Overview of Public Fiscal Administration

1. Overview of Public Fiscal Administration Reported by John C.T. Ko July 1st, 2005

2. Outline of the Presentation • 1. Definition of Public Fiscal Adm. • 2. The Analytical Framework • 3. Developing Country Perspective • 4. Coverage

3. Definitions • What is Public Fiscal Administration? • Public fiscal administration generally refers to the formulation, implementation & evaluation of policies & decisions on : • taxation & revenue administration; • resource allocation, budgeting & public expenditure; • public borrowing & debt management; • accounting & auditing. 

4. Differences of PFA between LDCs and DCs • Goals & Objectives– Development is the ultimate goal for LDCs; • Social-Economic relationship– Levels of economic development, historical experience, the scars & traumas of colonization, & politico-economic relationships maintained by LDCs.

5. 2. The Analytical Framework The “Mixed” Economy Free Enterprise Centrally Planned Economies Mixed Economy

6. 3. The Developing Country Perspective Development strategies which worked for industrialized countries may not necessarily transplant to LDCs. Successful fiscal policies in industrialized countries could result in disaster in LDCs.

7. Philippine Case The trend of fiscal policies Deficit financing Expanded expenditures for large-scale projects Traditional “balanced Budget” Increased public borrowings Aggressive taxation & revenue adm.

8. 4. Coverage • Major activities in public fiscal administration: • Fiscal policy formulation; • Taxation and revenue administration; • Budgeting and expenditure; • Public borrowings and debt management; • Accounting and auditing.

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10. The Development of Public Finance Institutions Reported by John C.T. Ko July 8, 2005

11. Outline of the Presentation • Introduction • The Breakdown of Feudalism • Capitalism • The Crisis of Capitalism • The Marxist Challenge • Impact of Western Public Finance • Institutions

12. I. Introduction • Early Public Finance • Ancient Finance: The Slave Societies • Medieval Public Finance: Feudalism

13. Stages of Development of Western Society Primitive Societies Slave States Feudal Systems Capitalist Capitalist Socialist

14. Objectives of Public Finance • The beginnings of public finance started from the creation of the states which were created to protect the welfare of man. • The state was composed of: the government, the people, territory, and sovereignty. • Public finance was supposed to finance the activities of government.

15. A. Ancient Finance The Slave Societies 1. Expenditures; 2. Revenues; 3. Budgeting; 4. Borrowings; 5. Auditing.

16. A. Ancient Finance The Slave Societies • Expenditures on: • Defense and aggression against outside; • Internal peace and order; • Maintenance of a state religion; • Maintenance of the king & his household; • Public works (tombs- pyramids, Taj Mahal); • Miscellaneous: goods distribution, education..

17. A. Ancient Finance The Slave Societies • Revenues from: • Lootings and tributes from conquered peoples; • War chests (money); • Fines; • Direct taxes imposed on non-citizens; • Donations or gifts from wealthy citizens; • Production of agriculture and mines.

18. A. Ancient Finance The Slave Societies • Features of Budgeting: • Budgeting was needed to allocate public revenues for specific purposes or functions. • The public budget was merged with the king’s purse, there was no distinction between the public and the king’s private expenditures.

19. A. Ancient Finance The Slave Societies • Borrowings: • Public borrowings and debt management were unheard of. • The ancient state was almost self-sufficient and public expenditures were borne by the citizens and non-citizens without asking for loans.

20. A. Ancient Finance The Slave Societies • Auditing: • The principle of independent state audit was accepted in ancient Greek states. • The audit was primarily concerned with the maintenance and inspection of financial records. • Ancient audit activities were performed by executive-judicial branch like Ombudsman.

21. A. Ancient Finance The Slave Societies Summary: Public finance in ancient time was still limited in scope and activity. This was because the functions of the slave state were limited to some basic activities only. Especially war expenditures got the lion’s share of state financing. 

22. B. Medieval Public Finance Feudalism (395A.D.-1500) Origin of “Feudalism”: During Middle Ages, the weakening of the monarchy (central authority) resulted in the system of feudalism which had the most significant impact on medieval public finance. What is “Feudalism”: Feudalism was the system of economic relationship based on land tenure among the king, the lords, and the vassals.

23. B. Medieval Public Finance Feudalism (395A.D.-1500) • Features: • Due to rising expenditures of defense & management limitation, the king was forced to grant lands (fiefs) to his nobles in return for revenues (aids or contributions). • This was a diminution of the king’s revenue powers over the whole territory. Government functions & public finance were decentralized. • Public borrowings were quite limited because of uncertain tenure of the king.

24. B. Medieval Public Finance Feudalism (395A.D.-1500) • Summary: • Public finance in Middle Ages: Revenue raising and expenditures were at 2 levels - the king (central government) and the feudal lords. • Economy centered on land: Most taxes were imposed on land-based activities. • Taxation emerged as the major source of public revenue.

25. II. The Breakdown of Feudalism Beginnings of Capitalism • The Rise of Central Government • Beginnings of Capitalism • 1. Mercantilism • 2. Cameralism • 3. Physiocracy

26. A. The Rise of Central Government Post-feudal era (1300-1500) • The growing cost of government forced the post-feudal states to raise more revenues. The return of revenue powers to central government led to the expansion of traditional taxes and the introduction of new taxes. • Most taxes followed old system but with expansion in scope and form. New taxes introduced due to changing conditions, e.g. poll tax, salt tax, window tax, income tax, sales tax, hearth tax etc. • Then, French revolution (1789) provided a relief from the king’s extravagance, feudal system phased out, and adequate national finance system was instituted. Accounting and audit institutions developed.

27. B. Beginnings of Capitalism • Since 15th century, the feudal system was gradually shattered by a rising tide of individualism. • Factories were built, technology advances appeared, trade increased, goods and services expanded. A strong central government forged. • During that time, to make a nation-state strong became economic concerns. Three schools of thought were evolved: - Mercantilism, Cameralism and Physiocracy.

28. B. Beginnings of Capitalism Mercantilism  • What is “Mercantilism”? • Mercantilism refers to those protectionist and monetary policies which European states pursued during 16th to 18th centuries in their efforts “to enrich a great nation by trade and manufactures than by the improvement and cultivation of land.” • Mercantilism has been expanded to embrace all the economic policies of the period between the end of Middle Ages and the emergence of laissez-faire and capitalism.

29. B. Beginnings of Capitalism Mercantilism  • Mercantilism’s Influences on Public Finance • It highlighted the necessity of state intervention in the economy of the mercantilist country. • It expanded the use of fiscal instruments (tax, budget) to guide economic activities towards prosperity. • The concern of the mercantile state to preserve and increase its wealth by active export and corresponding restriction on imports through high tariffs. • It showed the real economic prosperity of a nation laid on development of agriculture and industry, not on acquisition of gold only.

30. B. Beginnings of Capitalism Cameralism • What is “Cameralism”? • Like mercantilism, it was concerned with how to make the State powerful and wealthy. However, unlike the mercantilists who equally emphasized the accumulation of wealth through restrictive trade, cameralists advocated efficient administration and control of economic activities to develop a nation’s resources. • Cameralists encouraged the use of public finance institutions like taxation to create a prosperous economy.

31. B. Beginnings of Capitalism Physiocracy • What is “Physiocracy”? • Physiocrats agreed that the only way to institute a stable system of taxation was to base it on a sector which produced a net profit or surplus. • 2. To ensure the certainty of revenues, they argued all taxes should be abolished and a single direct tax on the land-rent income generated from agricultural production be instituted. • 3. To them, the agricultural surplus was the best foundation for a lasting system of taxation. Agriculture

32. III. Capitalism Public Finance & Free Enterprise Changes Industrial transactions Land-based transactions Capitalist & the worker Feudal lord & the tenant Laissez-faire policy Mercantilist Philosophy

33. Capitalism Public Finance & Free Enterprise 1. Adam Smith 2. David Ricardo 3. John Stuart Mill 4. Adolf Wagner Classical economists

34. 1. Adam Smith (1723-1790) • He was the initiator of “Classical economics”. • He advocated the policy of minimum government control on business activities (laissez-faire). Regulations reduced wealth. • He advised against large scale borrowing and deficit spending. He promoted the idea of a balanced budget. • Government should limit its expenditures; while private sector should provide the needs of society through the market mechanism. 

35. 2. David Ricardo (1772-1823) • He was credited for his theory of distribution of tax burden. • His concepts became one of the bases for the institution of equality and uniformity in modern taxation and the progressive tax structure. • His analysis of public credit led to an expanded view of the use of public borrowings.

36. 3. Adolf Wagner (1835-1917) • He emphasized that the state should eliminate the inequalities of wealth through fiscal measures. • The use of fiscal policies for distributive goals in modern times partly originated from his theory.

37. 4. John Stuart Mill (1806-1873) • A laissez-faire advocate, he contributed to public finance from his correlation of the functions of the state to public expenditures. • He justified government intervention as in public expenditures for the welfare of the state.

38. IV. The Crisis of Capitalism Keynesian Public Finance John Maynard Keynes(1883-1946) • On public finance, he insisted that government could and should intervene the economic activities. He developed the concept of fiscal policy as a tool for correcting imbalances in the economy. • He encouraged deficit financing. Public borrowings could fulfill economic objectives, and stimulate the economic development. • He introduced the concept of government fiscal management within the context of capitalism. • The concept of mixed economies served as basic tool in both industrialized or developing countries.

39. V. The Marxist Challenge Socialist Public Finance • Exploitation of working class • Fierce competition • Giant monopolies • War over markets & resources Negative Phenomena of Capitalism Communism emerged (Karl Marx)

40. Marxism (Karl Marx, 1818-1883) • Labor was the key instrument of productive capacity. • Marx claimed that capitalist exploited the working class by trying to get the largest possible amount of “surplus value”. Thus, conflict engendered between the working and capitalist classes. • The main force of revolution was the working class. He believed that capitalism, as it had succeeded feudalism, would likewise be replaced by a communion system.

41. Basic Features of Socialist Public Finance • The Primacy of Central Planning: Planning plays a crucial role in socialist public finance, while classical capitalist theory relies on market mechanism. Since there is only one sector in socialism –the state sector- so central planning is feasible. That is why socialist economies are named as Centrally Planned Economies. • Minor Role of Taxation in Revenue-Raising: Unlike the mixed economies where taxation accounts for most of government revenue, taxation plays a very minor role in socialist public finance. Revenue of state came mostly from state enterprises. • No Budget Deficits: Socialist countries do not have deficits but have surpluses of revenue over expenditure.

42. VI. The Impact of Public Western Finance Institutions on LDCs • Classical Public Finance • Keynesian Public Finance • Will the LDCs follow the various stages of development of the industrialized Countries?

43. Classical Public Finance on LDCs • Adam Smith’s ideas are still quoted in the LDCs. • Smith’s progressive taxation is enshrined in the Philippine Constitution. • Smith’s views on the balanced budget were upheld in the Philippines until 1972.

44. Keynesian Public Finance on LDCs • John Keynes had the most impact on public finance practices of LDCs. Keynesian economics was widely accepted when LDCs regained their independence. • Keynes’ view that government should play a dominant role in running economy was reechoed by LDC fiscal policy makers. • His concepts of deficit financing & borrowing gave standpoint to the need of borrowing & budget unbalance towards “development”.

45. Will the LDCs follow the various stages of development of the industrialized countries? The answer to the question is . Why? • The financial system of the industrialized countries was for their own benefit, not for LDCs. • The industrialized countries are the beneficiaries of colonialism, the LDCs are their victims. • The Philippines as example, after 400 years of rule by Spain, four decades by the U.S. and five years by Japan, Philippine vast resources and wealth were transferred to the colonizing country. Such transfer was facilitated by colonial finance.

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