PUBLIC FINANCE Ms.

Elizabeth Agol-Proel,
LECTURE NOTES SERIES 2 CPA

PUBLIC REVENUE
 is one of the branches of public finance.
 It deals with the various sources from which the state might derive it income.
 2 MAJOR SOURCES OF GOVERNMENT REVENUES
 TAX REVENUES
 compulsory contribution mandated by law and enacted by government.
 Tax collections 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.
o What do you mean by GDP?
o GDP stands for "Gross Domestic Product"
o GDP represents the total monetary value of all final goods and services produced (and
sold on the market) within a country during a period of time.
o GDP is the most common measure for the size of an economy
o GDP measures of national income and output for a given country's economy.
o GDP is a measure used to evaluate the health of a country's economy.
o GDP is used throughout the world as the main measure of output and economic activity.
o
 . NON-TAX REVENUES
 collection of government in exchange for services rendered, assets conveyed, penalties imposed
etc.

TAX REVENUES
 are composed by direct tax and indirect tax
 Direct Taxes: A tax is said to be direct, if the tax payer bears the burden of the tax. He cannot shift the
burden to any other person.
 Example – Income tax, gift tax, RPT, CGT.
 Indirect Taxes: Indirect tax is shifted by the payer to others.
 If sales tax is imposed on sugar, the producer or dealer who pays it passes it on to the next buyer
and ultimately the burden is born by the consumer.
 Example-Sales tax (vat, pt, excise tax), import export duties
 Major Classes of Tax Revenues
 Taxes on Income and Profits
 Taxes on Property
 Taxes on Domestic Goods and services
 Taxes on International trade and tansactions
 Other sources
 Major Tax Revenues
1) Property taxes – levied on the use or ownership of immovable property
2) Income taxes – imposed on incomes of individuals, corporations, partnerships and all fines and penalties
3) Amnesty taxes – imposed by special laws as in the series of PDs on delinquent taxpayers.
4) Estate taxes – a tax on the privilege of the decedent to transfer property upon is death.
5) Gift taxes – in the form of donor’s tax.
6) Community tax – a poll tax charged from individuals, partnerships and corporations.
7) Excise taxes – all the taxes and fees covering imports and exports.
8) License and business taxes – include privilege taxes, percentage tax, professional tax and similar taxes.
9) Import duties – cover all taxes on foreign goods levied in accordance with tariff laws and regulations
except wharfage.
10) Documentary stamps taxes – levied upon documents, instruments, papers, acceptances, etc.
11) Charges on forest products – imposed on timber and firewood cut in public forest or from private lands
and on other forest products.
12) Wharfage fees – charges to wharfage relative to trade.
13) Franchise taxes – imposed for any special right or privilege granted by the government.
14) Import tax – levied on imported materials to control their entry into the local market.
15) Other taxes – all taxes not mentioned.

NON-TAX REVENUES
 Non-tax revenue makes up a small percentage of total government revenue (roughly less than 20%),

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someone, feel; Before you speak, think! Page 1
 PUBLIC FINANCE Ms. Elizabeth Agol-Proel,
LECTURE NOTES SERIES 2 CPA

 NON-TAX REVENUES SOURCES

1) Administrative Revenue
 Fees - is not a voluntary payment it is a compulsory payment.
 Special Assessments – specific tax levied on properties or businesses
 Fines and Penalties - - punishment imposed for infringement of law.
 Forfeitures - refers to the penalty imposed by courts for the failure of individuals to appear in the
court.
 Escheats - are the claims of the government to the property of a person who dies without having
any legal heirs or without keeping a will.

 In such situations all the property of the person including bank balance and other
properties pass to the government.
2) Commercial Revenues
 The income earned by these public sector enterprises by selling the goods to the citizens
3) Other Revenues
 Gifts, Grants and Donations
 Government earns income in the form of gifts, grants and donations offered to it by the:
o citizens,
o institutions
o foreign governments and
o international institutions for different purposes
 For example grants by the international monetary institutions for rehabilitation work
during the natural calamities

 Government properties
 Government earns income from public property like land, Buildings, mines, forests,
fisheries etc.

 Public borrowings
 Public authorities can borrow from various sources both internally and externally
 These sources include borrowings from its citizen, foreign government, commercial
banks, central bank of the Philippines, international Monetary institutions like IMF, IBRD,
World Bank ADB etc.,
 These borrowings to be repaid in the future.

 Tributes and Indemnities

 The governments gets extraordinary revenue in the form of tributes and indemnities
 Foreign countries pay tributes

 Recovery of loans
 Miscellaneous Sources or other taxes
 Other taxes are motor vehicle tax, immigration tax, forest charges

ROLE OF PF IN A DEVELOPING ECONOMY

 To increase the rate of Capital Formation
 To increase the rate of economic growth
 To Achieve optimum utilization of resources
 To increase the rate of Capital Formation
 To increase the rate of economic growth
 To Achieve optimum utilization of resources

PUBLIC FINANCE CYCLE

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 PUBLIC FINANCE Ms. Elizabeth Agol-Proel,
LECTURE NOTES SERIES 2 CPA

 FORMULATION OF FISCAL POLICY

 Fiscal Policy refers to decisions on taxation, and other revenue, expenditure, and borrowing to
stabilize the economy, specifically by manipulating levels and allocations of taxes and government
expenditures.
 Fiscal Measures are frequently used in tandem with monetary policy to achieve goals
 Fiscal and monerary policy have been crafted in response to requirements of stabilization.
 Monetary policy is generally, understood to be that which influences the level of money supply in
the economy.

2.) GENERATION OF REVENUE

 Revenues- all cash inflows to the national government treasury.

 TAX- compulsory contribution mandated by law and enacted by government.
 NON-TAX- collection of government in exchange for services rendered, assets conveyed, penalties
imposed etc.

3.) EXPENDITURE OF FUNDS THRU BUDGET PROCESS

 Budget is an Estimate expenditures for the government operation and the proposed means of budgeting
them


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 PUBLIC FINANCE Ms. Elizabeth Agol-Proel,
LECTURE NOTES SERIES 2 CPA

4.) PUBLIC BORROWINGS

 is a source of public finance which carries with it the obligation of repayment to the individuals, along with
interest, from whom the debt was raised.
 Borrowing of funds obtained from repayable sources such as loans from financial institutions and other sources
(domestic or foreign), to finance various government projects and activities.
 The government borrows from any of the following reasons:
o to finance national government deficits;
o To obtain foreign exchange;
o Tp secure financing at more favourable terms than the opportunity cost of revenues;
o To take advantage of benefits attached to the funds, e.g. technology;

Role of the Government

 Promotion of human capital accumulation
 Provision of essential public goods
 Decentralization
 Facilitating and regulating the private sector for promoting industries, financial institutions, and building
infrastructures.
 Protections of individual liberties
 Private rights to land and capital
 Good courts and legal systems
 Representative political systems

5.) ACCOUNTABILITY

 Accountability is defined as a condition in which individuals who exercise power are constrained by external
means and by internal norms.
 Who are accountable?
 What are the types of accountability?
 Elected officials are politically accountable to the electorate or their constituencies who voted for them
 TYPES OF ACCOUNTABILITY

I. INDIVIDUAL ACCOUNTABILITY
- public employees are answerable for responsible, efficient and effective performance of their
tasks.

II. ACCOUNTABILITY OF ADMINISTRATORS

- for their stewardship of the administrative authority, resources and information placed at their
disposal as leaders of public organization.

III. POLITICAL ACCOUNTABILITY

– of institutions that must answer for their organizational mandate and functions, as they form part of the
incumbent government strategy for national development.

IV. ACCOUNTABILITY OF NATIONAL LEADERS

- elected national leadership must answer for the performance in pursuing their programs of gov’t and
their use of national resources given the authority, power and resources vested in them.

FUNCTIONS OF PUBLIC FINANCE

1. Economic activities of the state

 TRADITIONAL FUNCTIONS:
a) Provision for:
i) defense,
ii) law and order
iii) justice
iv) civic amenities

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 PUBLIC FINANCE Ms. Elizabeth Agol-Proel,
LECTURE NOTES SERIES 2 CPA

 CURRENT BROAD FUNCTIONS:

a) Use of Budget as a tool:

- to create employment
- to prevent market failure
- to achieve growth equity
- to maximize social welfare

2. Functional Finance

 Gov’t should maintain a reasonable level of aggregate demand at all times by using the BUDGET.
 Developed economies followed functional finance POLICIES to control trade cycles.
 Developing countries followed functional finance POLICIES to promote economic growth.

3. Fiscal operations

 Refer to raising public revenue

 Spending to achieve goals
 Financial administration

OBJECTIVES OF FISCAL OPERATION

1) Allocation of Resources

 The public budget determines the allocation of funds to various activities under different heads of
expenditures.
 The efficient allocation of available resources should be done for economic and social development.
 The allocation depends upon the collection of revenue and composition and size of government
expenditure.
 Through budgetary operations, the government ensures provision of public goods
o provision of public goods (such as maintenance of aw and order, defense, roads, transport, other
infrastructures, etc.
 According to Richard Musgrave, the government should not interfere where market forces work well,
but if market mechanism fails then, to secure a better and efficient allocation of resources, the
government has to intervene to provide public goods to satisfy social wants.

2) Distribution

 The government aim at fair distribution of the nation’s resources among the citizens.
 By imposing progressive taxes on income.
 lower income groups are exempted or subject to lower tax rates.
 Higher income groups are subjected to higher tax rates.
o What doctrine in tax that this is applicable? – Ability to pay principle

 Progressive direct taxes help to reduce income inequalities.

o how it reduce income inequalities?

 It also brings about social and economic justice.

o How it brings social and economic justice?
o Through subsidies given by government on food, family welfare, health and education
o In-order to confer large benefits to the poorer citizens.

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someone, feel; Before you speak, think! Page 5
 PUBLIC FINANCE Ms. Elizabeth Agol-Proel,
LECTURE NOTES SERIES 2 CPA

3) Stabilization

 The Philippines experience business cycles of booms and recession.

 Thus there is a need to bring stability in economic growth, specially during the times of recession.
 what happens when there is recession?
o Recession – is turmoil in financial markets.
o Economy stopped.
o There is inflation
o Price of oil and gasoline rose.
 what happens during recession?
o Economy is in the brink of death.
o Effects: unemployment; financial market unstable, housing sector collapse.
 Causes of recession:
o higher interest ratesl
o non-routine events like Russia-Ukraine war – inflation
o Natural disasters
o Pandemics
 To counter recession and depression, government expenditure is increased:
o to generate employment
o to encourage consumption and investment, taxes are reduced.

4) Economic growth

 To achieve growth and development, the focus of fiscal operations is the use of budgetary operations.
 How?
o By encouraging capital formation (thru capital markets transactions)
o By investments through public expenditures
o By giving tax encentives to private sectors.
 If there is tax incentives, private business will inject capital thru business establishments.
If there is a new establish business, it will generate employment and if there is
employment generation, other economic growths will have a domino effect. rents, more
consumptions and money in circulation
 The overall effect is economic growth.

SIMILARITIES BETWEEN PUBLIC FINANCE

& PRIVATE FINANCE

FEATURES PUBLIC and PRIVATE FINANCE

1. OBJECTIVE Satisfaction of human wants
2. PRINCIPLES Principle of maximum benefits and satisfaction while spending the income.
3. INCOME Limited

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 PUBLIC FINANCE Ms. Elizabeth Agol-Proel,
LECTURE NOTES SERIES 2 CPA

4. BORROWING In case of shortage

5. EXPENDITURE From borrowings under obligation to pay.
6. ADMINISTRATION Efficient administrative machinery to avoid losses.
7. POLICIES To maximize welfare and benefits
DIFFERENCES BETWEEN PUBLIC FINANCE
& PRIVATE FINANCE

POINT OF DIFFERENCE PUBLIC FINANCE PRIVATE FINANCE

1.MAGNITUDE Large amount of resources resulting to Smaller amount of resources resulting to
large budgets. smaller budgets
2. PUBLIC SCRUTINY Budgets are transparent to the people. Budgets are private and for businesses, are
transparent to stockholders
3. SOURCE OF REVENUE - Taxes and non-tax revenues. - Assets owned by individual or company.
- There is an element of compulsion - No element of compulsion.
4.SOURCE OF BORROWING Internal and External sources almost on a Formal and informal sources as long as
continuous basis. good creditor.
5.MOTIVE Based on common social objectives - Profit
- Satisfaction of wants
6.TIME DIMENSION Focused on immediate objectives and Focused on present and immediate wants
future goals
7. INCOME EXPENDITURE Adjust income to expenditure Adjust expenditure to income
ADJUSTMENT
8. ASSESSMENT OF Measured and evaluated in terms of Easier to measure and evaluate outcome
OUTCOMES multiple parameters.
9. NATURE OF BUDGET Deficit budgets in developing and third - Surplus budget
world countries - Economically prudent

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