Reported by :Gutierrez, Irene

Alvarez, Celica MayCortez, Cherry Ann

Sala, Sheila

Fiscal Policy

It takes off to influence income and consumption and lead the economy towards growth and development.

It also has non-economic objectives which may conflict with economic aims.

  It is the use of government revenue collection (taxation) and expenditure (spending) to influence the economy.

Sources and Uses of Public Funds

a.TaxesInclude income taxes of individuals and

businesses, property taxes, residence taxes, import taxes, inheritance taxes, gift taxes and other specific taxes.

Two Collecting agencies: - Bureau of Internal Revenue

- Bureau of Customs

b. Non-tax revenues Include collection of fines and fees, licenses

and registration charges and profits earned by government-operated and controlled corporations.

Public Debt consists of all claims against our government which may have resulted from loans or advances extended to the Philippine government or as payment of goods or services rendered to it.

A government tends to borrow for three reasons:

1.Due to political reluctance to raise tax2.Some government-sponsored capital improvements should be paid3.A deliberate use of the budget to stimulate the economy.

Government borrowing may be undertaken from internal sources such as Central Bank, or from external sources such as foreign governments.

Taxation: A Tool

Taxation as a tool is not just a source of income of the government. It is also used as an instrument to manipulate conditions in the economy.

An increase in tax rates will lessen the disposable income of the people and cause their demand to decrease.

Principles of Taxation

Direct Taxes are collected from people and are paid directly to a tax collecting agency of the government.

Examples: Income taxes, inheritance and residence taxes

Indirect Taxes are collected against goods and services and only indirectly on people.

Examples: Sales taxes and import duties

Taxation is the system of payments that individuals and businesses are required to pay the government.

Progressive tax systemThe tax rate tends to increase with an increase in

the tax base

Regressive tax systemIt is one where tax rates are high for low bases

and decrease with high bases.

Proportional tax systemIt imposes a uniform tax rate on all income levels.

Burden of Taxation

Taxes are considered a burden.

Two types of tax burden:

A. ImpactIt is the burden of the person who pays the

tax for the first timeB. Incidence

It is the burden of the person who ultimately has to pay for the tax.

For indirect taxes, the impact and the incidence of the tax fall on different people.

Income Distribution and the Lorenz Curve

Income distribution refers to the pattern of incomes received by different sectors in the economy.

The size of income distribution shows how income is shared.

The Uses of Fiscal Policy

Fiscal Policy may be used by the government to stimulate and depress the economy.

Fiscal policy can either be expansionary or contractionary.

It is expansionary or loose when taxation is reduced or public spending is increased with the aim of stimulating total spending in the economy, known as aggregate demand.

On the other hand, fiscal policy is contractionary or tight when taxation is increased or public spending is reduced in order to restrict demand and slow down the economy.

Increasing government purchases or cutting tax rates will have the effect of increasing aggregate demand. Reducing government purchases or increasing tax rates will decrease aggregate demand.

A deficit budget has an expansionary effect since it increases the flow of money into the economy as a result of an increase in government spending, the excess spending being derived from the sources other than taxes.

A surplus budget has an contracting effect since not all the taxes collected from the people are channelled back into the economic stream.

Effects of the Budget

The deficit and balanced budget have an expansionary effect while surplus budget can depress the economy.

Consider a budget where tax collections amount to P450 billion and the government spends P480 billion. This is obviously a deficit budget since government expenditure exceed tax revenue by P30 billion.

Supposing, the MPC is 80%, then the income multiplier will be:

K = 1 / 1 - .8 = 1 / 2 = 5

P30 billion x 5 = P150 billion, which means additional income generated and can therefore lead to expansion in the economy.

Now, consider a budget where tax collections amount to P450 billion and the government spends P430 billion out of these collections. The government keeps a surplus of P20 billion.

Using the same MPC of 80% so income multiplier is 5, the P20 billion surplus will lead to decrease in income multiplied by 5.

Thus, P20 billion x 5 = P100 billion decrease in income.

It has been said that the balanced budget is also expansionary, but to a lesser extent than the deficit budget. This is because the balanced budget increases income only by an income multiplier equal to 1.

Supposing the P450 billion tax collections of the government are all spent. Since government expenditure is equal to tax revenue, then the balanced budget will increase income by 1. Thus, P450 billion x 1 = P450 billion increase in income.

Comparing, what the government actually earns from its spending with what is given up the tax payers, we derive the following:

Government Exp. Of P450 billion x Income multiplier of 5 P2,250 billion

Income given up on tax payments:Consumption spending: 80% of P450 billion = 360 billion x multiplier of 5 1,800 billion

Savings: 20% of P450 billion = P90 billion: no income generated ── ────────── NET INCREASE IN INCOME P450 billion