Public Finance Part 2: Budgeting Process and Taxation Lesson Outcomes For this lesson, you will learn the importance of government budgeting and taxation. Budgeting ensures the efficient allocation of public funds to various programs and projects of the government. Taxation, as the life-blood of-the government, ensures the sufficiency of revenues necessary to defray the costs of operating the government and the effective delivery of services to the public. Lesson Objectives At the end of the lesson, the learners should be able to: a. _ explain the nature of government budgeting; b. _ identify the phases of the budgeting process; cc, _ define appropriation, allotment and obligation; d. _ identify the principles of sound fiscal operations; e. define taxation; f. differentiate the power of taxation from the police power g. _ and the power of eminent domain; h. identify the principles of a sound tax system; and i. enumerate the classification of taxes. Government Budgeting Implementing government plans, programs, and projects to benefit the public requires government spending. The actual spending or disbursement of government funds should be carried out economically and efficiently. To achieve this, government spending should be done within the authorized budget amounts. This is where the function of government budgeting comes in. Therefore, government agencies and instrumentalities may disburse funds only within their approved budgets. Jourtens teson2-Pusic inaneicial task that involves the strategic allocation of the economic, developmental, and societal ‘es the efficient management of government nomic impact from the production Government budgeting is a cru revenues and borrowed funds to achieve objectives of the country. It also encompass expenditures in order to generate the maximum eco and delivery of public services while ensuring fiscal sustainability. lies in its ability he governments to implement various ans of budgetary policies, and ‘onomic The significance of government budgeting y to facilitate financial planning and resource management by enabling t programs and projects that effectively foster national development. By mes measures and financial limits, governments can prioritize their plans, programs within the confines of their financial capacity as dictated by prevailing ec conditions. Steps in the Government Budgeting Process The government budgeting involves four phases, namely: * budget preparation; * budget authorization; * budget execution; and * accountability. THE NATIONAL BUDGET CYCLE a & -*@' While distinctly separate, these phases in the government budgeting proc: overlap in the implementation during a budget year. Budget preparation ae ess may budget may already commence at a time when government agencies are i scald the budget for the current year. Within the same time frame, budget acc cee review of past year's budget and actual implementation are also being dors uprila 1, Budget Preparation The preparation of the annual bud; ; aston ols get involves a series of st as ba the identification of the (1) national economic targets, ain ee ore iture levels, and (3) revenue projections and the financing i eit evelopment Budget Coordinating Committee (DBCC). laine dd 174 Special Topics in Financial ManagementSpecifically, the major activities involved in the preparation of the annual national budget include the following: @. Determination of overall economic targets, expenditure levels, and budget framework b. Issuance of the executive branch, through DMB, of the Budget Call which defines the budget framework which: * sets the economic and fiscal targets; * prescribes the priority thrusts and budget levels; * spells out the guidelines and procedures; and * timetable for budget preparation c. _ Preparation by various government agencies of their detailed budget estimates ranking programs, projects, and activities using the capital budgeting approach and submission of the same to DBM d. Conduct of budget hearings were government agencies are called to. justify their proposed budgets before DBM technical panels e. Submission of the proposed expenditure program of departme! and agencies for confirmation by department/agency heads f Presentation of the proposed budget levels of departments and nts agencies for approval g. _ Review and approval of the proposed budget by the President h. Submission by the President of the proposed budget to Congress The President submits the proposed budget to Congress as captured in the following documents: © Budget of Expenditures and Sources of Financing (BESF) * National Expenditure Program (NEP) containing the details of the proposed expenditures « President’s Budget Message, summarizing the budget policy thrusts and priorities for the upcoming year To meet the Constitutional requirement for the submission of the President's budget within 30 days from the opening of each regular session of Congress, the budget preparation phase is guided by a budget calendar. This submission of the proposed annual budget becomes the basis of the General Appropriation Bill which encompasses a budget of expenditures, sources of financing and receipts from existing and proposed revenue measures. Public Finance Part 2: Budgeting Process and Taxation 175, — | ere2. Budget Authorization he legislative enactment of the horization involves obtaining t Itis in this phase of the Peay disburse government funds ‘omes a law. This is eee mone ihe General Appropriation Bill bec: oney shall be paid noun os sopropration The consittion provides that “Nom now ; riation by law.” nce of an approp! ‘out of the treasury except in pursuance of tion made by law or legislative a Appropriation refers to an a ord services from government ment of g00 enactment directing the pay! funds under specified conditions. he General Act (GAA) is the legis! horization that lative authorizatior (GAA) is the legi | Appropriations " eae contains the new appropriations in terms of specific amounts for salaries, wages ting expenses; and other personnel benefits; maintenance and ee cee eae and capital outlays authorized to be spent for the imp! era programs/projects and activities of all departments, bureaus, government for a given fiscal year. The appropriation bill presents the proposals of ete alley appropriations in the coming year. Budget hearings and brie ned conser by the heads of government agencies explaining to Congress the justifications of their respective proposed budgets. sident for new In particular, the following procedures are conducted: * In accordance with the requirements of the Constitution, the President submits his or her proposed annual budget in the form of Budget of Expenditure and Sources of Financing (BESF) supported by details of Proposed expenditures in the form of a National Expenditure Program (NEP) alongside the President’s Budget Message. The budget message summarizes the budget policy thrusts and priorities for the year. . in Congress, the proposed budget goes firsttothe House of Representatives, which assigns the task of initial budget review to its Appropriation Committee. The Appropriation Committee together with the other House Sub-Committee conduct hearings on the budgets of departments/ agencies and scrutinize their respective Programs/projects, * — Consequently, the amended budget proposal is Presented to the House body as the General Appropriations Bill. While budget hearings are 176 Special Topics in Financial Management‘ongoing in the House of Representatives, the Senate Finance Committee, through its different subcommittees also starts to conduct its own review and scrutiny of the proposed budget and proposes amendments to the House Budget Bill to the Senate body for approval * To thresh out differences and arrive at a common version of the General Appropriations Bill, the House, and the Senate create a Bicameral Conference Committee that finalizes the General Appropriations Bill. 3. Budget implementation Budget implementation starts with the release of funds to the government agencies. The release of funds to the various government agencies jump-starts the operational phase of the budget process. To accelerate the implementation of government programs and projects and ensure the judicious use of budgeted government funds, the government adopted a simplified fund release system. The agency budget matrix (ABM) is prepared by the DBM in consultation with the agencies at the beginning of each budget year, upon approval of the annual General Appropriations Act. The ABM is a disaggregation of all the programmed appropriations for each agency into various expenditure categories. As such, the ABM serves as a blueprint which provides the basis for determining the timing, composition and magnitude of the release of the budget. In this phase of the budget process, allotments to the various government agencies are given. Allotment is an authorization issued by the DBM to 2 government agency which allows it to incur obligations for specified amounts within the legislative appropriation. Based on updated resources and economic development thrusts and consistent with the cash budget program, the Allotment Release Program (ARP) which prescribes the guidelines in the prioritization of fund releases is prepared. The ARP serves as basis for the issuance of either a General Allotment Release Order (GARO) or a Special Allotment Release Order (SARO), as the case maybe, to authorize agencies to incur obligations. Subsequently, the DBM releases the Notice of Cash Allocation (NCA) on a monthly or quarterly basis. The Notice of Cash Allocation (NCA) is an authorization issued by the DBM to government agencies to withdraw cash from the National Treasury through the issuance of checks or other authorized mode of disbursements. The NCA specifies the maximum amount of withdrawal that an agency can make from a government bank for the period indicated. The Bureau of the Treasury (BTr) replenishes the government servicing banks with funds equivalent to the amount of negotiated checks presented to the government servicing banks by implementing agencies. . owarrens teson2 pute Frarce Part Buen Process an Taaon 177The release of NCAs is based on: ies as indicated in their ABMs, i irements of agenci 1. the financial requireme Thee mse cash plans, and reports such as the (SLCI); and 2. the cash budget program of government and updates on projected resources. a maximum flexibility in the use of their cash allocations The agencies are given , : : not exceeded. Project provided that the authorized allotment for a specific purpose is implementation is thus made faster. To simplify the procedures in the incurrence of government obligations and the recording of budgetary accounts, allotments and obligations are used. Obligation refers to the commitment by a government agency arising from an act of a duly authorized official which binds the government to the immediate or eventual Payment of a sum of money. Adjustments to the budget Incidentally, adjustments may be made to the approved budget even during implementation primarily because of the following: Enactment of new laws - Within the fiscal year, new legislations with corresponding identified new revenue sources are passed which necessitate adjustments in the budget program. Adjustments in macroeconomic parameters — The macroeconomic targets considered in the budget are periodically reviewed and updated to reflect the impact of recent developments in the projected performance of the national economy and on the set fiscal program for the year. The relevant indicators affecting the budget aggregates include the following: the gross national product (GNP), inflation rate, interest rate, foreign exchange rate, oil prices, and the level of imports. Thus, a sensitivity measure on the impact of these parameters on the budget will determine whether recent macroeconomic developments have a negative or favorable effect on the budget. © Change in resource availability — Budget adjustments are undertaken when additional resources become available such as new grants, proceeds from newly negotiated loans and grants. Corresponding budget adjustments are also made when resources generation falls below the targets. 4. Accountability The last phase of the budget process serves as the mechanism that ensures the effective and efficient spending of government funds. Accountability focuses on the (1) tracking of the actual expenditures made, (2) monitoring and evaluation, and (3) independent audits of the actual spending and use of government assets. zThe tracking of expenditures is done through the periodic recording, accounting, and reporting by the government agencies of their actual spending and use of resources. This is captured in the periodic financial statements of the respective government agencies. Monitoring is done through a periodic review ‘of the accomplishments and outputs of the various government agencies relative to amounts utilized. At the agency level, budget accountability takes the form of management's review of actual performance or work accomplishment in relation to the work targets of the agency vis-a-vis the financial resources made available. Detailed examinations of each agency's book of accounts are undertaken by a resident auditor of the Commission on Audit (COA) to ensure that all funds have been disbursed in accordance with accounting regulations and the purpose for which the funds have been authorized. Fundamental principles for revenue All revenues accruing to the national government shall be governed by the following fundamental psrinciples: Unless otherwise specifically provided by law, ail revenues accruing to an entity by virtue of the provisions of existing law, orders, and regulations shall be deposited/remitted in the National Treasury or in any duly authorized government depository, and shall accrue to the General Fund (GF) of the national government. Except as may otherwise be specifically provided by law or competent authority, all monies and property officially received by a public officer in any capacity or upon any occasion must be accounted for as government funds and government property. Receipts shall be recorded as revenue of Special, Fiduciary or Trust Funds or Funds other than the General Fund, only when authorized by law as implemented by rules and regulations. No payment of any nature shall be received by a collecting officer without immediately issuing an official receipt in acknowledgement thereof. At no instance shall temporary receipts be issued to acknowledge the receipt of public funds. Prenumbered official receipts shall be issued in strict numerical sequence. ‘At no instance should money in the hands of the CO be utilized for the purpose of cashing private checks. Under such rules and regulations as the COA and the Department of Finance may prescribe, the Treasurer of the Philippines shall acknowledge receipt of all funds received by them, the acknowledgment bearing the date of actual remittance or deposit and indicating from whom and on what account it was received. PHP TERE Leon 2-ruvicrnance Part 2 Budgeting Proce and Taxaton 179Fundamental principles for {und disbursement® shall be governey ity ment enti The financial transactions and operations of any gover by the following fundamental principles reasury oF depository exe jn fic statutory authority, d solely for public Purposes, he specific purpose for @. No money shall be paid out of any public t Pursuance of an appropriation law or ather spec! b. Government funds or property shall be spent oF US€ Trust funds shall be available and may be spent only for # which the trust was created or the funds received. sarod by all th 4d. Fiscal responsibility shall, to the greatest extent, be sh a se exercising authority over the financial affairs, transactions, and OPErations of the government agency, e. Disbursement or aibbanich of government funds or property shall invariably bear the approval of the proper officials. f. Claims against government funds shall be Suppo’ documentation. &. All laws and regulations applicable to financial transactions shall be faithfully adhered to. h. Generally accepted principles and practices of accounting as well as of sound management and fiscal administration shall be observed, provided that they do rted with complete not contravene existing laws and regulations. Basic Concepts of Taxation The power of taxation Taxation is the inherent power of the state to impose a levy or charge upon persons, Properties, rights, for the purpose of raising revenues to defray governmental expenditures, and to enable the discharge of governmental functions. Since taxation is an inherent power of the state, there is no need for the constitution to expressly provide that the state .can tax its people. The power to tax already exists from the moment a state is born. This is because no government can operate without funds and, corollary, these government funds are obtained through the collection of taxes. This is the lifeblood doctrine of taxation. In essence, taxation is a legislative power. It falls upon ‘Congress to enact tax laws that imposes the levy or tax upon persons, properties, and rights. As such, the executive branch of the government cannot increase tax rates. Instead, it is the executive branch of 180 Special Topics in Financial Managementthe government that implements tax laws Jaws and, in particular, the collection internal Revenue. Other state powers Aside from the power Of taxation, the state i: ao , also ex i namely: police power and the power of nn deere two other inherent powers, Police power is the stat . sible PONV RSGRR Gh aa Power that is exercised in order to promote public order, power is when the uh ety, morals, and the general welfare. An example of police ee Se a ernment requires testing and approval of a new medicine prior to eh no ler to ensure its safe use. Another example of the exercise of police pow e regulation of professionals and businesses. The ea cee a domain is the power of the state that involves taking of prvate Pe : y to be used for a public purpose upon payment of just compensation. An exampl ; o i is is when the state expropriates the property of a private individual when national welfare necessitates it such as when a road needs to be constructed on a parcel of land. In this case, the government should pay the monetary equivalent of the property taken (just compensation). Similarities between the three state powers The power of taxation, police power, and power of eminent domain have the following similarities: 1. They are all inherent powers of the state and, as such, the state can exercise them even without expressly granted in the constitution. 2. They are all necessary attributes of the state because no effective and efficient government will exist without them. 3. In the exercise of the three state powers, the state interferes with rights and properties of private individuals. 4. The three state powers are legislative in nature and character. 5, The three state powers presuppose an equivalent compensation or benefit. Differences between the three state powers Taxation and eminent domain ation is imposed on all persons, properties, or rights covered by the The power of tai g ‘exercised only on a particular owner of the tax, whereas the power of eminent domain is property being taken. Through the power of taxation, exercising the power of eminent domain, there is payment of money by the taxpayer. In there is taking of private property by the state. 2- Public Finance Port 2: Budgeting Process and Taxation 181 Jouritta semIn taxation, the taxpayer is presumed to receive a benefit from the government. This is known as the benefits-received principle, On the other hand, the private owner received Just compensation from the government. Taxation and police power Taxation is exercised for the purpose of raising government revenues, while pote Power is exercised for the purpose of regulation. For instance, a license fee collected from a private individual to operate a certain business is an exercise of police power. In taxation, there is no limit on the amount of tax that may be imposed. For instance, output value-added tax (VAT) is 12% of sales, There is no maximum limit nor a ceiling on the amount of the output VAT because it depends on the amount of sales. On the other hand, the amount of the license fee is simply enough to cover the cost of regulation. Limitations on taxing power Despite the fact that taxation power is supreme, it is not absolute. The power to tax is subject to inherent and constitutional limitations. Inherent limitations are restrictions intended to ensure that taxation power will only be used for public purposes and that no one is to be personally enriched through it. The following are the inherent limitations on taxing power: 1. Taxes are to be collected only for public purposes. 2. The power to tax cannot be delegated by the legislature. 3. The imposition of a tax is limited to the territorial jurisdiction of the imposing state. 4. Tax laws cannot be imposed on the properties of coequal foreign states {international comity). 5. Government entities and political subdivisions are exempt from taxation in the absence of a clear proof of a contrary intent in the law. Provisions regarding taxation in the constitution are not grants of power but are merely limitations on taxing power. These limitations in the constitution on the power to tax are called constitutional limitations, The following are the constitutional limitations on taxing power: 1.._ No person shall be deprived of life, liberty, or property without due process of law. 2. The rule of taxation shall be uniform and equitable. 3. No law impairing the obligation of contracts shall be passed. 182 Special Topics in Financial Management4. No person shall be imprisoned for debt or the nonpayment of a poll tax. 5. No i law granting any tax exemption shall be passed without the concurrence of a majority of all the members of Congress. 6. Chara institutions, churches, parsonages, or convents appurtenant thereto, ve and nonprofit cemeteries and all lands, building and improvements ally, directly and exclusively used for religious, charitable, or educational Purposes shall be exempt from taxation. Essential Characteristics of a tax The following are characteristics of a valid tax It is a forced contribution. It is exacted pursuant to legislative authority in exercise of the taxing power. It is proportionate in character. It is payable in money. It is imposed for the purpose of raising revenue. It is to be used for a public purpose. m=paogse Basic principles of a sound tax system 1. Fiscal adequacy — The sources of revenues of the government must be sufficient or adequate to cover the cost of performing governmental functions. Fiscal adequacy refers to the ability of the sources of revenues to genet sufficient funds to meet the ever-growing expenditures of the government. It is jal for the government to have a well-balanced revenue system that can cover any shortfall or deficit. rate essenti all its financial obligations and commitments without The sources of revenues could include taxes, tariffs, fees, fines, grants, loans, and other forms of income generated by the government. Hence, achieving fiscal adequacy requires careful planning and management of public finances to ensure that there is always enough money available to support the various programs and services provided by the government. theoretical justice ~ Taxes to be collected must be based on the taxpayer's ability to pay. ce in taxation revolves around the principle of The concept of theoretical justi collecting taxes based on the taxpayer's ability to pay. This principle is also known as the “ability to pay” principle of taxation. This means that taxpayers who have a higher income or greater financial resources should be required to contribute a larger portion of their income toward taxes, while those with lower incomes should not be burdened with an unfairly large tax bill. This approach ensures that the tax system is fair and equitable, and that everyone contributes their fair share toward supporting the delivery of public services. Jesartetsteson2 Puricrirane port 2 Budgeting Process and Taxation 183Administrative feasibility - This principle of a sound tax system is Leen Pita efficiency of the processes involved in the assessment and collection of bes ae making it conducive and convenient on the part of taxpayers to pay the its, ln short, tax processes and procedures should not unduly be burdensome to taxpayers, There must be a convenient ways and means for collecting ea = taxpaying public. Taxpayers now pay their taxes through the Electronic Filing be Payments System (eFPS), which is an online platform of the BIR where naan filed and paid. More recently, the President signed Republic Act 11976, otherwise known as the Ease of Paying Taxes Act. Classification of Taxes 184 Taxes are categorized as follows: 1. _ Asto the object being taxed Using this category, taxes are classified into personal or poll tax, property tax, and excise tax. Personal or poll tax is a tax imposed on a person, natural or juridical person such as a corporation, without regard to their property or ‘occupation. The best example of a personal tax is the community tax which is also popularly known as cedula. On the other hand a property tax is a tax imposed on properties such as land, building, and improvements, the amount of which is proportionate to the value of the asset being taxed. An example of this is the real property being paid annually to local government units which is more popularly known as amilyar. Lastly, excise tax is a tax imposed upon the performance of an act, the enjoyment of a privilege such as operating a business or engaging in a professional work. Examples of excise taxes are the income tax and the value- added tax on sales of goods. 2. _Asto the person who shoulders the tax 3. Direct tax is a tax collected from the person to whom the law imposes the charge. In short, the one who is liable for the tax is the one who should shoulder it. An example of this is the income tax, which is generally collected from the person who earned the income. Indirect tax is a tax in which the payment may be shifted by the taxpayer to another person. An example of indirect tax is the value-added tax (VAT). VAT is shifted to consumers by adding it to the selling price. As to scope As to scope, a national tax is a tax imposed by the national government. Examples of national taxes are the income tax and VAT. On the other hand, a local tax is a tax imposed by local government units (LGUs). Examples of local taxes are real property taxes and community tax being imposed by LGUs. ‘Special Topics in Financial ManagementAs to proportionality As to proportionality of the amount, a tax may either be a progressive (2% regressive tax, or a proportional tax. A progressive tax is a kind of tax in which the increase in the tax rate to be imposed is proportionate to the increase In the tax base. For instance, there is bracketed income tax rates on compensation income of individuals. In simple terms, the higher the compensation income, the higher will be the tax rate. In contrast, a regressive tax is one in which higher tax rates are imposed as the tax base decreases, At present, there is no regressive tax in the Philippines because the constitution provides that the state shall implement a progressive system of taxation. Lastly, a proportional tax is a kind of tax computed as a fixed percentage of the tax base. Tax bases may be the amount of sales, value of real property, among others. An example of this is the VAT which is computed at 12% of the amount of the sales or purchase. As to the purpose of the tax Ageneral tax is one that may be used to defray the cost of various programs and projects of the government. In short, it can be used for different purposes. On the other hand, a special tax is a tax that can be utilized for a specific purpose only, An example of a special tax is the 1% special education fund being collected by LGUs. This is allotted for use to funding the public schools in the local government unit. As to the determination of the amount of the tax A specific tax is a tax imposed based on a specific quantity or some other standard of weight or measurement. Generally, a specific tax requires no assessment of an amount. It simply requires a listing of the objects to be taxed. An example of a specific tax is the the excise tax on gasoline which is determined on a per liter basis. ‘An ad valorem tax is a tax which is computed based on the value of the item being taxed. For instance, VAT that is computed at 12% of the amount of the selling price of a product is an ad valorem tax. Joartens_esson2 Pubic inaee Pare2 Budgeting Process and Taxation 185Relevance of the Lesson Knowledge of the government budgeting process and its phases is important because you might work for a government agency such as the DBM or BIR in the future. You need to understand the constitutional requirement that all disbursements of public funds must be supported by an appropriation. You also need to know concepts such as allotments, | carrer 3 Lesson 2 Public Finance Part 2: Budgeting Process and Taxation 189i future. cash allocations, and fund utilization. Finally, you might work for the ee ee As such, you need to have an initial understanding of government budgeting pr alongside the basic principles of surrounding government disbursements. _ Lesson Summary Taxation is the process through which the government collect revenue from taxpayers, individuals, or corporate, to fund public expenditures in order to provide essential services to the public. Taxation is different from the other two state powers, namely the power of eminent domain and police power. The power of eminent domain involves the taking of private property for a public use upon payment of just compensation to the private owner. Police power involves enacting regulations for the promotion and maintenance of public health, public order, public policy, and the general welfare of the citizens. There are many types of taxes. Taxes may be income tax, value-added tax, property tax, or personal tax. After the government revenues are raised and collected, they will be utilized and allocated to the various government programs and projects. To ensure effective and efficient utilization, there needs to be a sound government budgeting system. The phases in government budgeting are budget preparation, budget authorization, budget implementation, and accountability. In budget preparation, the proposed budget will be determined by the executive branch of the government taking into consideration national economic targets, planned expenditure levels, revenue projections, and financing plans. The President submits to Congress the prepared budget alongside the Budget of Expenditures and Sources of Financing, the National Expenditure Program, and his budget message. Budget authorization entails obtaining legislative enactment of the annual national budget. This involves appropriation which is an authorization made by law directing the payment of goods and services from government funds under specified conditions. Budget implementation involves executing the budget through allotments and notice of cash allocation. The final phase in the government budgeting process is accountability. This serves ‘as the mechanism that ensures the effective and efficient spending of government funds. Accountability focuses on the tracking of the actual expenditures and the independent audits performed by the Commission on Audit concerning the actual spending and use of government assets.eH reres CHAPTER SUMMARY Public finance deals with how the governments raise and spend money to fulfill their economic, social, and developmental objectives. It encompasses an analysis of government expenditures, revenue collection, and debt management. Effective management of public finance allows the proper allocation of government funds and resources for the welfare of citizens. To accomplish the above, there should be effective government budgeting. This is the process through which the government plans, prepares, and manages its financial resources. It involves setting revenue targets, allocating funds to different sectors, and monitoring expenditures to ensure they align with policy priorities. Effective budgeting is critical for achieving fiscal discipline, promoting transparency, and achieving long-term economic stability. There should also be an audit of public funds and resources. To raise public funds, taxation is employed. Taxation is the primary means through which the government obtain the much-needed revenue to fund public services and programs. It involves levying charges on individuals, businesses, and other entities based on their income, consumption, or wealth. By designing and implementing tax policies effectively, the government can finance its various functions in a sustainable manner.