FISCAL POLICY OF

THE PHILIPPINE
GOVERNMENT
•Fiscal Policy refers to the “measures
employed by governments to stabilized
the economy, specifically by
manipulating the levels and allocations
of taxes and government expenditures”.
 Fiscal Policy Works

Fiscal policy is based on the theories of birth

economist John Maynard Keynes. Also known
as Keynesian economics, this theory basically
states that governments can influence
macroeconomic productivity levels by
increasing or decreasing tax levels and public
spending.
FISCAL POLICY IS NEEDED
BECAUSE

RECESSION
INFLATION
JOHN MEYNARD KEYNES SAID

The normal curve will return in

the Long run…
“We are not alive on the long
run.”
 Fiscal Policy Works

This influence, in turn, arbs inflation (generally considered to be

healthy when between 2-3%), increases employment and
maintains a healthy value of money, fiscal policy is very
important to the economy. For example in 2012 many worried
that the fiscal different a simultaneous increases in tax rates and
cuts in government spending set to occur in January 2013, would
send the U.S. economy back to recession. The U.S. congress
avoided this problem by passing the American taxpayer relief act
of 2012 on January 1, 2013.
 Major Objectives
A. Full Employment
it is very important objective of fiscal policy. Unemployment reduces the level
of production, and hence the level of economic growth. It also creates many
problems to the unemployed in their day to day life. So, countries try to remove
unemployment and attain full employment. Full employment refers to that situation,
where there is no voluntary unemployment in the economy to attain this objective,
government should;

 Increase its spending

 lower the personal income tax
 lower the business taxes, or
Employ a combination of increasing government spending and decreasing taxes.
 Major Objectives
however, in practice, it’s a difficult to achieve full employment. As the factor markets are not
perfect, factor units may lose their jobs and may not get the new jobs immediately.

B. Price Stability
both sharp rise and sharp fall in general price level are not desirable. It
is because sharp prices makers many goods and services un affordable to
the consumers whereas sharp full in prices discourages the producers to
produce goodstand services. So, price stability is desirable. However, it
should be noted that the principle that general price level should be
reasonably stable is generally accepted, the determination of exact trends
which are most satisfactory from the stand point of welfare of society is
difficult. There are following there alternatives point of vies regarding the
price stability (due, 1970:513-518):
 Major Objectives

C. Economic Growth
-it is also an important objective of fiscal policy. By means of higher rate of
economics growth the problem of unemployment can also solved. However, it may
create some problems in the maintenance of price stability. The developed
countries, like USA, UK, Japan, etc, give attention to the relationship of actual
growth rate to the potential growth rate permitted by the consumption-saving ratio
as well as the relationship of the actual and potential growth rate (due, 1970:517)

D. Resource Allocation
-refers to assigning the available resources of the economy to the specific uses
chosen among many possible and competing alternatives.
 TAX REVENUE
Tax collection comprise the biggest percentage of revenue collected. Its biggest
contributor is the Bureau of Internal Revenue (BIR), followed by the Bureau of
Customs (BOC). Tax effort as a percentage of GDP has averaged at roughly 13%
for the years 2001-2010.

INCOME TAXES
Income tax is a tax on a person’s income, wages, profits arising from property,
practice of profession, conduct of trade or business or any stipulated in the
National Internal Revenue Code of 1997 (NIRC), less any deductions granted.
Income tax in the Philippines is a progressive tax, as people with higher incomes
pay more than people with lower incomes. Personal income tax rates vary as such.

In 2008, Republic Act No. 9504 (passed by then-President Gloria Macapagal-

Arroyo) exempted minimum wage earners from paying income taxes.
In the Philippines:
•We use the following to balance the
economy:
E-VAT
The Expanded Value Added Tax (E-VAT), is a form of sales
tax that is imposed on the sale of goods and services and on the
import of goods into the Philippines. It is a consumption tax
(those who consume more are taxed more) and an indirect tax,
which can be passed on to the buyer the current E-VAT rate is
12% of transactions. Some items which are subject to E-VAT
include petroleum, natural gases, indigenous fuels, coals, medical
services, legal services, electricity, non-basic commodities,
clothing, non-food agricultural products, domestic travel by air
and sea.
 Nature and Techniques
Expansionary fiscal policy increases the AD of the economy. It increase
the level of production, and hence the level of employment. It eliminate
the recessionary gap existing in the economy. It should be noted that
recessionary gap occurs when the equilibrium real GDP is less than the
potential real GDP of the country.
Contractionary fiscal policy reduces the AD of the economy, it reduces
the level of production, and hence the level of employment. It eliminates
the inflationary gap existing in the economy.
Fiscal policy can be used to eliminate the inflationary gap for;
• Government spending should be reduced
• Personal income taxes and business taxes should be treasured
 TARIFF AND DUTIES
Second to the BIR in terms of revenue collection, the Bureau of Customs (BOC) imposes tariffs
and duties on all items imported into the Philippines. According to executive order 206, returning
residents, 0verseas Filipino Workers (OFW’S) and former Filipino citizens are exempted from
paying duties and tariffs.

NON-TAX REVENUE
Non-tax revenue makes up a small percentage of total government revenue (roughly less than
20%), and consists of collection of fees and licenses, privatization proceeds and income from
other state enterprises.

THR BUREAU OF TREASURY

The Bureau of Treasury (BTr) manages the finances of the government, by attempting to
maximize revenue collected and minimize spending. The bulk of non-tax revenues comes from
the BTr's income. Under Executive Order No.449, the BTr collects revenue by issuing, servicing
and redeeming government securities, and by controlling the Securities Stabilization Fund (which
increases the liquidity and stabilizes the value of government securities) through the purchase and
sale of government bills and bonds.
CONCLUSION
Government can influence the level of production, inflation and
unemployment by using the fiscal policy. This, fiscal policy is an
important tool in the hands of the government to achieve its
macroeconomic goals.

Expansionary vs. Contractionary Fiscal Policy

• Increase in surplus indicates contractionary fiscal policy
• Decrease in surplus indicates expansionary fiscal policy
• Increase in deficit indicates expansionary fiscal policy
• Decrease in deficit indicates expansionary fiscal policy
 Fiscal measures are frequently used in tandem with monetary
policy to achieve certain goals. In the Philippines, this is
characterized by continuous and increasing levels of debt and
budget deficits, though there have been improvements in the last
few years.

The Philippine government’s main source of revenues are taxes,

with some non-tax revenue also being collected. To finance fiscal
deficit and debt, the Philippines relies on both domestic and
external sources.
 Alternative Fiscal Policy
A. Fiscal policy during the contraction

1. Increase in government spending

2. Reduction in personal income taxes
3. Reduction in business taxes
4. Increase in transfer payments
5. Practicing deficit budget
 Alternative Fiscal Policy
B. Fiscal policy during the expansion

1. decrease in government spending

2. increase in personal income taxes
3. increase in business taxes
4. reduction in transfer payments
5. practicing surplus budget
Fiscal Policy during the Marcos Administration was primarily focused on
indirect tax collection and on government spending on economic services
and infrastructure development.

The first Aquino Administration inherited a large fiscal deficit from the
previous administration, but managed to reduce fiscal imbalance and
improve tax collection through the introduction of the 1986 Tax Reform
Program and the value added tax.

The Ramos Administration experienced budget surpluses due to substantial

gains form the massive sale of government assets and strong foreign
investments in its early years. However, the implementation of the 1997
Comprehensive Tax Reform program and the onset of the Asian financial
crisis resulted to a deteriorating fiscal position is the succeeding years and
administration.
 The Estrada Administration faced a large fiscal deficit due to the
decrease in tax effort and the repayment of the Ramos Administration
debt to contractors and suppliers.

During the Arroyo Administration, the Expanded Value added Tax Law
was enacted, national debt-to-GDP ratio peaked, and under spending
on public infrastructure and other capital expenditures was observed.

The Philippine government generates revenues mainly through

personal and income tax collection, but a small portion of non-tax
revenue is also collected through fees and licenses, privatization
proceeds and income from other government operations and state-
owned enterprises.
1. Agricultural and marine products in their original state (e.g. vegetables, meats,
fish, fruits, egg, and rice), including those which have undergone preservation
processes (e.g. freezing, drying, salting, broiling, roasting, smoking or stripping);

2. Educational services rendered by both public and private educational institutions;

3. books, newspapers and magazines;

4. Lease of residential houses not exceeding ₱10, 000 m0nthly;

5. Sale of low-cost house and lot not exceeding ₱ 2.5 million;

6. Sales of persons and establishments earning not more than ₱ 1.5 million
annually.
 Privatization
Privatization in the Philippines occurred in three waves: The first wave in
1986-1987, the second during 1990 and the third stage, which is presently
taking place. The government's Privatization Program is handled by the
inter-agency Privatization Council and the Privatization and Management
Office, a sub-branch of the Department of Finance.

PAGCOR
The Philippine Amusement and Gaming Corporation (PAGCOR) is a
government-owned corporation established in 1977 to stop illegal casino
operations. PAGCOR is mandated to regulate and license gambling
(particularly in casinos), generate revenues for the Philippine government
through its own casinos and promote tourism in the country.
 Government Spending and Fiscal Imbalance
In 2010, the Philippine Government spent a total of ₱1.5 trillion and
earned a total of ₱1.2 trillion from tax and non-tax revenues, thus
resulting to a total deficit of ₱314.5 billion.

Despite the national deficit of the Philippines, the Department of

Finance reported an average of ₱29.6 billion in Local Government Unit
(LGU) surplus, which is mostly due to an improved LGU financial
monitoring system which the government implemented in the recent
years. Efforts of the monitoring system include "debt monitoring and
creditworthiness monitoring system, effective mobilization of second
generation funds (SGF) to promote LGU development, and the
implementation of a Land Administration and Management Project
(LAMP2) which received a 'very good' rating from the World Bank
(WB) and Australian Agency for International Development (AusAid).
 Microfinance management in the Philippines is improving
substantially. In 2009, the Economist Intelligence Unit "recognized
the Philippines as the best in the world in terms of its microfinance
regulatory framework." The DOF-National Credit Council (DOF-
NCC) focused on improving the state of local cooperatives by
developing a supervision and examination manual, launching
advocacies for these cooperatives, and pushing for the Philippine
Cooperative Code of 2008. A standardized national strategy for
micro-insurance and the provisions of grants and technical
assistance were formulated
 External Sources of Financing are:
1. Program and Project Loans - the government offers project
loans to external bodies and uses the proceeds to fund domestic
projects like infrastructure, agriculture, and other government
projects.

2. Credit Facility Loans

3. Zero-coupon Treasury Bills

4.Global Bonds

5. Foreign Currencies
Domestic Sources of Financing are:
1. Treasury Bonds

2. Facility loans

3. Treasury Bills

4. Bond Exchanges

5. Promissory Notes

6. Term Deposits
 In 2010, the total outstanding debt of the Philippines reached
₱4.718 trillion: ₱2.718 trillion from outstanding domestic
sources and ₱2 trillion from foreign sources. According to the
Department of Finance, the country has recently reduced
dependency on external sources to minimize the risks caused by
changes in the global exchange rates. Efforts to reduce national
debt include increasing tax efforts and decreasing government
spending. The Philippine government has also entered talks with
other economic entities, like the ASEAN Finance Ministers
Meeting (AFMM), ASEAN+3 Finance Ministers Meeting
(AFMM+3), Asia-Pacific Economic Cooperation (APEC), and
ASEAN Single-Window Technical Working Group (ASW-
TWG), in order to strengthen the countries' and the region's debt
management efforts
 Role of Fiscal Policy
• Fiscal policy is the use of government revenue (taxes) and expenditure (spending)
to influence the economy, and meet the macroeconomic goals.
• The government’s revenue and expenditures from its budget. If the revenue
collection in the form of taxes equals its expenditure, it’s a balanced budget. If
revenue exceeds expenditure, the government has a budget surplus. On the other
hand, if expenditure exceeds revenue, it’s a budget deficit.
• A government follows a neutral fiscal policy when the economy is in equilibrium.
In such a case, the government expenditure is fully funded by the tax revenue. A
government follows fiscal policy during times of recession. It may reduce taxes or
increase expenditure in order to stimulate the economy-to increase demand,
growth and employment. The government may follow contradictory fiscal policy
to reduce fiscal deficit or paydown government debt. To do so, it may increase
taxes or decrease expenditures which will decreased demand, growth and
employment.
 Role of Fiscal Policy

• Fiscal policy is based on Keynesian economics, which believes that the government can
influence the macroeconomic productivity levels by changing the taxes and spending. Such
influence can curb inflation, increase employment rate, and stabilize the value of money.
Monetarists, however, believe that the effects of fiscal policy are only temporary, and they
advocate use of monetary policy to control inflation.

• Fiscal policy can be discretionary or non discretionary (automatic stabilizers). A discretionary

fiscal policy refers to the deliberate changes in government spending and taxes in decides to
increase its capital expenditure on road infrastructure on the other hand, automatic stabilizers
are the automatic changes in the tax and spending levels because of the changes in economic
conditions. They help stabilized business cycles for example, when the economy is spending,
the tax revenue increases and vice verse. There will also be lower government spending form of
unemployment benefits. Economics have observed that automatic cycle by up to 20%.
 Balancing Act

• The idea, however, is to find a balance between changing tax rates and public
spending. For example, stimulating a stagnant economy by increasing spending or
lowering taxes runs the risk of causing inflation to risk. This is because an increase
in the amount of money in the economy, followed by an increase in consumer
demand, can result in a decrease in value of money-meaning that it would take
more money to buy something that has not changed in value.

• Lets say that an economy has slowed down. Unemployment levels are up,
consumer spending is down and business are same for everyone. Depending on the
political orientations and goals of the policymakers, a tax cut could affect only the
middle class, which is typically the largest economic group. In times of economic
decline and rising taxation, it is this same group that may have to pay more taxes
than the wealthier upper class.
 Balancing Act

• With more money in the economy and fewer taxes to pay, consumer demand for
goods and services increases. This, in turn, rekindles business and turns the cycle
around from stagnant to active.

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• If, however, there are no reins on this process, the increeconomic productivity can
across over a very fine line and lead to much money in the market. This excess in
supply decrease the value of money in the marke while pushing up prices (because
of the increase in demand for consumer products). Hence, inflation exceeds the
reasonable level.
 Balancing Act

• For this reason, fine turning the economy through fiscal policy alone can be a
difficult, if not improbable, means to reach economic goals. If not closely
monitored the line between a productive and one that is infected by inflation can
be easily blurred.
 When the Economy needs to Curb..

• When inflation is too, the economy may need a slowdown. In such a situation, a
government can use fiscal policy to increase taxes to suck money out of the
economy. Fiscal policy could also dictate a decrease in government spending and
thereby decrease the money in circulation of course, the possible negative effects
of such a policy in the long run could be a sluggish economy and high
unemployment levels, nonetheless, the process continues as the government uses
its fiscal policy to fine-tune spending and taxation levels with the goals of evening
out the best cycles.
 Revenue Tools

• Refer to the taxes collected by the government in various form. The taxes can be
direct or indirect.

• Direct taxes are taxes levied on the income or wealth individuals and firms. This
include income tax, wealth tax, estate tax, corporate tax, capital tax, social security
tax, etc.

• Indirect taxes are taxes levied on goods and services. This include sales tax, value
added tax, excise duty etc.
Spending Tools
-Spending Tools refer to increasing or decreasing government spending/expenditure to
influence the economy.
Government spending can be in the form of transfer payments, current spending and
capital spending.
Current Spending
-includes expenditure on essential goods and services such as health, education,
defense, etc.
Capital Spending
-is the public investment in infrastructure such as roads, hospitals, schools, etc.

The above two also include subsidy or direct provision on merit goods and public goods,
which would otherwise be underprovided.
Transfer Payments
- are the redistribution of income from taxpayers to those
requiring support, for example, unemployment benefits. It
also includes interest payments on government debt.
 Fiscal Policy Tools have several advantages

• Spending tools enable services such as defense to benefit everyone in the country
and build infrastructure that propels growth. Spending tools also ensure minimum
standard of living for the residents. Subsidies in research and development also
help in future economic growth.

• Taxes help also the government in meeting their fiscal needs. By levying high
indirect taxes, the government can also discourage use of items such as tobacco,
and alcohol.
 Challenges in Implementing Fiscal policy

The government has two tools to implement its fiscal policy:

• Taxes
• Government spending

If the economy is in recession, the government may decide to increase aggregate

demand, or decrease taxes to stimulate the economy and increase aggregate
demand. Similarly if the economy facing inflationary economic boom, it may
decrease spending or increase taxes.
The discretionary fiscal policy does not always work as intended by the government.
There are many reasons as to why the fiscal policy may not be as affective as desired, or
sometimes even be counter productive. Some of these reasons are discussed below:

1. If the government relies on enaccurate statistics, then its likely to make wrong policy
decisions in the first place.
2. There could be a lag in implementing a policy decision, and/or the impact of a policy
decision. For example, by the time the policymakers recognize the problem and take
decision to do something. It may already be too late (recognition lag and action lag).
Once the government implements a policy, there may be a time lag till the policy has
an impact on the economy(impact lag).
3. An expansionary fiscal policy may end up decreasing aggregate demand because or
crowding-out effect. Increase government borrowing leads to an increase in interest
rates. Which leads to a decrease in aggregate demand.
4. The economy may be slow because of shortage of resources rather than lower demand.
In this case, fiscal policy will not help (it may actually increases inflation).

5. Since expansionary fiscal policy increases fiscal deficit there is constant over how
much deficit the government can be tolerate.

6. While fiscal policy solves one problem, it may aggregate another problem.
 Major Objectives

 It is sometimes argued that slightly downward-trend best serves the interest of the economy, as
a whole, because the gains from increased productivity and lower cost would be sharped among
all persons in the industries affected. On the other hand, a downward trend would increase the
difficulty of maintaining full employment because of its adverse effects upon investment and
business optimism. Furthermore, such as trend appears to bee impossible of attainment in the
light of present day union strength and policies.

 A gradually increasing general price level has likewise been labour strife, since annual money
wages increase would be possible. However, this alternative would produce a gradual
worsening of the economic position of the fixed income receives.
 Major Objectives

 The third alternative point of view, a compromise between price level as the optimum. The
gains from greater productivity would go primarily to the workers in the industries, but the
injury to the economic well-being of the fixed income groups would be avoided, as well as
dampening effects of declining prices.
 Effectiveness

• fiscal policy becomes effective when its produces the intended result.
There are different objective of fiscal policy, like achievement of full
employment, price stability, economic growth, and so on. If the
government is able to achieve these objectives by employing the fiscal
policy, then such fiscal policy becomes effective, otherwise it becomes
in effective
• Size of the multiplier effect
In the size of multiplier is large, the effect of financial policy on AD is also large so
that fiscal policy becomes effective to achieve the desired objectives, and vise versa.

• Timing of the effects of fiscal policy

This timing significantly influence the effectiveness of fiscal policy. If the techniques
of fiscal policy take very long period of time to create the effects.

• Effects of change in AD
The different techniques of fiscal policy influence the AD. The effectiveness of fiscal
policy also depends upon the effects of change in AD on the level of output, employment,
inflation, and so on.
• Effects on incentives
the use of fiscal policy has some effects on the incentives. The effects may be
positive as well as negative. Such effects on the incentives influence the effectiveness of
fiscal policy.

• Size of acceleration effect

if the acceleration effect is strong, fiscal policy becomes more effective.
Fiscal multiplier and balanced budget multiplier
 As a part of its expansionary fiscal policy, when the government of a country decides
to increase spending, it has a multiplier effect on the aggregate demand. i.e. the
aggregate demand increase much than the actual increase spending.

 The actual effect increase in the aggregate demand depends on the tax rate (again set
by the government), and the marginal property to consume (MCP), i.e. how much will
the consumption increase with an increase in disposable income.
RICARDIAN EQUIVALENCE
The Ricardian Equivalence is a position named after the economist David Ricardo.
The idea behind Ricardian equivalence is that the choice of financing the current deficit
by its government (increase in tax, or spending with debt) is inrelevant.

When the government has a deficit, it has two choices to raise money: increase tax, or
issue bonds. The second option of using debt is also related to the first option, because
the bonds represents debt that needs to be repaid in the future.

assume that the government issues debt to finance its extra spending, that is it has
chosen to increase taxes later. The taxpayers will now expect that they will have to pay
higher taxes in the future.
Balanced Budget Multiplier
when the government increase spending, it mat
also want to increase taxes to balance its budget. If
the spending is increased by then it may also increase
the taxes.
 Fiscal Deficit
When a government’s total expenditures exceed the revenue that it generates (excluding
money from borrowings). Deficit differs from debt, which is an accumulation of yearly deficits.

Why high fiscal deficit is a real concern?

1. It leads to an increase in future taxes.
2. If investors don’t refinance, government may default, or print more money.
3. Printing money will cause high inflation
4. Crowding-out effect. Increased government borrowing leads to an increases in interest rates,
which leads to decrease in aggregate demand. Thr purpose of spending more has failed.
 Fiscal Deficit
Why high fiscal deficit is not that a big problem?
1. If the debt raised is used for capital investment, it will pay off in the future.
2. The government may want to consider tax reforms.
3. If Richardian equivalence holds time, this is not a problem as there wont be any impact on
aggregate demand.
4. Deficits can help in increasing GDP and employment.
5. If most debt is raised domestically, the problem is not that big.
4 more most important limitations of fiscal policy

LAG TIME
is the time it takes to implement fiscal policy. For example, governments around the
world announced several fiscal and monetary policy initiatives to deals with the 2008
government investment, private sector investment and net exports in the economy.

CROWDING-OUT EFFECT
fiscal policy could have a crowding-out effect. This occurs when government
borrowing hampers private sector borrowing. Investors are more likely to buy low-risk
government bonds than riskers corporate bonds. This makes it more difficult and
potentially more expensive in the form of higher interest rates.
Terms relating to fiscal policy

 Limited discretion
 Information availability
 Fiscal stance
 Time turning
 Automatic fiscal stabilizers
 The multiplier effect
 Injection (J)
 Withdrawals (W)
Criticism of fiscal policy

 The government may have poor information about the state of the economy and
struggle to have the best information about what the economy needs.

 Time lags

 Crowding out

 Government spending is in efficient.

 Higher borrowing costs.

Evaluation of fiscal policy

 It depends on the size of the multiplier

 It depends on the state of the economy

-liquidity trap and fiscal policy

 It depends on other factors in the economy

 Bond yields
Monetary policy
measures or actions taken by the central bank to influence the general price levels and
level off liquidity in the economy.

 Expansionary monetary policy

 Fiscal policy expansion