Module 3 Session 1 - Overview of Fiscal Policy and Terrain (revised format).pdf

Fiscal policy is the government’s policy on the generation of its resources through
taxation and/or borrowing, as well as the setting of the level and allocation of
expenditures.

1. 1

2. Contents
I.Public Finance in Theory
II.Public Finance in Practice

3. I. Public Finance in Theory (and some
practices)
A.Three Branches of Government
Economic Activities
B.Financing Government Operations
C.Taxation
D.Expenditure
E.Fiscal Decentralization
F.Debt and Debt Financing
G.New Development: Public-Private
Partnership

4. A. Three Branches of Government
Economic Activities
1.Allocation of Resources
2.(Re)Distribution of Income
3.Stabilization of the Overall Economy

5. A.1 Allocation of Resources
Market Failure Government Action Example
Monopolies–price-
makers
Regulation ERC on electricity prices
Negative externalities –
overproduction
Regulation
(Corrective) Taxation
Carbon emission limit
Sin taxes
Positive externalities –
underproduction
Subsidy, Government
provision, fiscal
incentives
Subsidy to research
Public goods –
underproduction
Subsidy
Government provision
Universal Education
National Defence
Unclear Property rights
–dampens incentives
Define, assign property
rights
Titling of lands,
recognition of patents
Lack of informationGovernment provisionLaw enforcement;
contract enforcement

6. A.2 Redistribution of Income
1.Taxation–progressivity
2.Transfersystem–CCT
Mayalsoredistributecapitalvia
1.Fiscalincentivesandpreferentialtreatments
2.Sponsoringofmicro-financeandmicro-
insuranceprograms

7. A.3 Stabilization of the Overall
Economy
1.MonetaryPolicy
2.FiscalPolicy(narrowsense)
3.PrudentialRegulationoftheFinancial
Sector
4.MaintainingHealthyBalanceofTrade
5.RiskandDebtManagement
GDP = C + G + I(r) + NX(ER)

8. Fiscal Policy Defined
“Fiscalpolicyistheuseoftheleveland
compositionofthegeneralgovernment
andpublicsector'sspendingand
revenue—andtherelatedaccumulationof
governmentassetsandliabilities—to
achievesuchgoalssuchasthestabilization
ofthegeneraleconomy,thereallocationof
resources,andtheredistributionof
income.”-IMFGovernmentFinance
StatisticsManual2014

9. Public Sector
Central Bank
Other Public
Financial
Corporations
Public Deposit-
Taking
Corporations
Public Financial
Corporations
Public Non-
Financial
Corporations
Social Security
Funds
Extra-budgetary
Budgetary
Social Security
Funds
National
Government
Local Government
General
Government
Public Deposit-
Taking Corporations
Ex. Central Bank
Public Corporations
Source: IMF 2014
9
The Public Sector

10. B. Financing Government Operations
1.Taxation
2.Borrowing
3.Seigniorage
4.SellingofGovernmentAssets
5.DrawingofSavings
6.Grants

11. Normative Aspects of Revenue-
Raising
1.Fairness
–Horizontalandverticalequity
2.Efficiency
–Minimaldistortions
3.Flexibility
–Relevanceinchangingconditions
4.Administrativesimplicity
5.Politicalresponsibility

12. C. Taxation
•Notes:
–Raisesrevenuesandalsoachieveothergoals
suchasequitypromotionandcorrectionof
marketfailures
–Altersbehaviourandmayintroducedistortions
–Equityandefficiencymaynotbeattainedboth
atthesametime.Ex.Sintaxesmaybeefficient
butmayberegressive.

13. C.1 Typology of Taxes
1.Direct
–Imposeddirectlyontaxpayers;theburdenis
notgenerallypassedontoothers.Ex:Personal
IncomeTax,CorporateIncomeTax,Transfer
Taxes
2.Indirect
–Leviedontheproductionandsaleofgoods
andservices
•Ex:Salestax,Specifictaxes(e.g.,ontobacco),
Exporttax,Importtax

14. C.2 Other Goals of Taxation
1.PromotionofEquity
–Progressivetaxation
2.CorrectionofMarketFailures
3.ProtectionofDomesticIndustry
4.PromotionofInvestmentviafiscalincentives
–Mayintroducedistortionsanderodefiscal
stability
–Couldbeusedforavenueforsmugglingandtax
evasion

15. D. Expenditure
•Theprimarypolicyinstrumentbythe
governmenttodirecttheeconomytoapath
ofgrowthanddevelopment
•Governmentspending,asauthorizedin
nationalbudgets,isexpectedtoreflect
nationalpolicies

16. Functional Use of Government
Expenditure
1.EconomicDevelopmentExpenditures
–Agriculture,infrastructure,commerce
2.SocialDevelopment
–Healthandeducation
3.NationalDefense
–Nationalsecurity
4.Generalpublicservices
–Legislativeservices,administrationofjustice,
pensions,publicorderandsafety
5.DebtServices
–Interestpayment

17. E. Fiscal Decentralization
•Allowsthenationalgovernmenttofocuson
broaderissuessuchasexternalitiesand
incomeredistribution
•Basedonthepremisethatlocalofficialsare
moreattunedtothepreferencesoftheir
constituentsthannationalofficials.
•Increasedspendingandrevenue-raising
responsibilitiesforlocalgovernment
enhancesaccountability.

18. F. Debt and Debt Financing
•Deficit financing
•Options
–New Taxes
–Borrowing
–Seigniorage

19. •Deficit and alternative measures of deficit:
Public Sector Deficit –NG, GOCCs, BSP, LGUs
Consolidated Public Sector Deficit –NG, 14 MNFCs,
GFIs, BSP, SSIs, LGUs
General Government (GG) Deficit –CSPD less GFIs,
BSP, 14 MNFCs
National Government (NG) Deficit
NG
LGUs
SSIs
BSP
GFIs
14 MNFCs
GOCCs
GOCCs
GG
CPS
PS
•Deficit level and private sector orientation of the economy
Crowding-out Effect
Savings rate and deficit levels
19
Deficit: Expenditure > Revenue

20. Economic Implications of Government
Borrowing
•Crowdingoutofinvestments
–Lessloanablefunds,thus,lowerprivate
investments,thus,lowereconomicgrowth
–Iftore-financeloans,crucialpublicspending
isforegone

21. G. Public-Private Partnership
•GovernmentMotivations:
–Attractprivatecapital
–Increaseefficiencyanduseavailableresources
moreeffectively
–Reformsectorsthroughareallocationofroles,
incentivesandaccountability

22. II. Public Finance in Practice
A.RevenuePerformance
B.Expenditure
C.DebtManagement
D.LegislativeMeasures

23. 23
Philippines: Revenue Effort
% of GDP

24. REVENUE EFFORT
% of GDP, 1990-2013
27.2
25.5
23.0
20.3
17.9
17.2
16.3
12.3
0
5
10
15
20
25
30
SingaporeVietnam Malaysia ASEAN ThailandIndonesiaPhilippinesIndia
Revenue Effort below Asian Peers

25. 21.9
17.20 17.1
15.8 15.6
14.6
14.2
13.3
8.7
0
5
10
15
20
25
Vietnam China MalaysiaASEAN ThailandSingaporePhilippinesIndonesiaIndia
TAX EFFORT
% of GDP, 1990-2013
Revenue Effort below Asian Peers

26. Non-tax revenueeffort lowest among Asian peers
NON-TAX REVENUE EFFORT
% of GDP, 1990-2013
12.6
5.9
4.5
3.9
3.6 3.6
2.8
2.3
2.1
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
SingaporeMalaysiaASEANIndonesiaVietnam India ChinaThailandPhilippines

27. PHILIPPINES
As a % of GDP, revenue performance relatively flat except for RVAT reforms (2006) ,
revenue-losing measures (2008-2010) and sin tax adjustment (2013)
j
0
1
2
3
4
5
6
7
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
P
e
r
c
e
n
t
t
o
G
D
P
Revenue Performance, by Major Type of Tax (2000-2013)
Income Taxes Excise Tax VAT (BIR) VAT(BOC) Duties
27

28. 28
Income Tax
59%
Excise Tax
10%
VAT
21%
Percentage Tax
5%
Others
5%
2013 Bureau of Internal Revenue (BIR) Collection, type of Tax

29. Philippines rates low in all taxes except Indonesia…
Country
Tax
Effort
Income
Taxes
o.w.
Corp
o.w.
Personal
Consumption
Taxes
o.w.
VAT
o.w.
Excise
o.w.
Ext
Trade
Philippines 13.3 5.5 3.8 1.7 5.8 4.5 1.3 0.4
Selected Asian
countries 16.1 6.9 5.6 1.3 7.7 4.7 1.9 1.2
China* 20.8 4.7 3.4 1.3 13.3 10.1.2.4 0.6
Indonesia 12.8 6.3 6.3 0.0 5.2 4.1 1.1 0.8
Malaysia 15.3 10.8 8.5 2.3 3.2 1.0 1.3 0.5
Thailand 16.7 7.9 5.9 2.0 7.8 3.7 3.7 0.9
Vietnam 17.2 5.9 5.5 0.4 10.6 5.0 1.4 4.2
29

30. …despite having typical tax rates
TAX RATES
Country
VAT
(standard)
CIT
(standard)
PIT
(top rate)
Philippines 12 30 32
Selected Asian Countries 12 30 39
China 17 30 45
Indonesia 10 30 30
Malaysia 6 26 26
Thailand 7 20 35
Vietnam 10 22 35
30

31. Why low collection despite high rates?
•Toomanyexemptionsandincentives
100+taxexemptionlaws
•Poortaxadministration
–54.5%collectionrateforBIR(2012)
–63.9%collectionrateforBOC(2011)
•Unabletoadjustspecificexcisestoinflation,
e.g.,petroleumtaxes(setin1997),tobacco
andliquors(until2013)

32. NG expenditures lowest among Asian peers
25.0
24.9
23.6
20.4
20.2
18.8
18.4 18.4
18
19
20
21
22
23
24
25
26
MalaysiaVietnam China ASEAN SingaporeThailandIndonesiaPhilippines
CENTRAL GOVERNMENT EXPENDITURES, 1990 -2013

33. Capex lowest among Asian peers
CENTRAL GOVERNMENT CAPITAL EXPENDITURES, 1990 -2013
7.9
5.3
5.2
4.8
3.7
3.4
3.2
0
1
2
3
4
5
6
7
8
9
Vietnam Malaysia Thailand ASEAN Indonesia SingaporePhilippines

34. NG INFRA AND SOCIAL EXPENDITURES
Catching up with ASEAN peers
SOURCE: DBM

35. Fiscal Gap comparable with Asian peers
CENTRAL GOVERNMENT DEFICIT
% of GDP, 1990-2013
-6.4
-5.8
-4.5
-3.2
-2.1 -2.1
-1.2 -1.1
5.9
-8
-6
-4
-2
0
2
4
6
8
Vietnam IndiaMalaysiaASEANPhilippinesThailandChinaIndonesiaSingapore

36. NG fiscal balance improving
Fiscal Deficit/GDP-3.8%-5.0%-4.4%-3.7%-2.6%-1.0%-0.2%-0.9%-3.7%-3.5%-2.0%-2.3%-1.4%
Deficit/Total Savings19.0%25.0%22.0%18.5%11.8%4.5%0.1%2.0%16.7%14.8%8.2%9.5%5.7%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
0
50
100
150
200
250
300
350
2001200220032004200520062007200820092010201120122013
Fiscal Deficit (P Billions)Share of Deficit in Total Savings (%)
36

37. 0%
10%
20%
30%
40%
50%
60%
70%
80%
-
1,000
2,000
3,000
4,000
5,000
6,000
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
B
i
l
l
i
o
n
P
e
s
o
s
NG Debt NG Debt/GDP
% Distribution
Domestic52.3%52.3%50.8%52.5%55.7%55.9%59.3%57.2%56.2%57.6%58.0%63.8%65.7%
Foreign47.7%47.7%49.2%47.5%44.3%44.1%40.7%42.8%43.8%42.4%42.0%36.2%34.3%
NG Debt declining and more sustainable
37

38. Debt burden higher than ASEANpeers
CENTRAL GOVERNMENT DEBT
% of GDP, 2008-2013
68.6
53.0 52.5
48.5
44.9
43.6
28.3
18.6
0
10
20
30
40
50
60
70
India PhilippinesMalaysia Thailand ASEAN Vietnam Singapore China

39. Debt Stock Higher Than
Asian Peers
68.5
56.7
52.4
51.3
50.1
34.4
24.4
0
10
20
30
40
50
60
70
80
India Malaysia Philippines Vietnam ASEAN Indonesia China
CENTRAL GOVERNMENT
DEBT STOCK
% of GDP, 1990-2011

40. 40
Why high debt ratio despite low deficits?
•Bailout of losing GOCCs in the past
-3 government financial institutions in 1983-1984
-Central bank in 1993
-State power firm in 2005
•High interest rates in the past due to low savings

41. Recent Developments
Debt-GDP ratios have dropped57
52.4
50.9 51.5
49.2
47.4
50
47
45.7 44.9
39.2
38.1
0
10
20
30
40
50
60
2009 2010 2011 2012 2013 2014*
NG Debt General Government Debt
*Augfor NG;
Mar for Gen Govt
41

42. Recent Economic Developments
More funds are being allocated to productive spending as share of
InterestPayment to expenditures declines
in %
Revenues allocated to debt service have declined drastically
in %
31.6%
23.6%
22.6%
24.8%
24.3%
20.5% 20.4%
18.8%
16.8%
15%
20%
25%
30%
35%
2006 2007 2008 2009 2010 2011 2012 2013 2014*
29.7%
23.3%
21.4%
19.6% 19.3%
17.9% 17.6%
17.2%
16.6%
15%
20%
25%
30%
2006 2007 2008 2009 2010 2011 2012 2013 2014*
* As of November
Interest Payments/Revenue
Interest Payments/Expenditure
* As of November
42

43. Prudent debt management
NG Financing Program
…focused on increasing domestic source of funds
General Government Debt/GDP
...lower than NG Debt/GDP ratio
SHIFTTOWARDDOMESTICDEBT&LONGERMATURITIES
GGdebt went down as the National Government (NG) purchased more
debt from domestic sources at cheaper interest and longer maturities.
To create more fiscal space in the budget and strengthen fundamentals

44. 0
5
10
15
20
25
30
35
2007 2008 2009 2010 2011 2012 2013 2014*
17.30
20.10
17.30
20.50 20.50
18.50
19.40
20.00
33.90
26.70
25.40
29.10
26.80
25.10
25.50
28.00
%
o
f
G
D
P
Investment Rate Savings Rate
Recent Economic Developments
*Projection
Savings rise, investments lag behind, IS surplus rises
44

45. Medium-Term Fiscal Program
Strong commitment to fiscal discipline to enhance long-term sustainability

46. Medium-Term Fiscal Program (% of GDP)
Actual
46

47. Medium-Term Fiscal Program (% of GDP)
6
Actual
Debt ratio to be cut to the level of peers
47

48. Actual
Capital outlays to be upgraded to level of peer countries
48
Medium-Term Fiscal Program (% of GDP)

49. Medium-Term Economic Program (% of GDP)
Actual
49

50. Measures in place
Other initiatives
BIR: Heightened collections from
Self-employed
Estate Taxes
BOC: Change management strategies
Massive reorganization of BOC leadership
Creation of Office of Revenue Agency Modernization (ORAM) in the DOF
Creation of Customs Policy Research Office (CPRO) in the DOF
Full implementation of RA 10351 (Sin Tax Law)
Establishment of the Fiscal Intelligence Unit
Revenue Enhancement Measures
Focus to ensure that positive momentum in government fiscal finances continue
50

51. Run After Tax Evaders (RATE) Program
“OplanKandado” Program (closure/suspension
of business establishments)
Heightened collection of taxes from self-
employed, business and professionals (SEP), and
estates
Re-engineering of business processes
Fiscal Incentives Rationalization (FIR)
Rationalization of the Mining Fiscal Regime
Tax Incentives Management and Transparency Act
(TIMTA)
Customs and Tariff Modernization Act (CTMA)
FIR, TIMTA and CTMA are pending in the
Committee on Ways and Means at the House
of Reps (HOR) and Senate
Rationalization of the Mining Fiscal Regime is
pending in the Committee on Natural
Resources in HOR and Senate
Initiatives Progress
195 RATE cases filed with tax liability of
Php44.0bn as of Nov 8, 2013
Collected Php64.4mn from OplanKandado&
closed 66 business establishments in 2012
High BIR tax effort of 10.5% for FY 2013
15.0% growth of BIR collections for FY 2013
Fiscal Reforms and Programs: Looking Ahead
Focus to ensure that positive momentum in government finances will continue
Roadmap on key fiscal legislative and administrative reforms
Sources: DOF, DBM, Bureau of Internal Revenue (BIR), Bureau of Customs (BOC),
Presidential Legislative Liaison Office (PLLO)
51

52. Priority Legislative Measures
Amendment to RA
7718 or the BOT Law
Removing Investment
Restrictions in Specific
Laws in the Foreign
Investment Negative
List (FINL)
Various proposals being considered to make the FINL less negative to increase
investments and generate employment.
Additional PPP modalities such as joint venture, concession arrangement and
management contract which would not require President’s approval to give
more flexibility to the government, among others.
Fiscal Incentives
Rationalization
The bill seeks to institute structural reforms and policy to enhance transparency
and accountability in the grant and administration of tax incentives.
Tax Incentive
Management and
Transparency Act
(TIMTA)
The bill seeks to foster transparency and accountability in the grant of tax
incentives; and to institutionalize a system of monitoring and reporting tax
expenditures
52

53. Customs
Modernization Act
Thebillaimstopromoteandsecureinternationaltrade,protectgovernment
revenueandmodernizecustomsandtariffadministrationbyadoptingcustoms
policies,rulesandprocedureswhichareclear,transparentandconsistentwith
internationalagreementsandcustomsbestpractices.
Valuation Reform Act
TheproposedVRAseekstoinstitutionalizereformsinlandandrealproperty
valuationwhichwilltranslateintoimprovedrealpropertyandrelatedtaxes.
Fiscal Regime for
Mining Industry
TheMiningIndustryCoordinatingCouncil,whichtheDepartmentofFinanceco-
chairs,iscurrentlystudyingoptionsforminingfiscalregimeandrevenuesharing.
Theplanistodesignaschemewhichadoptsasinglefiscalregimeandasimple
formulaindeterminingthesharingarrangement.
53
Priority Legislative Measures

54. 54
Concluding Remarks
•Thereisacompellingneedtoimproverevenueperformancein
thePhilippines.Increasingrevenuemobilizationiscriticalto
achievinginclusivegrowth.
•Whileadministrativereformsareimportantandgivenpriority
inboostingrevenues,dueconsiderationmustalsobegivento
newtaxmeasuresinthenearfuture.
•Revenueandexpenditurespolicyreformsgohandinhand.To
becredibletothemarkets,thePhilippinesmustremain
steadfastintheachievementofitsmediumtermfiscal
program.

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