Republic

of the Philippines
Laguna State Polytechnic University
Province of Laguna
ISO 9001:2015 Certified
Level I Institutionally Accredited

LSPU Self-Paced Learning Module (SLM)
Course ELECTIVE 1 (Public Finance)
Sem/AY Second Semester/2022-2023
Module No. 3
Lesson Title Origins and Implications of Public Borrowings and Debt
Week
10-13
Duration
Date April 3-April 28, 2023
Meaning of public borrowing in English. the total amount that a government
Description borrows, or the act of borrowing this money: The Treasury is keen to reduce
of the government borrowing quickly. The government has been forced to rely on public
borrowing to finance a series of stimulative measures.
Lesson
Public debt is the income of the government. This is generally in the form of
bonds. It carries with them the promises of the government to pay interest to the
holders of these bonds at stipulated rates at regular intervals or in lump sum at the
end of the period, in addition to the principal amount.

This process has brought different debt types according to maturities (short,
medium, long term), resources (internal and external debts), and
voluntariness (voluntary and compulsory debts).

Learning Outcomes

Intended Students should be able to meet the following intended learning outcomes:
Learning
Outcomes • Define Public Finance.
• Understand the different Categories and Relevance of Public Expenditures
• Know the Influence on Public Expenditures
• Lay down the Demand and supply theories to explain the trends in public expenditure
over time
• Understand the relationship between public expenditure, public services and the
prevailing economic climate.
• Enumerate the different classes and characteristics of public revenue
Targets/ At the end of the lesson, students should be able to:
Objectives
• Define Public Finance.
• Understand the different Categories and Relevance of Public Expenditures

LSPU SELF-PACED LEARNING MODULE: TECHNOLOGY FOR TEACHING AND LEARNING

 Republic of the Philippines
Laguna State Polytechnic University
Province of Laguna
ISO 9001:2015 Certified
Level I Institutionally Accredited

• Know the Influence on Public Expenditures

• Lay down the Demand and supply theories to explain the trends in public expenditure
over time
• Understand the relationship between public expenditure, public services and the
prevailing economic climate.
Enumerate the different classes and characteristics of public revenue

Student Learning Strategies


Online Activities A. Online Discussion via Google Meet
(Synchronous/ You will be directed to attend in a Four-Hour class discussion on the
nature and types of educational technologies. To have access to the
Asynchronous) Online Discussion, refer to this link: ____________________.

The online discussion will happen on March 14 to April 01, 2023, from
7:00-9:00AM.

(For further instructions, refer to your Google Classroom and see the
schedule of activities for this module)

B. Learning Guide Questions:

• What is Public Finance?
• What are the different Categories and Relevance of Public Expenditures
• What are the Influences on Public Expenditures
• What are the Demand and supply theories to explain the trends in public
expenditure over time
• What are the relationship between public expenditure, public services and the
prevailing economic climate.
• Enumerate the different classes and characteristics of public revenue
Note: The insight that you will post on online discussion forum using Learning Management
System (LMS) will receive additional scores in class participation.

Offline Activities Lecture Guide
(e-Learning/Self-
Paced)
1. THE DIFFERENT CONCEPTS AND MEASURES OF PUBLIC DEBT A.
Definitions

Two major questions of definition, and a third somewhat less important one, arise
when public debt is discussed. Should one look at gross or net debt? Is debt of the
central government alone, the general government sector or the public sector as a

LSPU SELF-PACED LEARNING MODULE: TECHNOLOGY FOR TEACHING AND LEARNING

 Republic of the Philippines
Laguna State Polytechnic University
Province of Laguna
ISO 9001:2015 Certified
Level I Institutionally Accredited
whole, including public corporations, the most relevant concept? Finally, is there
any reason to distinguish between foreign and domestic debt?

The measure of public debt usually discussed is gross debt (i.e. the total financial liabilities
of government), reflecting the fact that the corresponding data are more readily available
and thus more widely publicised, and that there is a direct link between gross debt and the
-
level of debt service payments an important aspect of the concern about debt (see
below). The net debt (i.e. the gross financial liabilities less the financial assets) of
government, on the other hand, comes closer to reflecting the cumulative total of past
budget deficits, which represent the net borrowing b y government in each period. The
distinction between the t w o concepts is best examined by considering the nature of
government's financial assets - the wedge between gross and net debt. These fall into t w
o main categories: the assets held by the government as a financial intermediary and the
social security funds built up in anticipation of future liabilities.

As a financial intermediary the government borrows funds (which increase its

grossfinancialliabilities)inordertomakeloanstobothindividuals(e.g. mortgages) and
institutions (e.g. investment loans for regional development). The financial assets thus
acquired typically yield interest income to the government and should represent a legitimate
offset against its gross debt. However, there are three concerns about such assets, which
in some countries and to varying degrees suggest that netting them out of the gross debt
figures may be inappropriate. First, in some cases, the interest paid to the government by
individualsor institutions does not offset the government's own borrowing costs. Second, if
the quality of the financial assets held by the government is open to question

the true value of the assets may be less than their recorded value. This can be the case for
loans to insolvent private sector corporations or to some public enterprises. Finally, the
additional government borrowing undertaken to acquire such assets may create pressures
on financial markets if it corresponds to an increase in overall private sector access to
credit.

The other important category of government financial assets is associatedwith social

insurance schemes. The funds involved can represent buffers for year-to-year fluctuations
of premiums and expenditures for unemployment or medical insurance schemes, for
example. However, a major component of these assets in several countries relates to public
pension plans, which also involve substantial future liabilities. The gross debt will usually
fail to account for the social security sector at all, an important drawback given the
implications of ageing populations (see below). Net debt figures are also misleading, since
they take account of only the assets side of the social security balance sheet. In some
countries, notably Japan, such figures are in fact discounted by the authorities because
they expect demographic changes to reduce the social security assets markedly in the near
future. To sum up, the links between net debt and budget deficits, make it more appropriate
to use net debt in

the calculation of prospective debt scenarios. However, the problems associated with the
quality of financial assets, the existence of implicit liabilities and the attention paid to gross
debt interest payments make it important to consider gross debt as well.

The second major question of definition of public debt concerns the level of government
considered. In some countries much of the attention is focussed on central government

LSPU SELF-PACED LEARNING MODULE: TECHNOLOGY FOR TEACHING AND LEARNING

 Republic of the Philippines
Laguna State Polytechnic University
Province of Laguna
ISO 9001:2015 Certified
Level I Institutionally Accredited
debt, while in others the debate has centred on the liabilities of the general government or
the public sector as a whole (including publicly-owned enterprises). The narrowest concept
could be justified because of the greater availability of data, and because central
government debt is more subject to "monetisation", as central banks do not generally buy
or discount local government debt. However, there are difficulties in comparing central
government debt data across countries, for instance in those with and without federal
systems. Alternatively, the widest concept (the public sector) could bejustified from a
balance sheet framework, since the government usually owns shares in public
corporations, which are not counted as financial assets (at least at their true as opposed to
historical values). For instance, sales of such shares affect central or general government
gross and net debt, but not the public sector's overall position. Estimates of the public
sector deficit are also less affected by changes in the definition or extent of other "off-
budget" transactions. In addition, public enterprises have often been used as instrumepts of
government policy, particularly with respect to employment and price-setting. If the losses
that result are met by government- guaranteed borrowing rather than operating subsidies,
they will not show up, as they should do, in measures of general government deficits or
indebtedness.

However, measuring the public sector debt raises significant data and definition problems
across countries and, in general, the activity of public sector enterprises is more like that of
private firms than of government entities. On balance, therefore, the use of the intermediate
(general government) concept, ensuring reasonable comparability across countries and
consistency with the National Accounts, seems the most appropriate. Moreover, for most
countries, the behaviour of central and general government gross debt in recent years has
been quite similar.

Finally, a distinction between types of debt is relevant to policy debates in some countries,
such as Denmark, Sweden, Ireland, New Zealand, Portugal and Turkey: how much of the
public debt is held by foreigners and how much is denominated in foreign currencies?

Foreignloansallowcountriestoacquiretheadditionalresourcestoinvestmore than they save

with lower interest rates than otherwise. On the other hand, interest paid on foreign-owned
debt is not an internal transfer (itenters the current account of the balance of payments and
thus lowers GNP and national income) and hence the

ability to service the debt is of even greater importance than usual. Moreover: external
financing can at times affect the competitiveness of the economy, notably if the capital
inflows lead to an appreciation of the exchange rate. For a given total foreign debt,
however, whether it is the government or the private sector that borrows abroad is
(economically) largely irrelevant.

Foreign currency debt can pose a problem for governments if the domestic currency
depreciates relative t o those in which the debt has been contracted. While in the long run
interest rate differentials would tend to offset exchange rate movements, in the short run
the exchange risk can be fairly important. Recent fluctuations in the U.S. dollar value of
many national currencies have produced significant changes in the debt/GNP ratio
unrelated to budget deficits for countries with large external debts, although such
adjustments are not always reflected in published data. The analysis below does not
distinguish between foreign and domestic liabilities of the government sector.

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 Republic of the Philippines
Laguna State Polytechnic University
Province of Laguna
ISO 9001:2015 Certified
Level I Institutionally Accredited
B. Recent trends in debt/GNP ratios in a historical context

Actual and projected figures for the gross and net debt/GNP ratios, on a book
valuebasis,arepresentedinTables 1and2fortheperiod 1972-1986*.Thegross data show rapid
increases in the ratios for most major countries in the years after 1 9 8 1, particularly in Italy
and Canada. The United Kingdom's relatively stable ratio is an exception but its level is
comparatively high. Italy, Japan and Canada among the major countries and Belgium,
Ireland, the Netherlands, Sweden and Denmark among the smaller economies have the
highest gross debt ratios. All appear t o have been above 6 5 per cent at the end of 1985.
The lowest ratios are in France, Australia, Finland and Norway. However it is noteworthy
that, for many countries,the 1970swerenotcharacterizedbyrapidincreases.Thedebtratiooften
did not rise above the 1972 level until 1978 or later.

The net debt ratios have generally evolved in a fairly similar manner to gross debt ratios.
However, their levels are substantially lower, particularly in Japan, Canada, the United
States and the Nordic countries. Indeed, in the early years of the period several countries
-
had negative net debt financial assets exceeding financial liabilities. Except for a few
countries (Japan, Germany, Australia, Denmark)the level of both gross and net debt ratios
is expected to rise again, often significantly, in 1986. In the case of Japan, debt ratios seem
to have stabilized, reflecting in part the 19 8 6 increase in contribution rates for the pension
system, which expanded the surplus of the social security sector. Without such an increase,
the debt ratios would have probably risen further; moreover, it should be noted that the
social security

C. Debt analysis in a government balance sheet framework

The debt data that have been discussed so far are based on financial concepts,
using the financial liabilities and (for net figures) the financial assets of the
government sector. Reference has already been made t o loans and loan
guarantees by the government for public sector enterprises, to government asset
sales and to the implicit liabilities of public pension plans. All of these (as well as
the government capital stock) have implications for what could be called the public
sector's net worth that are different from their consequences for the governments'
financial position as measured by either gross or net debt.

The use of such a "net worth" concept has been suggested as a better indicator for
assessing the medium-term consequences of fiscal policy (Buiter, 1985; Odling-
SmeeandRiley, 1985).Sinceassetaccumulationordecumulationwouldbe clearly
observable if government accounts were presented in a balance sheet format,
thiswouldbeanaturalvehicleforexaminingtheimplicationsofgovernment capital
formation, asset sales, resource depletion and social security. For example, as
noted above, when the government sells non-financial assets, such as public
corporations, the proceeds reduce its net financial debt but there is no equivalent
improvement in its net worth4. In some circumstances this may increase budgetary
flexibility, but such an assessment requires knowledge of the government's overall
balance sheet and not just its purely financial component.

There are two ways in which the government net worth concept can be defined.
The broader definition would include not only financial and non-financial assets and

LSPU SELF-PACED LEARNING MODULE: TECHNOLOGY FOR TEACHING AND LEARNING

 Republic of the Philippines
Laguna State Polytechnic University
Province of Laguna
ISO 9001:2015 Certified
Level I Institutionally Accredited
liabilities, but also the net present value of future tax receipts less transfers and the
net present cost of future consumption expenditures5, as well as the net present
value of future seignorage. This definition of net worth is not

11. THE PROJECTED EVOLUTION OF PUBLIC DEBT

A. The risk of "debt explosion"

Since the late 1970s interest rates have been particularly high in most Member countries,
generally exceeding economic growth rates. Given the large budget deficits, this has led to
a rapid increase in government debt service payments and raised concern that the
compounding effects of such a situation would imply continuously growing deficits and an
"explosion" of debt as a proportion of GNP. As an illustration of the seriousness of the
problem, Table 4 shows, for most OECD countries, the evolution of budget balances net of
debt interest payments in recent years and as forecast for 1986. The last column
represents the "threshold" or required budget surplus under the admittedly arbitrary
assumption that the interest ratecontinuestoexceedthegrowthratebytwo
g
percentagepoints .Thisprovidesa rough indication of the extent of fiscal adjustment required
to stabilize the existing debt/GNP ratio. It can be seen that, although only some countries
are now in a "stable" position by this criterion, most governments have nevertheless been
moving quickly to improve their net-of-interest budget balances. Italy, Greece, the

Netherlands and Spain still have very large net of interest deficits. On the basis of 1986
projections, the United States, France, Canada, Belgium and Ireland also

require further improvement to stabilize their debt positions.

If the non-interest budget balance of the OECD countries not yet in a "stable"

position does not improve and if interest rates remain above growth rates' O, then
government debt will tend t o increase more rapidly than GNP. The first t w o curves in
Chart B (see Annex) show the projected evolution of net debt/GNP ratios for the countries
included in Table 4, under the following alternative assumptions:

i) the non-interest budget balance remains at the forecast 1986 ratio to GNP, except in the
United Kingdom where projected changes in 'oil revenues are taken into account, while the
economy grows at its trend rate' ; and

ii) the economy returns to its mid-cycle position over the three years 1987- 89. As a result,
the non-interest budget balance is affected by the automatic stabilizers during that period,
after which it remains constant at its new ratio to GNP while output grows in line with its
trend rate.

The projected debt figures suggest that the situation varies widely among the different
countries considered. In thirteen of these, including the United States, France, Italy and
Canada, the present position can be characterizedas "unstable" in the sense that their
public debt/GNP ratio would continue to rise if the non-interest budget balance does not
improve. Italy, Belgium, Ireland and the Netherlandswould have debt/GNP ratios of 160 per
cent or more by the end of the century, while in Canada it would be close to 95 per cent.
Only in Japan, Austria and Denmark would the debt ratio fall to any extent. Under the

LSPU SELF-PACED LEARNING MODULE: TECHNOLOGY FOR TEACHING AND LEARNING

 Republic of the Philippines
Laguna State Polytechnic University
Province of Laguna
ISO 9001:2015 Certified
Level I Institutionally Accredited
alternative assumption, with economic activity returning to a mid-cycle level, automatic
stabilizers improve or worsen the non-interest budget balance according to whether the
economy is projected to be below or above its mid-cycle position in 1986. For several of
the countries whose activity is currently below trend, the additional growth significantly
improves the debt outlook. Germany, France and Sweden would see their debt reduced as
a proportion of GNP, while in the United Kingdom and in Belgium the increase in the debt
ratio would slow markedly. On the other hand, in most other countries the debt ratio would
continue to increase, albeit at a reduced rate, even if their growth rate

returned to its mid cycle trend level. In those countries (Australia, Finland and Norway)
where economic activity currently appears t o be above estimated mid-cycle positions,
debt/GNP ratios would be less favourable under this assumption. However, the relatively
low initial debt levels in these countries relative to GNP should presumably make any policy
adjustments less pressing.

On the whole, in both scenarios, debt ratios will continue to rise rapidly in a number of
countries. The need t o improve the public finances therefore remains of

primary importance. This is especially true for the United States, Italy, Canada, and the
Netherlands, where debt ratios will rise quickly without changes in the non-interest budget
balances, even under the more favourable assumptions about economicgrowth.
Forcountrieswhosebudgetsaresuchthatdebtratiosarelikelyto fall (particularly Japan,
Germany, Austria and Denmark), Chart B suggests that there may be a choice as t o the
speed with which the relative size of the debt is reduced. Relativelysmall additional efforts
to improve non-interest budget balances could put countries projected to have relatively
stable debt ratios in a similar position, if the return to mid-cycle activity levels materialises.

These debt projections are, of course, particularly sensitive to the assumptions about trend
output and about interest rates. They may well be too pessimistic if the trend level of output
is underestimated, which may be the case in some countries because of excessive weight
placed on the recent period of slow growth. Moreover, maintaining interest rates above
growth rates may also be pessimistic. Although this situation has existed for several years
in most countries considered, it had not
previouslybeenexperiencedforanyconsiderablelengthoftime, atleastsinceWorld War II.
Because no universally accepted explanation for the persistence of high real interest rates
has been provided (Atkinson and Chouraqui, 19851, and given that in any event there is
little monetary policy can do t o affect real interest rates in the long run, it is difficult to
predict whether the present interest rate/growth rate pattern will continue or be reversed.
As a result, no specific assumption is made here about monetary policy stance but real
interest rates are held constant over the period. Under this hypothesis, any changes in
inflation would be fully reflected in nominal interest rates and the outlook for the debt/GNP
ratio would not therefore be affected, except for delays in rolling over old debt (which will
tend t o raise the ratio if inflation falls and lower it if inflation increases). Finally, the
assumption that non-interest expenditures and revenues stay constant as a share of output
(except for the effect of automatic stabilizers) would imply that fiscal drag (due to either
inflation or real growth) was offset by the authorities. This hypothesis is consistent with the
view that present levels of taxation are already too high; to reduce both deficits and the
growth of the debt over the medium term by allowing fiscal drag to operate would not
therefore represent a neutral policy.

LSPU SELF-PACED LEARNING MODULE: TECHNOLOGY FOR TEACHING AND LEARNING

 Republic of the Philippines
Laguna State Polytechnic University
Province of Laguna
ISO 9001:2015 Certified
Level I Institutionally Accredited

Engaging Activities

• What is Public Finance?
• What are the different Categories and Relevance of Public Expenditures
• What are the Influences on Public Expenditures
• What are the Demand and supply theories to explain the trends in public
expenditure over time
• What are the relationship between public expenditure, public services and the
prevailing economic climate.
• Enumerate the different classes and characteristics of public revenue



Performance Tasks


PT 1
Answer the following questions comprehensively based on the different topics presented in class by
citing examples.

Guidelines:
a. Overview of the topic under study
b. Answer the questions within the Philippine context
c. Relevance of the topic in the Philippine current situation
d. Evaluation and Conclusion
Questions:
1. What is Public Finance?
2. What are the different Categories and Relevance of Public Expenditures
3. What are the Influences on Public Expenditures
4. What are the Demand and supply theories to explain the trends in public expenditure over
time
5. What are the relationship between public expenditure, public services and the prevailing
economic climate.
6. Enumerate the different classes and characteristics of public revenue

LSPU SELF-PACED LEARNING MODULE: TECHNOLOGY FOR TEACHING AND LEARNING

 Republic of the Philippines
Laguna State Polytechnic University
Province of Laguna
ISO 9001:2015 Certified
Level I Institutionally Accredited

Understanding Directed Assess

Rubrics

1 point 2 points 3 points 4 points
Introduction Did not include a Attempted to Included a Included a hook
brief/concise include a brief/concise
introduction brief/concise basic
introduction introduction

Details Did not include Included relevant Included Included details

details details descriptive that create an
details image

Conclusion Did not include a Attempted a Included a basic Included a well-

conclusion conclusion conclusion developed
conclusion

Adopted from: https://www.coursehero.com/file/41388589/EDRD-430-COOPER-Lesson-Plan-Rubricdocx/



Learning Resources

LSPU SELF-PACED LEARNING MODULE: TECHNOLOGY FOR TEACHING AND LEARNING

 Republic of the Philippines
Laguna State Polytechnic University
Province of Laguna
ISO 9001:2015 Certified
Level I Institutionally Accredited
1. https://www.google.com.ph/url?sa=t&rct=j&q=&esrc=s&source=web&cd=&cad=rja&uact
=8&ved=2ahUKEwjU8M6k6tj2AhUGLpQKHXrhB9QQFnoECAsQAw&url=https%3A%2F
%2Fwww.economicsdiscussion.net%2Findia%2Fpublic-expenditure%2Fpublic-
expenditure-causes-principles-and-importance%2F17462&usg=AOvVaw3Z-xzKVj--
g6c0OfMQEY3h
2. https://www.google.com.ph/url?sa=t&rct=j&q=&esrc=s&source=web&cd=&cad=rja&uact
=8&ved=2ahUKEwjHzJOk6dj2AhUkw4sBHVUYCfkQFnoECAsQAw&url=http%3A%2F%
2Fwww.ombudsman.gov.ph%2FUNDP4%2Fwp-
content%2Fuploads%2F2012%2F12%2FChap4_FAQ.pdf&usg=AOvVaw2L4PN3Asrbb
WfI3r_KJpNR
3. https://www.google.com.ph/url?sa=t&rct=j&q=&esrc=s&source=web&cd=&cad=rja&uact
=8&ved=2ahUKEwij9vSExdj2AhUxBKYKHXcfDooQFnoECAIQAQ&url=https%3A%2F%
2Fwww.uv.mx%2Fpersonal%2Fclelanda%2Ffiles%2F2014%2F09%2FHyman-David-
2011-Public-Finance.pdf&usg=AOvVaw0NzKIkmrlhZR5xLwaBm66_

LSPU SELF-PACED LEARNING MODULE: TECHNOLOGY FOR TEACHING AND LEARNING