PA305 Public Fiscal Administration

By: Trisha Mae C. Asuncion

Engr. Erlinda J. Goh, PhD Professor

Monetary policy is the monitoring and control of money supply by a central bank, such as the Federal Reserve Board in the United States of America, and the Bangko Sentral ng Pilipinas in the Philippines. This is used by the government to be able to control inflation, and stabilize currency. Monetary Policy is considered to be one of the two ways that the government can influence the economy the other one being Fiscal Policy (which makes use of government spending, and taxes). Monetary Policy is generally the process by which the central bank, or government controls the supply and availability of money, the cost of money, and the rate of interest.

INFLATION TARGETING This revolves around meeting publicly announced, preset rates of inflation. The standard used is typically a price index of a basket of consumer goods, such as the Consumer Price Index (CPI) in the United States. It intends to bring actual inflation to their desired numbers by bringing about changes in interest rates, open market operations, and other monetary tools.

PRICE LEVEL TARGETING This involves keeping overall price levels stable, or meeting a predetermined price level. Similar to inflation targeting, the central bank alters interest rates to be able to keep the index level constant throughout the years. Flourishing and advanced economies opt not to use this method as it is generally perceived to be risky and uncertain.

MONETARY AGGREGATES This approach focuses on controlling monetary quantities. Once monetary aggregates grow too rapidly, central banks might be triggered to increase interest rates, because of the fear of inflation.

FIXED EXCHANGE RATE This is also often called Pegged Exchange Rate. Here, a currencys value is pegged to the value of a single currency, or to a basket of other currencies or measure of value, such as gold. The focus of this monetary system is to maintain a nations currency within a narrow band.

GOLD STANDARD In Gold Standard, the government allows its currency to be converted into fixed amounts of gold, and vice versa. This may be regarded as a special kind of Fixed Rate Exchange policy, or of Price Level Targeting. This monetary policy is considered flawed because of the need for large gold reserves of countries to keep up with the demand and supply for money. It is no longer used in any country, though it was widely used in the mid 19th century through 1971.

OPEN MARKET OPERATIONS consist of repurchase and reverse repurchase transactions, outright transactions, and foreign exchange swaps. Repurchase and Reverse Repurchase This is carried out through the Repurchase Facility and Reverse Purchase Facility of the Bangko Sentral ng Pilipinas. In Purchase transactions, the Bangko Sentral buys government securities with a dedication to sell it back at a specified future date, and at a predetermined interest rate. The BSPs payment increases reserve balances and expands the monetary supply in the Philippines. On the other hand, in Reverse Repurchase, the government acts as the seller, and works to decrease the liquidity of money. These transactions usually have maturities ranging from overnight to one month.

Outright Transactions Unlike the repurchase or reverse repurchase, there is no clear intent by the government to reverse the action of their selling/buying of monetary securities. Thus, this transaction creates a more permanent effect on our monetary supply. When the BSP buys securities, it pays for them by directly crediting its counterpartys Demand Deposit Account with the BSP. The reverse is done upon the selling of securities.

Foreign Exchange Swaps This refers to the actual exchange of two currencies at a specific date, at a rate agreed upon the deal date and the reverse exchange of the currencies at a farther ate in the future, also at an interest rate agreed on deal date

Acceptance of Fixed-Term Deposits To expand its liquidity management, the Bangko Sentral introduced this method in 1998. In the Special Deposits Account, or SDA, consists fixed terms deposits by banks and institutions affiliated with the BSP.

Standing Facilities To increase the volume of credit in the financial system, the Bangko Sentral ng Pilipinas extends loans, discounts, and advances to banking institutions. Rediscounting is a standing credit facility provided by the BSP to help banks meet temporary liquidity needs by refinancing the loans they extend to their clients. There are two types of rediscounting in the BSP: the peso rediscounting facility and the Exporters dollar and Yen Rediscount Facility.

Reserve Requirements In banking institutions, there are required amounts that banks cannot lend out to people. They always need to maintain a certain balance of money, which are called "reserves". Once these reserve requirements are changed and are varied, changes in the monetary supply will be observed greatly.

Fiscal policy refers to the "measures employed by governments to stabilize the economy, specifically by manipulating the levels and allocations of taxes and government expenditures. Fiscal measures are frequently used in tandem with monetary policy to achieve certain goals. In the Philippines, this is characterized by continuous and increasing levels of debt and budget deficits, though there have been improvements in the last few years. The Philippine governments main source of revenue are taxes, with some non-tax revenue also being collected. To finance fiscal deficit and debt, the Philippines relies on both domestic and external sources.

The Philippine government generates revenues mainly through personal and income tax collection, but a small portion of non-tax revenue is also collected through fees and licenses, privatization proceeds and income from other government operations and state-owned enterprises.

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 20012010.

Income Taxes Income tax is a tax on a person's income, wages, profits arising from property, practice of profession, conduct of trade or business or any stipulated in the National Internal Revenue Code of 1997 (NIRC), less any deductions granted. Income tax in the Philippines is a progressive tax, as people with higher incomes pay more than people with lower incomes.

E-VAT The Expanded Value Added Tax (E-VAT), is a form of sales tax that is imposed on the sale of goods and services and on the import of goods into the Philippines. It is a consumption tax (those who consume more are taxed more) and an indirect tax, which can be passed on to the buyer. The current E-VAT rate is 12% of transactions. Some items which are subject to E-VAT include petroleum, natural gases, indigenous fuels, coals, medical services, legal services, electricity, nonbasic commodities, clothing, non-food agricultural products, domestic travel by air and sea.

Tariffs and Duties Second to the BIR in terms of revenue collection, the Bureau of Customs (BOC) imposes tariffs and duties on all items imported into the Philippines. According to Executive Order 206, returning residents, Overseas Filipino Workers (OFWs) and former Filipino citizens are exempted from paying duties and tariffs.

Non-Tax Revenue Non-tax revenue makes up a small percentage of total government revenue (roughly less than 20%), and consists of collections of fees and licenses, privatization proceeds and income from other state enterprises.

The Bureau of Treasury The Bureau of Treasury (BTr) manages the finances of the government, by attempting to maximize revenue collected and minimize spending. The bulk of non-tax revenues comes from the BTrs income. Under Executive Order No.449, the BTr collects revenue by issuing, servicing and redeeming government securities, and by controlling the Securities Stabilization Fund (which increases the liquidity and stabilizes the value of government securities) through the purchase and sale of government bills and bonds.

Privatization Privatization in the Philippines occurred in three waves: The first wave in 1986-1987, the second during 1990 and the third stage, which is presently taking place. The governments Privatization Program is handled by the inter-agency Privatization Council and the Privatization and Management Office, a sub-branch of the Department of Finance.

PAGCOR The Philippine Amusement and Gaming Corporation (PAGCOR) is a governmentowned corporation established in 1977 to stop illegal casino operations. PAGCOR is mandated to regulate and license gambling (particularly in casinos), generate revenues for the Philippine government through its own casinos and promote tourism in the country.

Fiscal policy during the Marcos administration was primarily focused on indirect tax collection and on government spending on economic services and infrastructure development. The first Aquino administration inherited a large fiscal deficit from the previous administration, but managed to reduce fiscal imbalance and improve tax collection through the introduction of the 1986 Tax Reform Program and the value added tax.

The Ramos administration experienced budget surpluses due to substantial gains from the massive sale of government assets and strong foreign investment in its early years. However, the implementation of the 1997 Comprehensive Tax Reform Program and the onset of the Asian financial crisis resulted to a deteriorating fiscal position in the succeeding years and administrations.

TheEstrada administration faced a large fiscal deficit due to the decrease in tax effort and the repayment of the Ramos administrations debt to contractors and suppliers. During the Arroyo administration, the Expanded Value Added Tax Law was enacted, national debt-to-GDP ratio peaked, and underspending on public infrastructure and other capital expenditures was observed.