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
5) A) Cyclical UnemploymentB) Seasonal Unemployment
6) C) Structural UnemploymentD) Frictional Unemployment
7) A condition in which unemployment is a result of slow or no
activity in the production of goods and services.
8) A) Cyclical UnemploymentB) Seasonal Unemployment
9) C) Structural UnemploymentD) Frictional Unemployment
10) Lack of work caused by business cycle changes in the volume
of work available.
11) A) Cyclical UnemploymentB) Seasonal Unemployment
12) C) Structural UnemploymentD) Frictional Unemployment
13) Key instrument employed by governments of various countries
in mitigating the adverse effects of economic fluctuations one of
which is employment.
14) A) Cyclical UnemploymentB) Seasonal Unemployment
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,