Ako si HARREL at ito ang aking Buhay!..... Noon, Ngayon at Bukas!: 2013

Polytechnic University of the Philippines

MASTER IN PUBLIC ADMINISTRATION

Open University System, Lopez Campus

Lopez, Quezon

HARREL M. PAYCANA

MPA Student

09-000014-3

PROF. FLORENDA S. FRIVALDO

Subject Professor

PUBLIC FISCAL ADMINISTRATION

PA 626

The development of public finance institution

EARLY PUBLIC FINANCE

A. Ancient Finance: The Slave Societies

B. Medieval Public Finance: Feudalism

THE BREAKDOWN OF FEUDALISM: BEGINNINGS OF CAPITALISM

A. The Rise of Central Government

B. Beginning of Capitalism

CAPITALISM: PUBLIC FINANCE AND FREE ENTERPRISE

A. Adam Smith

B. David Ricardo

C. John Stuart Mill

D. Adolf Wagner

THE CRISIS OF CAPITALISM: KEYNESIAN PUBLIC FINANCE THE MARXIST CHALLENGE: SOCIALIST PUBLIC FINANCE

A. Marxism

B. Basic Features of Socialist Public Finance

Public Finance – that branch of economics which deals with the revenues and expenditures of governments and their impact on the economy.

In recent times, however, with the emergence of the field of public administration, much interest has been directed towards the political 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, implementation and evaluation of policies and decisions on taxation and revenue administration; resource allocation, budgeting and public expenditure; public borrowing and debt management; and accounting and auditing.

As a system

It includes the environment, structures, systems, processes, and personalities involved in formulating, implementing and evaluating fiscal policy.

FISCAL POLICY – refers to the mix of policies on taxation, expenditures and borrowings for the achievement of government objectives.

DEVELOPMENT OF PUBLIC FINANCE

Development of Public Finance institutions merely reflects the development of organized society, particularly the state.
Changes in concepts 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.
Public finance raises and spends revenues for the functions of the state.
Functions have been changing with the development of society.
Tracing the development of public finance institutions necessitates an examination of the development of organized society.

STAGES OF DEVELOPMENT

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 acquired from hunting and fishing was immediately consumed

v 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.

Slaves states

· Their early public finance served as foundations for modern institutions and practices.

· Ancient public finance provided some of the basic instruments of public fiscal management like

v EXPENDITURES – which is characterized by enormous public expenditures for defense and aggression

- To protect and maintain the state system

Constant aggression within and from outside

Perpetrate aggression to eliminate its neighbours

Expands its frontiers

Consolidate its territories

Provision and maintenance of armies and navies

(PUBLIC FINANCE started with WAR ACTIVITIES) this was the largest single item of expenditures in ancient times.

- Preservation of internal peace, order and security and the administration of justice

Administration of justice (for free citizens only)

Security within and without

- Maintenance of state religion

Elaborate bureaucratic structures were set up state religions

Massive temples were erected

- Maintenance of the King and his household

Inalienable right of the sovereign

It was people’s obligation to provide him with revenues and to spend such (divine obligation)

- Building and maintenance of public works

- Distribution of free grains in times of famine

v TAX and REVENUE ADMINISTRATION – the state has to imposed and collect revenues.

- State’s revenues were ordinarily limited to: LOOTINGS and TRIBUTES from conquered peoples, war chests, fines, and direct taxes imposed on non-citizens of the state or on conquered people.

Ancient governments had little need for direct taxes since they levied tributes on conquered peoples.

The most common source of revenues was from the ruler’s domain and tributes from conquered provinces.

v BUDGETING – was exercised because of the need to allocate public revenues for specific purposes.

v BORROWINGS – public borrowings and debt management were unheard of since the ancient states did not borrow money even in emergencies.

o They only solicited gifts or levied limited taxes

o Ancient states were relatively self-sufficient and public expenditures were usually borne by the citizens and non-citizens without recourse to loans.

v AUDITING – state audit was also an ancient and respected branch of state administration.

o The principle of accountability for those in charge of government expenditures of resources from public funds is perhaps as old as organized government.

o The principle of independent state audit was accepted in ancient Greek times.

o Ancient public finance is limited to tax and expenditure aspects

Medieval Public Finance

· refined these concepts and introduced some basic tools like ACCOUNTING and AUDITING.

The development of medieval public finance closely followed the changes in the political structure of the state during the Middle Ages

It weakened Monarchy (Central Government)

Resulted to fragmentation of public authority

Leads to the system of feudalism and the rise of limited monarchy

The institutions of political authority and their economic, social and cultural ramifications were not only diverse but overlapping

Medieval conditions were greatly varied in scope and nature among the different European states.

Feudal systems

· Essentially the system of economic relationship based upon land tenure, among the King, the lord, and the vassals.

· The King which theoretically owned all lands has chartered his land to his nobles since he could not administer them directly.

· Due to rising expenditures for defense against the invading barbarians, aggravated by his prodigal spending, the King was forced to grant lands in return for immediate revenues (aids or contributions).

· The public domain was divided into numerous feudal jurisdictions (fiefs) where the feudal lords ruled more or less independently.

· The feudal lords became vassals to the King (suzerain), accepting the fiefs in promise for aids and soldiers.

· Revenue raising and expenditures occurred at two levels

v King or the Central Government – mainly involved in national wars and administration of his demesne.

v Feudal Lords – provide basic services and in the process collected most of the taxes.

THE RISE OF CENTRAL GOVERNMENT

· The modernization of public finance at the national level was developed

· Strong central governments included the expansion and the rationalization of national finances

· Due to the growing cost of government, they compelled the post-feudal states to raise more revenues

· Broadened revenue system and tax powers of central governments

o Poll tax was introduced

o Magna Carta of 1215 compelled the English King to grant civil and political liberties including the right to be consulted on matters of revenue collection

o French revolution in 1789 eliminated most of the existing taxes under the feudal system.

o The abolition of the feudal taxes was accompanied by a severe restriction of the King’s expenditures power.

· The rise of central governments was also accompanied by circumstances which expanded public borrowings and introduced new debt management practices.

Capitalist systems

From 15^th century onwards, the feudal system was gradually shattered by the rising tide of individualism. Prosperous merchants and craftsmen began to go against communal restraints.

o Factories were established to provide goods for increasing populations

o Technological advances enabled man to explore other lands for raw materials and food.

o Commercial trade increased with the establishment of colonies

o Increased wealth accompanied by accelerated demands for goods and services expanded the domestic markets

o The feudalistic system together with its parochial and static socio-economic and political structures slowly disintegrate

o The nation-state arose, forged by a strong central government

CLASSICAL ECONOMIST of the ERA of CAPITALISM

v ADAM SMITH (1723-1790)

Laid the philosophical basis and justification for free enterprise or capitalism as the “ideal” political and economic system.

Advocated the policy of minimum governmental control on business activities (laissez-faire)

His theories on taxation in his famous canons- equity, certainty, convenience and economy established a set of principles which the state should observe in deriving its income more efficiently, yet equitably.

He contended that borrowing should only be resorted to in exceptional circumstances and should be repaid as soon as possible since he was consequently against deficit spending and advocated the concept of balanced budget.

His doctrines advocated limited expenditures - for defense, justice, and for the construction of a few indispensable public works.

His contribution to capitalism are not limited to public finance since his ideas were largely shaped on the moral “rightness” of capitalism and the perceived functions of government under such system.

v DAVID RICARDO (1772-1823)

Contributed in no small measures to the refinement of modern fiscal administration concepts and practices.

He is credited for his theory of distribution of tax burden which he applied in his extensive studies on the shifting and incidence of taxes.

His analysis of public credit led to an expanded view of the utilization aspects of public borrowings.

v ADOLF WAGNER (1835-1917)

Ascribed to the state the function of eliminating the inequalities of wealth through fiscal measures.

The use of fiscal policies for distributive goals in modern times partly owes its origin to him.

JOHN STUART MILL (1806-1873)

Contended that governmental action usually involved added expense which was usually defrayed out of compulsory contributions levied upon the persons and properties of the state.

He observe that “the business of life is better performed when those who have an immediate interest in it are left to take their own course, uncontrolled either by the mandate of law or the meddling of any public functionary.

THE CRISIS OF CAPITALISM: KEYNESIAN PUBLIC FINANCE

The economic depression of the 1930s changed the views of the great economist that labor could be fully employed continuously and the resources of a country could be utilized most efficiently if government activities were kept at a minimum and that government was not supposed to interfere with the free enterprise system, except for minimal regulatory functions.

· They discovered that economies under the capitalist or free enterprise system are subject to cyclical fluctuations and to the ravages of the inflation, stagnation and recession.

· In 1936, modern capitalists economics was changed by the appearance of a single book “The General Theory of Employment, Interest, and Money” written by John Maynard Keynes.

· On public finance issues, he insisted that the government could and should influence the prices of goods and services, the amount of consumption, the degree of employment and the distribution of national income through taxation, borrowings and the purchase and sale of commodities and labor.

· He developed the concept of fiscal policy as a tool for correcting imbalances in the economy.

· Keynes’ ideas said to have revolutionized public finance in the sense that he completely changed the earlier theories of free enterprise economists. He introduced the concept of government management of the economy within the context of the capitalist system.

· Critics of the capitalist system, on the other hand say that he is a reactionary in the sense that his theories “saved” capitalism from collapse.

Socialist systems

v KARL MARX (1818-1883) MARXISM

Wrote his DAS KAPITAL which laid the foundation for socialist public finance

Marx characterized his approach as the “materialist conception of history,” maintaining that the key to understanding human culture and history was productive capacity, which means obtaining the means of subsistence by interaction with nature; in short LABOR.

“Labor is a process in which both man and nature participate, and in which man of his own accord starts, regulates, and controls the material relations between himself and nature.”

The capital system, despite its outward features, carries with it the momentum of class struggles. Such class struggle has been present in societies formed by various “modes of production” from the classical (slave) through feudalistic to the capitalist society. In each society, a minority of people own and/or control the means of production: land, money, labor, tools, etc. This minority composes the ruling class.

The vast majority comprised of the working class, own and control little or nothing, possessing only their capacity to work and produce what is largely appropriated by the ruling class.

In his theory of SURPLUS VALUE, Marx explained how under capitalist production, the capitalist exploits the worker by constantly trying to extract the largest possible amount of “surplus” – that is, whatever value the worker produces beyond what is required for his basic needs – and the lowest possible cost. The capitalist extends the hours of labor or makes labor more intensive or productive.

Conversely, the workers consistently seek the highest possible wages, under the best possible working conditions, for the least possible working hours.

These opposed interests and the exploitative aspects of the relationship breed struggle between the working and the capitalist classes.

The working class in the course of its struggles confronts many forces and institutions that serve to maintain and defend the prevailing system.

Marx believed it would require a revolutionary act to overturn the existing system.

The main force of revolution is the working class, the class which experiences the adverse effect of the “contradictions”

Marx in his post capitalist concept pointed out that, Communism could not be achieve immediately after the revolution, for between capitalism and communist society lies the period of the revolutionary transformation of one into the other.

The transition to communism would be marked by two central processes: First, the means of production would be owned by the society, and the products of human labor would no longer be directly appropriated by a single possessing class. Since the division of society into classes were largely determined by ownership or non-ownership of the means of production, this would pave the way for a classless society. Secondly. the state would be gradually abolished, in the sense that there would no longer be a political instrument for class domination and exploitation. Only on this HIGHER STAGE OF COMMUNIST SOCIETY would society be able to INSCRIBE ON ITS BANNERS: FROM EACH ACCORDING TO HIS ABILITY, TO EACH ACCORDING TO HIS NEEDS.

BASIC FEATURES OF SOCIETY PUBLIC FINANCE

1. The Primacy of Central Planning – since there is only one sector in socialism – namely the state sector – central planning is feasible and has been proven successful.

2. The Role of Taxation in Revenue-Raising – taxation plays a very minor role in socialist public finance.

3. Budget Deficits – budgets of socialist countries do not have deficits but have surpluses of revenue over expenditures.

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PUBLIC FISCAL ADMINISTRATION PA 626

MARCH 2021

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