Philippine Public Fiscal Administration LEONOR MAGTOLIS-BRIONES Secretary to thé Commission Commission on Audit and Associate Professor of Public Administration University of the Philippines Published by: National Research Council of the Philippines (bookbound edition) Commission on Audit Research & Development Foundation (paperbound edition)Copyright, 1983 by Leonor Magtolis-Briones All rights reserved, No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopy, recording, or any information storage and retrieval system, without permission in writing from the author. Requests for permission to make copies of any part of this book should be mailed to the author through: COA Research & Development Fou! indation, inc, State Accounting & Auditing Center (SAAC) Don Mariano Marcos Ave, Quezon City Philippines First Edition Printed by: @ 2am peepeeSCIENCE 4ain ere UEP sen To my husband, Caloy, because he does not need further education in public finance; and to my children, Hoche and Ricky, because development is really for the children of the world,THE FOLLOWING CONTRIBUTED THEIR SHARE IN THE PREPARATION OF THIS BOOK: Data gathering/ Assistance in drafting of manuscripts, Luzviminda M, Pantaleon Chapters 10, 11, 12, & 13. Rodolfo C. Sabio Chapters 4, 6, & 8, Manuel Y, Pineda Chapters 7 & 14. Jessie Rose Mabutas Chapter 15, Ligaya P. Castor Chapter 9. Assistance in Revision and Rewriting Teofilo Gaius M.Sison, Jr. Chapters 2,5, 6, 7, 14, 15, & 19. Noel B. Clemente Chapters 11, 16, 17, & 22.CONTENTS PART 1 CHAPTER 1 PREFACE INTRODUCTION OVERVIEW THE DEVELOPMENT OF PUBLIC FINANCE INSTITUTIONS Early Public Finance ‘The Breakdown of Feudalism: Beginnings of Capitalism Capitalism: Public Finance and Free Enterprise ‘The Crisis of Capitalism: Keynesian Public Finance ‘The Marxist Challenge: Socialist Public Finance The Impact of Western Public Finance Institutions on LDCs DEVELOPMENT FINANCE Introduction; The Changing Meanings of Development Financing Development Issues and Problems THE CONSTITUTIONAL AND LEGAL BASIS OF PUBLIC FINANCE IN THE PHILIPPINES Introduction: The Philippine Fiscal Framework Taxation Budgeting Accountigg and Auditing xi 7 25 rel 33 52 53 55 61 70 1 n 79vi PART iI PART it POLITICS AND FISCAL ADMINISTRATION Introduction ‘The System Fiscal Decision TAXATION AND REVENUE ADMINISTRATION TAXATION FOR DEVELOPMENT ‘Theory and Concept of Taxation ‘The Development Requirements The Philippine Tax System and Its Response Issues and Problems PATTERNS OF PHILIPPINE REVENUE, 1972-1980 Introduction Income Sources of the Philippines Trends in the General Government Revenue System Revenue Performance by Level of Government Performance of the National Government Revenue System International Comparisons Issues INTERGOVERNMENTAL FISCAL RELATIONS FINANCING PHILIPPINE LOCAL GOVERNMENTS The Local Government System Intergovernmental Relationship ‘Local Government's Fiscal Structure Local Fiscal Administration Budgeting and Fiscal Management Assessment of Local Fiscal Performance Conclusions FINANCING METROPOLITAN GOVERNMENTS: THE MMC EXPERIENCE Introduction The Integration ‘The Creation of the Metropolitan Manila Commission MMC Finance Office: Organization, Function and Operations Revenue Ganeration at the MMC Revenue Allocation Borrowings Issues and Problems a1 92 93 100 103 104 107 110 127 137 139 142 148 153 157 163 nm 172 176 179 190 192 200 209 216 217 217 218 220 224 226 229 235,PART IV 10 nu 12 13 4 GOVERNMENT BUDGETING AND EXPENDITURES POLICY THEORY OF THE BUDGET ~ APPLICATION TO LESS-DEVELOPED COUNTRIES Introduction Budgeting Principles and Theories Modern Dimensions of Budgeting for National Development ‘Toward a Practical and Operational Theory of the Budget for Less-Developed Countries Conclusion APPROACHES AND TECHNIQUES IN BUDGETING: THE PHILIPPINE EXPERIENCE Introduction Orientation in Budgeting Line-Item Budget Approach Performance Budgeting Planning, Programming and Budgeting System Zero-Base Budgeting (288) Approach Conclusion ORGANIZATION FOR PHILIPPINE BUDGETING Introduction The Development Budget Coordination Committee The Office of Budget and Management (OBM) Issues and Problems THE BUDGET PROCESS AND SIGNIFICANT BUDGETARY INNOVATIONS Introduction The Budget Cycle Reforms and Innovations in the Budget Process Issues and Problems PATTERNS OF PHILIPPINE EXPENDITURES, 1972-1980 Introduction The Developmental Problems of LDCs Philippine Expenditure Policies Classification of Philippine Public Expenditures Patterns of Governmental Expenditures Patterns of Expenditure by Level of Government Expenditure Patterns According to Nature of Expenses ‘The Expenditure Patterns of the Netional Government International Comparisons summary vii 241 242 242 245 246 253 257, 258 258 260 263 273 278 288 293 294 294 299 308 313 315 315 333 336 377 378 379 380 381 383 388 392 397 410 41316 7 PART VI ACCOUNTING AND AUDITING GOVERNMENT ACCOUNTING SYSTEMS: CONCEPTS, THEORIES AND PRACTICES Definition of Government Accounting, Objectives of Government Accounting Government Ascounting Systems The Standard Government Chart of Accounts (SGCA) Characteristics of Government Accounting Accounting for Appropriations, Allotments and Obligations Accounting for Disbursements Accounting for Income and Receipts Decentralized Accounting Issues and Problems of State Accounting Rale of Government Accounting in the Financial ‘Management System ‘STATE AUDIT IN THE PHILIPPINES: Introduction Landmarks in the Development of the Philippine Audit System Post-1975 Reforms: A Clear Linkage Between Auditing and National Development Issues and Problems TRAINING FOR STATE ACCOUNTING AND AUDITING Introduction: The Challenge Existing Training Programs in State Accounting and Auditing in LDCs The COA’s Experience in Training Accountants and Auditors For Development Issues and Problems PUBLIC BORROWING THEORIES OF PUBLIC BORROWING: APPLICATION TO LDCs Introduction LDC Adaptations of the Keynesian Theory of Deficit. Financing Development Finance Development Finance: Another View Summary Conclusion a7 418 418 419 420 423 425 429 433 435 448 456 484 485 485 487 495 510 Bit 514 519 522 52219 20 PART VII 21 22 STRUCTURE OF PHILIPPINE PUBLIC DEBT, 1972-1980 Introduction Patterns of Yearly Borrowings Patterns of Outstanding Public Debt, 1972-1980 Patterns of Outstanding Domestic Oebt, 1972-1980 Patterns of Outstanding Foreign Public Debt Philippine External Debt, 1972-1980 Summary MUDP: A CASE STUDY IN PUBLIC BORROWINGS AND PROJECT DEVELOPMENT ‘The Need for Public Borrowings ‘The Process of Developing the Project for Financing {dentification of the Project Preparation of the Project Appraisal of the Project Negotiations Supervision: A Postcript to Loan Availment Conclusion SELECTED ISSUES PUBLIC FISCAL ADMINISTRATION AND BUREAUCRATIC BEHAVIOR: THE CASE OF THE BUREAU OF INTERNAL REVENUE Introduction The BIR: A Brief Review The Administrative Culture Internal Corruption Externat Corruption Cases of Corruption Reforms of the BIR Effects of Corruption Conclusion TRAINING IN PUBLIC FINANCE IN THE PHILIPPINES Introduction Academic Courses in Public Finance Existing Public Finance Training Programs in Selected Government Agencies Adequacy and Effectiveness of Training in Public Finance Recommendations REFERENCES ix 527 528 528 532 639 539 545 545 551 552 556 556 56t 565 580 590 590 595 596 598 600 602 604 606 612 617 618 621 622 622 623 625 628PREFACE The Need This publication is in response to the long-felt need to update and synthesize the still limited literature on Public Fiscal Administration. With this book, we attempt not only to fill such a need with relevance and com- prehensiveness but also to initiate critical discussion of the issues and prob- lems of a fiscal administration system within the context of a less-developed country, This book is not the first on public fiscal administration. Professor Odell Waldby’s Philippine Public Fiscal Administration book in 1954 which was later revised in 1966 by Professor Jose Soberano, pioneered in this field. The Philippine Public Finance textbook by Eduardo Z. Romualdez, Sr., Angel Q Yoingco and Antonio O. Casem, Jr. and colleagues added breadth and depth to the field of public finance with its publication in 1973. Since then, prevailing ideas on public fiscal administration in less- developed countries (LDCs) have been scrutinized and challenged. Issues, problems and alternatives to current practices have been raised, The inter- national and domestic environments within which fiscal policies of LDCs. are formulated have undergone radical changes. While the literature on fiscal administration has been growing, this has been mainly on specific areas. For example, the decade of the seventies saw a dramatic increase in the number of publications, specifically on budgeting and on auditing. The wide-ranging changes introduced in these fields correspondingly produced a vast array of publications, researches, handbooks and manuals. In spite of these developments, there was still a felt need for a book which would treat the fiscal administration system as a whole, and not in segments. When we were doing the research for this book, we had three groups of readers in mind: academicians and students of public fiscal administra- tion and other related fields, participants of training programs and semi- nars on fiscal administration-related subjects, and citizens who need to know more about public finance issues confronting LDCs, the options that are available and the choices that have to be made. Public Finance and Public Fiscal Administration courses are taught in nearly all leading universities as part of either Master of Public Adminis- tration, Master of Governmental Management, or Master of Business Ad- ministration programs. Public Finance is also taught in many schools at the undergraduate level. And yet, aside from the two books mentioned earlier, xixii there is no basic Philippine. textbook on the subject. Heavy reliance is on western-oriented books which place emphasis on the experience of indus- trialized countries. Professors and students have to rely on magazine and journal articles for current developments in the field, While frenzied re- search activities are undertaken on various aspects of public administration, published findings on fiscal issues are few and far between, with the possible exceptions of budgeting and auditing. In the Commission on Audit, we noticed the dearth of training materials in fiscal administration when we were developing our two-week seminar on Public Finance for our senior executives. We were then organizing with the Development Academy of the Philippines a training program for our senior officials similar to the CESO program. One major difference, however, was the Public Finance module which COA Chairman Francisco S, Tantuico, Jr. insisted should be part and parcel of any self- respecting program for government executives. Because of the paucity of readily available books, we compiled our own 3-volume set of readings on Public Finance which were culled from various sources. Interestingly, notwithstanding the scarcity of integrated materials on Public Finance and/or Fiscal Administration, there has been a very marked increase in the interest generated on issues related to the subject — i.e., fiscal policy, taxes, government spending, accountability, and most important of all, public borrowings. Clearly, this situation did not arise from the publica- tion of. books on fiscal administration but from actual economic crises which dramatized these issues. In the light of the difficulties encountered by LDCs in their efforts to attain development goals, many of the strategies and policies adopted, including fiscal policies, have been increasingly brought to question. Lively debates on development issues like dependency theories, neo-colonialism, the role of former colonial masters in the development process of their ex-colonies, the impact of borrowing on development, transnational corporations, the World Bank and the IMF are not only carried ‘on in academic circles and classrooms but in the streets, the factories, and the farms as well, Laymen are beginning to raise questions on fiscal policy decisions which ultimately affect their daily lives — whether these be on taxes, inflation, government spending and the like. The book attempts to identify such issues and discusses them in detail, From Public Finance to Public Fiscal Administration — The research, as originally conceptualized, was entitled “Public Finance,” However, as research activities developed, the research group decided to change its focus from Public Finance as a branch of the field of Economics, to Public Fiscal Administration, a sub-field of Public Administration. Issues would there- fore be examined not only from the point of view of economics but from two other aspects as well: politics and administration, hence, Public Fiscal Admjnistration. The change in focus was also motivated by the compositionxiii of our immediate target readers: middle-level and senior-level officials of the Commission on Audit who are all required to take the regular Senior Executive Development Program (SEDP), heads of all audit units all over the country, and undergraduate and graduate students of Public Adminis- tration who take Fiscal Administration subjects. My own personal expe- rience in dealing with graduate students and participants of executive train- ing programs indicates that many of them are not really trained in econo- mics. Most of them are supervisors and public administrators, Thus, the Public administration viewpoint would be very useful and meaningful to them since they can easily relate it to their official duties and their con- cerns as citizens, Acknowledgement. Many of the ideas which are reflected in this book were developed from my experience in teaching Public Fiscal Administration at the University of the Philippines and elsewhere for the past fifteen years. All teachers know that the teacHing process, especially at the graduate level, is also a learning process for the teacher. Research requirements for my lectures and lively classroom discussions with my students have helped crystallize and sharpen many of the issues which are discussed here. My involvement in the executive development programs of the Com- mission on Audit, the Development Academy of the Philippines, the Uni- versity of the Philippines, and other leading training institutions afforded me the invaluable experience of transporting fiscal administration issues from the classroom right into the arena of public administration practice. | was very fortunate that the most crucial and perhaps the most im- portant years of my teaching career occurred during a period of great chal- lenges:and opportunities — and yes, problems — for fiscal administrators: the period of the seventies. Far-ranging changes in the fiscal administra- tion system were instituted during this period amid much debate, discuss- ion and controversy. The persistence of fundamental economic problems in spite of the reforms initiated has kept these issues alive and relevant. | had the good fortune to observe these events, and at times be actively involved as a government official, an academician and a citizen. Finally, the urgency and the challenges of the fiscal issues, in a sense, impelled me to go beyond the confines of classroom and office. | learned as much from dialogues with non-academicians, non-students and non- officials. These experiences helped me look at issues not as sterile academic concerns expressed in cold-blood statistics but as problems involving human beings inextricably linked with the political, economic and social environ- ment. This time, the ordinary man on the street was the teacher and | the student. The research project which provided most of the data used in this bookxiv was funded by the National Science Development Board (NSDB), now the National Science and Technology Authority (NSTA). Although as a rule, the then NSDB did not fund studies of this type, it recognized the import- ance and selevance of such a research study to national concerns. For this, ‘we are immeasurably grateful. We are fortunate that the National Research Council of the Philippines (NRCP) agreed to publish this research. The support that the NRCP has given to the project is a clear indication of the importance of the subject of public fiscal administration. NRCP‘s involvement in this project in a real sense is not only financial assistance but primarily support of research activities in areas which touch on current economic and political issues. NRCP’s interest in this subject deserves our admiration and respect. The Commission on Audit is sponsoring the printing of the paper- back edition of this book. This will make it readily available to students and the general reading public. It should be emphasized however that the views expressed in the book do not reflect the official position of the National Institute of Science and Technology (NIST), the National Research Council of the Philippines (NRCP) and the Commission on Audit (COA). The members of the Public Finance Research Staff who helped write some of the drafts of this book were: Luzviminda Pantaleon ~ Research Associate and Coordinator {part time) Manuel Pineda — Research Associate and Division Chief Rodolfo Sabio — Research Associate (part time) Ligaya Castor — Research Assistant Louena Labrador — Research Assistant Francisco Manaog ~ Research Aide Ludovico Nalica ~ Research Aide The typists were: Mildred Magtolis Sigrid Sison Jessie Rose Mabutas, Assistant Regional Director, helped draft the chapter on accounting. Dr. Agustin Kintanar, Professor of Economics, University of the Philippines, who has written and lectured extensively on Public Finance, patiently went over the first drafts and gave detailed com- ments, Manuel Y. Pineda, Research Associate, made the computations and prepared the tables and charts for Chapters 7 and 14. :Ligaya Castor coordinated administrative and technical arrangements with regards to publishing, Marilou Del Rosario and Almaflor Nuas did the final typing. Ruby Joy Sison and Jeannabeth Hernandez helped in proof- reading. For purposes of publication, the output of the research staff was substantially revised and rewritten. The Secretariat Staff assisted me in this very difficult task. The entire process took three months, of working after office hours since we still continued with our regular duties. | am specially grateful to Teofilo Gaius Sison, Jr., Senior Executive Assistant, Ligaya Castor, Research Assistant and Noel Clemente, also Senior Executive Assist- ant. Not only,did they assist me in writing and rewriting; they stood by me throughout these three long months, giving up their free time including weekends, just to see the work done. They supported my belief that it is Not enough to do research; the results of such research must be immediately disseminated to as many sectors as possible. This is much theirs as it is mine. We were faced with two difficult choices: spend more time to make our work “perfect” and impregnable so we could have an elegant theoretical framework and technically sophisticated analyses; or proceed with the publication because of the urgency of the fiscal issues facing the country today. We opted for the latter. It has been ten years since the last book on Philippine Pablic Finance and Administration. We cannot spend another ten years perfecting our publication and fiddling leisurely with our theories and our syntax even as harsh economic realities are demanding a drastic re- examination of existing policy. Lastly, this entire exercise would not have come:off the ground were it not for one person. All academicians often dream of writing a book but never get around to doing it. They are either too busy teaching, working in government or earning money. Or maybe they could not get support. The idea of writing a Public Finance-related book started with COA Chairman Francisco $. Tantuico, Jr., who, while neither an economist, political scien- tist, nor a public administration professor, recognized the urgent need for research in public fiscal administration. He made the preliminary negotia- tions with NSDB and convinced the Board to support the project. Chairman Tantuico himself, with the active participation of the NRCP Auditor Rodolfo Hernandez, initiated the negotiations for NRCP support for public- ation and printing. The fact that he was the prime mover of the project enabled us to generate the support we needed — whether people, money or data. Once started, he nagged, browbeat and finally in exasperation, cowed us into finishing the project and revising the results for publication. Even while he may not totally agree with the views presented in this book, he consistently supported our right to express such views, provided the necessary logistics and even assured us of readership. He was not of the university but he recognized the importance of academic freedom in re-xvi search. This book, whatever is left after its many imperfections, is our tribute to him. LM.B. Quezon City, Philippines April, 1983CHAPTER ql OVERVIEWOVERVIEW What is Public Fiscal Administration? Writers have defined public finance as that branch of the field of eco- nomics which deals with the revenues and expenditures of governments and their impact on the economy. Public finance has always been considered part of economics. In recent times, however, with the emergence of the field of public administration, much interest has been directed towards the poli- tical, administrative and management aspects of formulating, implementing and evaluating fiscal policy — hence the term public fiscal administration. Public fiscal administration generally refers to the formulation, im- plementation and evaluation of policies and decisions on taxation and revenue administration; resource allocation, budgeting and public expend- iture; public borrowings and debt management; and accounting and auditing. 'f we view it as a system, it includes the environment, structures, systems, processes and personalities involved in formulating, implementing and eva- luating fiscal policy. Fiscal policy of course refers to the mix of policies on taxation, expenditures and borrowings for the achievement of government objectives. The above attempt at a comprehensive definition would describe any public administration system, especially those with mixed economies in- volving two sectors — the public sector and the private sector. The current consensus, however, is that public fiscal administration systems in less- developed countries (LDC’s), while visibly patterned after those of indus- trialized countries, are actually different. One obvious difference is in goals and objectives. The obsession for and preoccupation with development (whatever iis interpretation) as the overriding goal makes fiscal systems of LDC's different in more ways than one. Other obvious differences are in levels of economic development, historical experience, the scars and traumas of colonization, and politico-economic relationships which are maintained even after an LDC is purportedly independent. Suffice it to say at this point that if we were to define public fiscal administration for LDC’s, the defini- tion, in the second paragraph would be applicable, with the added phrase that development is the ultimate goal. The Analytical Framework — the “Mixed” Economy It would be ideal to have a book on public fiscal administration which deals with both types of economic systems — free enterprise and centrally planned economies. A free enterprise economy is theoretically characterized by perfect competition in the market. There are basically two sectors; the private sector and the public sector. Ideally, the market mechanism is allow- ed to operate freely in the operation of the price system. However, it is nowconsidered that even under a philosophy of free enterprise, government intervention is necessary in running the economy. Hence, the term “mixed” economy to denote the combination of a market system tempered by government regulation. In popular political language, such systems are re- ferred to as ‘capitalist.’ On the other hand, socialist economies are character- ized by centralized state planning. The economic problems of production, distribution, consumption and full employment are not left to the operation of the price system but are managed through planning. This book uses the “mixed economy” as the analytical framework. The LDC Perspective The discussions on the chapters that follow view fiscal administration issues and problems from the perspective of LDC's. This view Jiterally spells a world of difference. More and more peopie are accepting the fact that development strategies which have worked for industrialized countries may not necessarily be applicable once transplanted to LDC's. Theories, strategies and techniques have to be tailored to the specific conditions of LDC's. Gone are the days when students studying the experiences of industrialized countries would assume that if we follow their examples, development will only be just a matter of time and patience. The Development Decades which Produced innumerable studies on the development process have totally changed this earlier outlook. Thus, the question that is always raised is, will it work for the LDC? The overall framework here is therefore public fiscal, administration for LDC’s. Many LOC’s, especially before the start of the Development Decades, had mechanically adopted fiscal policies of industrialized countries mainly on the assumption that these would work because these were successful earlier. Also, leading fiscal policy makers were educated and trained in the industrialized countries which, at that time, only had their experiences to offer as examples. In more than one instance, these exercises resulted in disaster. An effort is therefore made in this book to look into the specific application of fiscal policy strategies for LDC's, Focus on the Philippines. In this book, attention is focused on the Philippines, for several reasons, Firstly, it is directed primarily to Filipino readers. Even the average reader might find the discussions of fiscal policy issues relevant and meaningful especially if viewed in the light of larger national concerns. Secondly, for students of public fiscal administration for LDC's, the Philippines makes an excellent case study. In recent times, the Philippines underwent a series of wide-ranging changes in fiscal policy formulation and implementation, as part of a bigger package of administrative and political reforms, These were initiated after the declaration of Martial Law. Finally, the Philippine experience could be useful to other LDC’s because it reflects many of thedilemmas and options faced by countries who similarly underwent a long process of colonization prior to formal political independence. In most of the analyses in this book, focus is on the Martial Law years from: 1972-80. The choice is deliberate. Under Martial Law, many fiscal policies swung from the traditional “balanced budget’ outlook to an open policy declaration of deficit financing and increased public borrowings. An aggressive policy of taxation and revenue administration was vigorously pursued. All these activities were launched under the aegis of an integrated development plan which called for expanded expenditures to finance large- scale programs and projects. The impact of all these changes on patterns of revenues and expenditures is extremely interesting. What is even more fascinating are the questions which have arisen in the process. We decided on 1980 as the cut-off date for statistics because the latest available data during the period of the research was on this year. Because of the difficulties and delays in integrating and summarizing data at the na- tional level, national figures and statistics tend to be behind by a year or two. Thus, most of the data used here are on the Martial Law years. As far as possible, we have tried to make comparisons with the pre-Martial Law period, where data are available and comparable. We have also used more recent data than 1980, whenever such were available. Coverage. The book covers what is popularly known as ‘‘the public finance cycle” consisting of major activities in public fiscal administration. These are: fiscal policy formulation, taxation and revenue administration, budgeting and expenditure, public borrowings and debt management, and accounting and auditing. These activities are not necessarily sequential, In most instances, these are undertaken simultaneously and, hopefully, in close coordination. The book covers these five major activity areas and various issues and prob- tems from the perspective of an LOC, using the Philippine experience as an example. Chapter Descriptions. The book is divided into seven major parts. Part | which introduces the basic ideas in the book, is divided into five chapters. Chapter 1 gives an overview of public fiscal administration. Chapter 2 traces the development of public finance institutions, using the experience of industrialized countries. It ends with John Meynard Keynes and his views on fiscal policy. In quite a number of LDC's, his ideas are still dominant, especially those on compen- satory financing, deficit financing and the use of fiscal policy as a tool for correcting imbalances in the economy. Although industrialized countries have already gone into what is described as the “post-Keynes era", many ofhis ideas are reflected in not a few LDC fiscal policies. Thus, a discussion of the impact of his ideas on LDC's is important. The chapter ends with the query whether LDC’s will follow the pattern of the industrialized countries, not only in the development of public finance institutions but in economic development as well. The current thinking is that this is not Possible, since the experience of the industrialized countries is no longer replicable, Chap- ter 2 explains why it is so, and examines the implications of such view for LOC fiscal policies which are visibly patterned after those of the industrial- ized countries, Chapter 3 tackles issues and problems in development finance and cites the Philippine experience. As mentioned earlier, the attainment of develop- ment goals has became the overriding concern of most LDC's. As interpreted in their development plans, such goals require massive investment for large scale projects designed to propel LDC’s into developmental orbit. Dramatic increases in GNP were even anticipated in some instances. The problem that has emerged of course is, how massive development programs should be financed in the light of the limited resources of LDC's. Chapter 3 assesses the strategies that LDC’s have evolved, under the tutelage of former colonial masters and international financing institutions, for financing their develop- ment ambitions. {t raises the issue on how effective such strategies have been and what the costs are. Chapter 4 and 5 look into the political basis of public fiscal adminis: tration, Chapter 4 discusses the constitutional and legal basis for fiscal policy formulation and implementation in the Philippines, On the other hand, Chapter 5 describes the close interrelationship between the political system and the fiscal system, This process is sometimes called as “fiscal politics.”* Part II introduces the reader to the resource generation activities of the government through taxation and other forms of revenue. Chapter 6 explains the current policies on taxation for development and gives a des- cription of the Philippine tax system. It identifies the basic dilemmas which are frequently faced by the policy makers who formulate tax policies for development purposes. Chapter 7 analyzes patterns of Philippine revenue from 1972-80. In the process, it raises questions on the implications of the trends in composition and structure of government revenues. Part II! examines the financial : - .. ionship between national and local governments. Chapter 8 tooks into‘ activities of tacal governments in raising resources to finance ‘he! '-vetu; ental activities. It pinpoints prob- lems in national-local fiscal relations which have persisted in spite of efforts to pass laws and other measures to enhance local fiscal autonomy. One very significant development trend in local governments is the metropolitan government, as exemplified by the Metropolitan Manila Commission (MMC)experience. Chapter 9 describes the financial system of MMC and identifies issues: which might be useful to other metropolitan areas in the country. The unique experience of MMC is examined and the question is raised whether such can be replicated in other regions. Part IV covers another major area in public fiscal administration: government budgeting and expenditure policy. Chapter 10 surveys theories of the budget and their possible application to LDC's. The difficulties of LDC's in working out effective budget systems against the backdrop of un- predictable and oftentimes unmanageable economic crises are discussed. Chapter 11 describes the Philippine experience in shifting from one budget approach to another. It recounts the circumstances under which each budget approach was adopted. The chapter emphasizes that a change in budget approach does not merely imply a change in technique or process but also in perspective. Chapter 12 discusses the organizational aspects of Philippine budgeting and describes the current administrative arrangements for budget- ing. The budget process is then described in detail in Chapter 13. The focus is not only in organizational processes but also in the informal interplay of political, social and economic factors. Chapter 14 analyzes the patterns of expenditures of the Philippines from 1972-1980. Part V focuses on the accountability aspect of public fiscal adminis- tration. Chapter 15 gives a technical description of concepts, thearies and practices in the state accounting system. The chapter ends with a discussion of issues and problems in state accounting in the country. Chapter 16 discusses state auditing in the Philippines, It traces the developments in state audit and identifies current thrusts and priorities. A detailed discussion of issues and problems in state audit is also included. Since 1976, training for state accounting and auditing has gained ascendancy as a major concern. Training activities during this period have accelerated dramatically. Because of the importance that has been given to it and the magnitude of resources that have been poured into this endeavor, it is felt that special attention should be given to it. Chapter 17 in its entirety is directed to this issue. Part V1 focuses on what is perhaps the most controversial aspect of Public finance for LDC’s — public borrowings. This is an activity whose impact on LDC's has not been clearly established but ironically, this is also a fiscal tool which LDC’s are using with vigor, whether as a matter of policy ‘or as a result of circumstance. Perhaps, one can even safely say that public borrowing is the most significant activity currently pursued in public fiscal administration by most LDC’s. This aspect of fiscal policy is fraught with controversy and disagreement not only among policymakers who accept it in one way or another but also among various sectors of society. The sig- nificance of the subject lies in the fact that it is obviously linked to the development efforts of LDC's. Borrowing is the primary too! used for financing development projects. Thus, it is a major component of develop-ment finance, Chapter 18 makes a survey of theories of public debt and their applicability to LDC's, Chapter 19 looks into the present structures and composition of the Philippine Public Debt. It concludes with a dis- cussion of issues on public borrowings which are confronted by LDC's. The discussion on public borrowings ends with a case study on the Manila Urban Development Project (MUDP) originally prepared as a term paper for my class in P.A. 231 (Public Fiscal Administration), it has been published several times. We are including it in this chapter because the insights gained from the case are still relevant and meaningful. It is the only case study which describes in detail the processes involved in public borrowings. Part VII concludes with some selected issues on public fiscal adminis: tration. Chapter 21 deals with negative bureaucratic behavior in fiscal agen- cies. Recently, there has been an upsurge of concern over the problem of graft and corruption. Not surprisingly, one of the areas where this is a pernicious problem is public fiscal administration, A case study on the BIR is included. This is not to imply that corruption is a problem only in the BIR or that the BIR is doing nothing about it. It is a problem not just of the government but of society itself. The case illumines and explains how cor- ruption can occur in a fiscal agency. Chapter 22 highlights a concern which we feel strongly about -- training in public finance in the Philippines.CHAPTER 2 THE DEVELOPMENT OF PUBLIC FINANCE INSTITUTIONS INTRODUCTION I EARLY PUBLIC FINANCE A. Ancient Finance: The Slave Societies B. Medieval Public Finance: Feudalism t, THE BREAKDOWN OF FEUDALISM A. The Rise of Central Governments B. Beginning of Capitalism 1, Mercantilism 2. Cameralism 3. Physiocracy tt CAPITALISM: PUBLIC FINANCE AND FREE ENTERPRISE A. Adam Smith B. David Ricardo C. John Stuart Mill D. Adolf Wagner NW. THE CRISIS OF CAPITALISM: KEYNESIAN PUBLIC FINANCE Vv. THE MARXIST CHALLENGE: SOCIALIST PUBLIC FINANCE A. Marxism B. Basic Features of Socialist Public Finance Vi. THE IMPACT OF PUBLIC FINANCE INSTITUTIONS ON LDC's A. Classical Public Finance B. Keynesian Public Finance C. Will the LDCs follow the various stages of development of the industrialized countries?INTRODUCTION The development of public finance institutions merely reflects the development of organized society, particularly the state. Changes in con- cepts of what should be the functions and responsibilities of the state have to a large extent shaped concepts of what the goals of public finance ought to be. For after all, public finance raises and spends revenues for the functions of the state. These functions have been changing with the deve- lopment of society. Thus, tracing the development of public finance insti- tutions necessitates an examination of the development of organized society itself. Students of western society identify the following stages of develop- ment: the primitive societies, slave states, feudal systems, capitalist systems, and socialist systems. On the other hand, other writers include the less developed countries as a specific stage of development towards either a capitalist state or a socialist system, In this chapter, public finance institutions during the various stages in the development of society will be traced, with particular emphasis on Public finance institutions in LDC‘s with mixed economies, which is the basic framework of this book, 1. EARLY PUBLIC FINANCE If we are to trace the origins of public finance institutions, we would probably start with the beginnings of the state under the slave societies, Under the primitive societies, there was not probably much public finance to speak of. The primitive tribes were on a subsistence basis, with hardly any surplus. Whatever was acquired from hunting and fishing was imme- diately consumed. Battles over territories, the capture of defeated tribes who were turned into slaves, the development of settled agriculture and rudimentary advances in the production of goods led to the great slave empires of Asia, Africa and Europe. The early public finance institutions of these slave societies served as foundations for modern institutions and practices. Ancient public finance Provided some of the basic instruments of public financial management i.e., budget and expenditures, tax and revenue administration, and debt and borrowings. Medieval public finance further refined some of these concepts, distilling their basic aspects by an expanded application to me- dieval public goals and conditions. It also introduced some basic tools like accounting and auditing.10 A, Ancient Finance: The Slave Societies The idea of financing public goals and activities is as old as the or- ganization of public authority. Logically, the beginnings of public finance started from the creation of the state. The state was created by the neces- sity to protect and ‘purportedly promote the welfare of man. Basically, the state was comprised of: the government, the people, territory, and sovereignty. Public finance was supposed to preserve the state and promote the goals of society. In particular it financed the activities of government. Expenditures. The role of public finance therefore became inextricably linked with the functions of the government. The traditional public finance-government functions unity originated from ancient times. To protect and maintain the state system, the government had to perform several vital functions. Among the most basic of these functions was the protection of the people, the territory and sovereignty from outside aggression. As the state was under- going its initial stage of formation under the slave empires, it was subject to constant aggression within and from outside. At the same time it had to perpetrate aggression to eliminate its neighbors, expand its frontiers and consolidate its territories. Ancient public finance was therefore character- ized by enormous public expenditures for defense and aggression. The pro- vision and maintenance of armies and navies were basic allocations of the public purse.? As a matter of fact, writers claim that public finance started with war activities. This was the largest single item of expenditures in an- cient times. Regimes were literally driven into bankruptcy because of war expenditures. War was such a frequent preoccupation that peace has been defined as “an uneasy period between two wars.’” A second primary function of ancient government was the preserva- tion of internal peace, order, and security and the administration of just- ice.3 Considering the fact that a vast majority of the populgtion in slave empires were slaves who might rebel any time, peace and order for the ruling minority was a primary concern. The administration of justice, of course, was for the free citizens and not for the slaves. Security, within and without, can therefore be considered as the main function of ancient governments; it therefore followed that much of public finance was poured into this activity. A third function was the maintenance of a state religion. Religion helped stabilize and rationalize the ruling order in slave empires. It there- fore played a major role in justifying the slave system. In slave empires, as in Egypt, the rulers were considered gods and goddesses; they were Jooked upon as human manifestations of deities and were considered religious as well as temporal leaders. Thus, elaborate bureaucratic structures were setn up for state religions and massive temples were erected, These activities necessitated huge expenditures. In instances where religion was separate from the state, the former had its own financial system with high powers of compulsion. A fourth function, the maintenance of the king and his household, was deemed the inalienable right of the sovereign. It was the people’s obliga- tion to provide him with revenues and he, to spend such (as a divine obliga- tion), for anything he deemed good for the public welfare. This function has its modern counterpart in the general national government expendi- tures,* Building and maintenance of public works was also a common activity in the slave societies. Roads, canals, irrigation systems, pyramids, and fortifi- cations were considered public concerns to be financed from public resour- s ces.’ The term “public works” may not necessarily be descriptive of the massive structures which were built in ancient times since quite a few of them were really tombs of rulers. The tomb of Mausolus at Halicarnassus, the pyramids of Egypt, and the Taj Mahal are among the most. famous examples, Other structures were monuments to the might and power of conquering warriors. Finally, other state concerns included limited goods and services like the distribution of free grain in times of famine as in Rome, public recrea- tion,and physical education, It can therefore be seen that the responsibilities of ancient govern- ments were limited to a few major functions. Public finance expenditures were correspondingly limited to these activities. Compared to the present range of goods and services which modern governments are expected to deliver, ancient governments can be said to have a narrower scope of public service, and therefore of public finance, Still these early concepts of the responsibilities of the state laid the groundwork for our present public finance institutions. Revenues, To finance its public functions, the State had to impose and collect revenues. Ancient taxes and revenues were generally crude and simple in form. The slave state’s revenues were ordinarily limited to: lootings and tri- butes from conquered peoples, war chests, fines, and direct taxes imposed on non-citizens of the State or on conquered peoples. From this practice12 originated the vassalage taxes imposed on conquered provinces, Other re- venues consisted of donations or gifts from the wealthy citizens of the state.” Ancient governments had little need for direct taxes since they levied tributes on conquered peoples. The Greeks and Romans objected to any direct taxes but nevertheless were forced to practice direct taxation in times of emergency. Aside from the “gifts” of some citizens, ancient governments derived considerable revenues from the public domain -- particularly from agriculture and mines. Of the direct taxes in ancient times,the more import- ant was the poll tax which was levied on Egyptian male population and ‘on Roman non-citizens engaged in business. This developed into a kind of personal property tax in later times. One of the more popular taxes was the tax on inheritances, Originating from ancient Rome and Egypt, this direct type of tax provided elaborate exemptions. Significantly, it had a higher tax rate for childless couples and unmarried individuals, apparently in con formance with the ancient high regard for fertility, especially in Egypt.® The most common sources of revenue were from the ruler's domain and tributes from conquered provinces. Trade and commerce which were potentially rich sources of revenues were not yet developed. The Greeks and Romans did not encourage entrepreneural activities which were considered earthly and menial. The concept of economic prosperity was confined to ideas of division of labor and the beneficience of agriculture. Likewise, property taxes were not yet developed at that time.? Ancient Greece did not levy taxes on its citizens without the latter's consent. This “assent principle,’ that is,direct taxation has to have consent of the people, was carried on to modern times. Further taxation was resort- ed to only in exceptional cases i.e., calamities and emergencies. '° Budgeting Since the ancient governments had several functions to perform, it was logical that they had to apportion revenues for each of these functions. Budgeting was obviously exercised because of the need to allocate public revenues for specific purposes. Since the public budget was merged with the king’s purse, there was no distinction between the public and the king's private expenditures.! Borrowings Public borrowings and debt management were unheard of, Although there was already, a form of money lending, the ancient state did not borrow money even in emergencies. It only solicited gifts or levied limited taxes, The ancient state was relatively self-sufficient and public expenditures were usually borne by the citizens and non-citizens without recourse to loans,'?