Disadvantages of Using Spending Tools Capital spending strategies tend to take time. Formulation and implementation of capital spending may take several years; and Too much spending on recurrent projects might be unproductive and have negative effects on the economy.
Government Revenue Tools Indirect Taxes Indirect taxes refer to taxes imposed on specific goods such as cigarettes, alcohol, fuel and services. Direct Taxes Levies on profit, income, and wealth are direct taxes. Advantages of Using Fiscal Tools Raising taxes helps in discouraging alcoholism and drug abuse.
Disadvantages of Using Fiscal Tools Raising taxes is unpopular and can be politically challenging to impose and implement. Question Which the following statements is the most accurate regarding fiscal tools? Indirect taxes cannot be modified quickly; therefore, they are not relevant fiscal policy tools B. Direct taxes are useful for discouraging alcoholism C. Government capital spending decisions are slow to plan, implement, and execute; thus, they are of little use for short-term stabilization of the economy Solution The correct answer is C.
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Thank you! Grateful I saw this at the right time for my CFA prep. To finance fiscal deficit and debt, the Philippines relies on both domestic and external sources. 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 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 Comprehensive Tax Reform Program and the onset of the Asian financial crisis resulted to a deteriorating fiscal position in the succeeding years and administrations. Income tax in the Philippines is a progressive tax, as people with higher incomes pay more than people with lower incomes. In , Republic Act No. It is a consumption tax those who consume more are taxed more and an indirect tax, which can be passed on to the buyer. Some items which are subject to E-VAT include petroleum, natural gases, indigenous fuels, coals, medical services, legal services, electricity, non-basic commodities, clothing, non-food agricultural products, domestic travel by air and sea.
The E-VAT has exemptions which include basic commodities and socially sensitive products. Agricultural and marine products in their original state e.
Educational services rendered by both public and private educational institutions; 3. Books, newspapers and magazines; 4. Lease of residential houses not exceeding P10, monthly; 5. Sale of low-cost house and lot not exceeding P2. Sales of persons and establishments earning not more than P1. Under Executive Order No. 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.
Despite the national deficit of the Philippines, the Department of Finance reported an average of P In , the Economist Intelligence Unit "recognized the Philippines as the best in the world in terms of its microfinance regulatory framework. A standardized national strategy for micro insurance and the provisions of grants and technical assistance were formulated.
In , the government borrowed a total net of P Program and Project Loans - the government offers project loans to external bodies and uses the proceeds to fund domestic projects like infrastructure, agriculture, and other government projects.
Credit Facility Loans 3. Zero-coupon Treasury Bills 4. Global Bonds 5. Treasury Bonds 2. Facility loans 3. Treasury Bills 4. Bond Exchanges 5. Promissory Notes 6. Term Deposits In , the total outstanding debt of the Philippines reached P4. According to the Department of Finance, the country has recently reduced dependency on external sources to minimize the risks caused by changes in the global exchange rates.
Efforts to reduce national debt include increasing tax efforts and decreasing government spending. In response to the higher global interest rates and to the depreciation of the peso, the government became increasingly reliant on domestic financing to finance fiscal deficit. The tax reform program resulted in reduced fiscal imbalance and higher tax effort in the succeeding years, peaking in , before the enactment of the Comprehensive Tax Reform Program CTRP.
Public debt servicing and interest payments as a percent of the budget peaked during this period as government focused on making up for the debt incurred by the Marcos administration. This increased the taxing and spending powers to local governments in effect increasing local government resources. The government benefited from the massive sale of government assets totaling to about P70 billion, the biggest among the administrations and continued to benefit from the TRP. The administration invested heavily on the power sector as the country was beset by power outages.
The government utilized its emergency powers to fast-track the construction of power projects and established contracts with independent power plants. This period also experienced a real estate boom and strong foreign direct investment to the country during the early years of the administration, in effect overvaluing the peso.
The Ramos administration relied heavily on external borrowing to finance its fiscal deficit but quickly switched to domestic dependence on the onset of the Asian financial crisis. Republic Act RA and RA , which were implemented under the program, were estimated to yield additional taxes of around P7. This was attributed to the unfavorable economic climate created by the Asian fiscal crisis and the poor implementation of the provisions of the reform. The Ramos administration also provided additional incentives to export-oriented firms, the most prominent among these being RA which was instrumental to the success of the Subic Bay Freeport Zone.
The administration also had to pay P60 billion worth of accounts payables left unpaid by the Ramos administration to contractors and suppliers. Public spending focused on social services, with spending on basic education reaching its peak.
To finance the fiscal deficit, Estrada created a balance between domestic and foreign borrowing. Large fiscal deficits and heavy losses for monitored government corporations were observed during this period. National debt-to-GDP ratio reached an all-time high during the Arroyo administration, averaging at Investment in public infrastructure at only 1. If revenue exceeds expenditure, the government has a budget surplus. A government follows a neutral fiscal policy when the economy is in equilibrium.
It may reduce taxes or increase expenditure in order to stimulate the economy — to increase demand, growth and employment. The government may follow contractionary fiscal policy to reduce fiscal deficit or pay down government debt. To do so, it may increase taxes or decrease expenditure, which will decrease demand, growth and employment. Fiscal policy is based on Keynesian economics, which believes that the government can influence the macroeconomic productivity levels by changing the taxes and spending.
Such influence can curb inflation, increase employment rate, and stabilize the value of money. Monetarists, however, believe that the effects of fiscal policy are only temporary, and they advocate use of monetary policy to control inflation. Fiscal policy can be discretionary or nondiscretionary automatic stabilizers. A discretionary fiscal policy refers to the deliberate changes in government spending and taxes in order to stabilize the economy; for example, the government decides to increase its capital expenditure on road infrastructure.
On the other hand, automatic stabilizers are the automatic changes in the tax and spending levels because of the changes in economic conditions. They help stabilize business cycles. For example, when the economy is expanding, the tax revenue increases, and vice verse.
There will also be lower government spending in the form of unemployment benefits. Fiscal policy is based on the theories of British economist John Maynard Keynes. Also known as Keynesian economics, this theory basically states that governments can influence macroeconomic productivity levels by increasing or decreasing tax levels and public spending.
Fiscal policy is very important to the economy. For example, in many worried that the fiscal cliff, a simultaneous increase in tax rates and cuts in government spending set to occur in January , would send the U. The U. Balancing Act The idea, however, is to find a balance between changing tax rates and public spending. For example, stimulating a stagnant economy by increasing spending or lowering taxes runs the risk of causing inflation to rise.
Let's say that an economy has slowed down. However, they are not part of the government expenditure component of GDP.
Current government spending refers to expenditure on providing regular recurring goods and services such as healthcare, education, etc. Capital expenditures are expenditures on infrastructure and physical capital.
Purpose of government spending include a provision of services, such as defense which benefits all citizens equally, b create infrastructure necessary for growth, c guarantee minimum income by redistributing income and wealth, d achieve objectives of sustainable growth and low inflation, and e subsidize high-risk innovation.
Government revenues are mainly in the form of direct and indirect taxes. Direct taxes include personal income tax, social insurance tax, corporate tax, capital gains tax, property tax, inheritance tax, etc.
Indirect taxes are taxes levied on consumption, such as sales tax, value-added tax. These may have social and environmental considerations. Indirect taxes can be adjusted as soon as they are announced, and they affect consumer behavior and increase government revenue almost immediately. Similarly, social policies can be changed almost instantly. Another measure was cutting down several tax rates and social security contributions.
For example, in Belgium, the immediate fiscal rescue involved spending 3. The temporary unemployment relief worth 0. The implementation of fiscal policy involves time lag in recognition, raising bills and getting them approved. By the time of policy implementation, the economic situation may have drastically changed. Also, when the government aims to improve the employment level, it is possible that such a policy may not benefit the targeted unemployed personnel due to a lack of skills.
Therefore, the policy cannot be the sole solution to crisis-hit economies. It must be applied in coordination with monetary policies. At the same time, intervening policies must be revoked timely to avert the over-dependency of the economy. After a while, it should be allowed to overcome its problems on its own.
One example of fiscal policy is increasing taxes on commodities to curb inflation to reduce the availability of money amongst consumers. The government imposes fiscal policy using the tools of taxation and government expenditure to bring about macroeconomic changes in a nation.
The third tool is direct spending which takes precedence during an economic crisis when employment is low, and money is hard to arrange. Suppose a nation is facing an economic slowdown. The government may choose to implement specific expansionary measures such as reducing the tax rates. It is intended to ensure more disposable income with consumers to enhance consumption and aggregate demand. This has been a guide to Fiscal Policy, types of fiscal policies, its objectives, a fiscal surplus and fiscal deficit, and tools of fiscal policies.
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