a radical shift in revenue and expenditure priorities is called for. Human development – process of enlarging the range of people’s choices; increasing their opportunities for education, health care, income and employment, and covering the full range of human choices from a sound physical environment and political freedom. Sustainable development – is a process of change in which the exploitation of resources, the direction of investments, the orientation of technological development, and institutional change are made consistent with future as well as present needs.

TARGETS OF MONETARY POLICY – given the effect of MP on the inflation rate, interest rates and levels of output and employment, and growth, monetary authorities try to target some variables in order to achieve a certain inflation rate or GNP growth

Monetary Aggregate

s

Refer to the different measures of money. As per the Quantity Theory of Money, money supply increases do tend to raise the inflation rate

Interest Rates

It does not directly target. Rather, BSP uses the policy interest rates for Repurchase Agreements (Repos) and Reverse Repos (RRPs) to signal to the market their intention to tighten or loosen monetary policy or simply maintain the status quo. These are made by the MB.

Inflation Targeting

The government’s inflation target is defined in terms of the average year-on-year change in the consumer price index (CPI) over the calendar year focused mainly on achieving a low and stable inflation

Price Index – an average of prices of commodities in relation to their prices in a specified base year

COMPUTING AN INDEX

Price of Rice (per kg) Price Index (Rice)

2000* 14.00 (14/14) X 100 = 100.0

2003 15.40 (15.40/14) X 100 = 110.0

2004 16.17 (16.17/14) X 100 = 115.5

Annual Increase (%)2003 – 2004 = (16.17 – 15.40) 15.40 = 5.0%

Annual increase (%)2003 – 2004 = (115.5 – 110) 110 = 5.0%

Three elements in the construction of an average price index

1. the items in the market basket 2. the weight of each item 3. the base year used as the point of

comparison.

Inflation yardsticks:1.GNP deflator - 2.Producers Price Index (PPI)3.Consumer Price Index (CPI)

INFLATION YARDSTICKS:1. GNP deflator - a measure, which shows the

general price level of the final output of goods and services by Philippine nationals for a given period.

2. Producers Price Index – measures the price changes of finished goods, intermediate materials and crude materials at the level of the factory or production unit.

3. Consumer Price Index – is a measure of the changes in prices of consumer goods and services.

TOOLS OF MONETARY POLICY (monetary policy instruments used by the BSP to ease and tighten credit in the economy thus promote price stability, and increase or reduce liquidity in the financial system)

(1) Tools Aimed at Monetary Aggregates ?

a. Purchase / Sale of Foreign Exchange in the FOREX Market in order to ensure that banks are able to provide ample liquidity in the

market but, at the same time, conduct their business in a sound manner, and guard against speculative activity, limits on their “net open foreign exchange position” are instituted.

“Open Foreign Exchange Position” shall refer to the extent that banks' foreign exchange assets do not match their foreign exchange liabilities

An open position may either be: o "positive", "long", or "overbought" (i.e., foreign exchange assets exceed foreign exchange liabilities) or o "negative", "short", or "oversold" (i.e., foreign exchange liabilities exceed foreign exchange assets).

Allowable Open Foreign Exchange Position. Banks' allowable open foreign exchange position (either overbought or oversold) shall be the lower of 20 percent (20%) of their unimpaired capital or USD50 million.

Any excess of the allowable limit shall be settled on a daily basis.

Penalties on excess overbought and oversold positions of banks when PDS trading is suspended shall be waived.

b. Open Market Operations - are a key component of monetary policy implementation. These consist of repurchase and reverse repurchase transactions, outright transactions, and foreign exchange swaps.

i.Repurchase and reverse repurchase

In a repurchase or repo transaction, the BSP buys government securities from a bank with a commitment to sell it back at a specified future date at a predetermined rate. The BSP’s payment to the bank increases the latter’s reserve balances and has an expansionary effect on liquidity. In a reverse repo, the BSP acts as the seller of government securities and the bank’s payment has a contractionary effect on liquidity

ii. Outright transactions

refer to the direct purchase/sale by the BSP of its holdings of government securities from/to banking institutions.

In an outright transaction, the parties do not commit to reverse the transaction in the future, creating a more permanent effect on money supply.

The transactions are conducted using the BSP’s holdings of government securities.

When the BSP buys securities, it pays for them by directly crediting its counterparty’s Demand Deposit Account with the BSP.

The transaction thus increases the buyer’s holdings of central bank reserves and expands the money supply.

Conversely, when the BSP sells securities, the buyer’s payment (made by direct debit against his Demand Deposit Account with the BSP) causes the money supply to contract.

iii. Foreign exchange swaps refer to transactions involving the actual exchange of two currencies (principal amount only) on a specific date at a rate agreed on the deal date (the first leg), and a reverse exchange of the same two currencies at a date further in the future (the second leg) at a rate (different from the rate applied to the first leg) agreed on deal date.

TOOLS OF MONETARY POLICY

(2) Tools Aimed at Influencing the Multiplier or Interest Rate

a. Reserve Requirements - refer to the percentage of bank deposits and deposit substitute liabilities that banks must keep on hand or in deposits with the BSP and therefore may not lend.

Money multiplier is inversely related to the required reserves percentage. If the required reserves are low, banks can lend more of their deposit and themultiplier is high. If it is increased, banks can lend less and the multiplier goes down.

Changes in reserve requirements have a significant effect on money supply in the banking system, making them a powerful means of liquidity management.

Reserve requirements apply to peso demand, savings, time deposit and deposit substitutes (including long-term non-negotiable tax-exempt certificates of time deposit or LTNCTDs) of universal banks (UBs) and commercial banks (KBs) and may be kept in the form of cash in vault, deposits with the BSP and government securities.

TOOLS OF MONETARY POLICY

Required reserves consist of two forms: regular or statutory & liquidity reserves

- Deposits maintained by banks with the BSP up to 40 percent of the regular reserve requirement are paid interest at 4 percent per annum

- Liquidity reserves are paid the rate on comparable government securities less half a percentage point. The use of liquidity reserves help to reduce bank intermediation costs since they are paid market-based interest rates.

- In March 2006, the Monetary Board began to require banks to keep liquidity reserves in the form of term deposits in the reserve deposit account (RDA) with the BSP instead of government securities bought directly from the BSP.

TOOLS OF MONETARY POLICY

b. Rediscounting

The BSP extends discounts, loans and advances to banking institutions in order to influence the volume of credit in the financial system. Rediscounting is a standing credit facility provided by the BSP to help banks meet temporary liquidity needs by refinancing the loans they extend to their clients. The rediscounting facility allows a financial institution to borrow money from the BSP using promissory notes and other loan papers of its borrowers as collateral.

There are two types of rediscounting facilities available to qualified banks: the peso rediscounting facility and the Exporters’ Dollar and Yen Rediscount Facility (EDYRF) which was introduced in 1995.

If the BSP wants to constrict deposits and money supply, it simply reduced the amount of funds it makes available and/or raises the rediscount rate.

Differences between Developed and Developing Countries in FISCAL SYSTEMS stems from the following: Level of Economic Development Historical Experience Scars and Traumas of Wars Process of Colonization Politico – Economic Relationships

Developed Countries = goals are more concerned with maintaining growth and economic stability

Developing Countries = its goal is to achieve DEVELOPMENT, or narrowly, INDUSTRIALIZATION

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