Lesson 2

THE DEVELOPMENT OF PUBLIC FISCAL ADMINISTRATION

Public finance evolves with the development of society and the growth of communal
life. Changes in the demands and needs of people create added functions to
government. This scenario largely shaped the concepts and goals of public fiscal
administration. The knowledge, ideas and operation of public finance are
themselves produced by, and dependent on, the condition of society.

From the early occasion where the subject-people provided services to their king,
changes in politics and history evolved to government ‘s responsibility of providing
protection to its citizens and many of their other needs. This transformation
necessitates the requirements of resource provision, allocation, and management
on the part of government.

Evolution of Public Fiscal Administration

In ancient and primitive community, the citizens rendered services as their

contribution to the maintenance of their government. The economic and other
commodities needed are mostly furnished by individuals through the mode of
exchange or barter. In classical times, the state ‘s special officers were provided
income from certain sources such as mines or productive enterprises and taxes
upon tributary peoples or certain inferior classes of citizens. Out of these funds the
public officers were supported and paid.

Early forms of public revenue were obtained from the property of the subjects: land,
cattle and slaves were all constituents of the king‘s revenue, forced work were
contributed by members of the community. Kings or rulers formed financial
organization. Tributes in the form of money or other valuable things were paid by
tributary state or person as acknowledgment of submission to kings, or for peace or
protection. The oldest and most general form of taxation is levied on the produce of
land.

In the early stages of State life, public existence was associated with the family and
religion. The first form of public treasurer supported religious activities. There were
little expenditures for security/protection. Citizens rendered voluntary service to
protect the state. In foreign wars, the people furnished their own weapons and paid
by the spoils of conquest. Illustrations of these are: Great Wall of China and
Pyramid of Egypt which were constructed over a long time; armies and navies were
for the defense against desert raiders; peace and order was the community’s
primary concern; the administration of justice and enjoyment of rights were only for
the citizens of Greece city states.

Public borrowings and debt management were practically non-existing. The ancient
state did not borrow money even in emergencies. It is relatively self-sufficient and
public expenditures were borne by the citizens and non-citizens. Government had
several functions to perform and revenues were needed for these functions.
Budgeting could no longer be ignored thus, it was exercised in order to allocate and
properly distribute public revenues for specific purposes. Since the public budget
merged with the king‘s purse, no distinction was made between the public and the
king‘s private expenditures. State audit had its beginning during ancient times and
was a respected function of state administration. The principle of accountability for
those in charge of government expenditures of resources emerged with organized
government. As Plato wisely advised: Public money should be disbursed before the
eyes of the public.

Since ancient public finance was limited to tax and expenditure aspects, state audit
got its focus on the maintenance and inspection of financial records to ensure the
regularity of accounts and the legality of expenditures. Government examiners
performed audit activities: in Ancient Korea, by executive judicial bureaucracies like
the Ombudsman in Scandinavian countries, the Control Yuan of old China and the
Roman Tibunus Plebis in the Imperial Rome.

a. Medieval Public Finance

This is the time in European history between the ancient and modern times.
It extends from the middle of the 5th to the 15th centuries.

b. Feudalism
 A contractual system of political and military relationships existing among
the nobility in Western Europe during the High Middle Ages is known as
feudalism. It is characterized by the granting of fiefs land and labor in
return for political and military services of the landlords and kings. The
contract is sealed by oaths of homage and fealty (fidelity).
 The grantor is the lord, and the grantee, his vassal who holds land. Both
are free men and social peers. For land (fief) provided, a vassal provides
a variety of works and services to his lord. He is expected to contribute to
the wealth of

his lord by turning over part of his collected rents, along with farm
products. He joins the army or the king and goes to war when ordered to;
keeps the fief in good order; maintains buildings; cultivates acreage.
Failure of the vassal to meet his pledge, the fief is confiscated and
delivered to another.
 The church greatly influenced feudalism. The church hierarchy paralleled
the feudal hierarchy. It owned much land given by nobles as donation or
gift. Many powers behind the throne serving as advisors were clergies
called the black chamber or ―camara negra‖ who were heavily sought by
rulers. Examples are “Richelieu” in France, Thomas Moore in England,
Rasputin in Russia, Cardinal Spellman in America, Cardinal Sin in the
Philippines.
 In Japan the feudal system was well ordered before the 10th century in
the person of the Shogun. In other areas, as in China, feudal practices
were in existence by 1100 B.C. Feudalism in India and in the Saracen
and Ottoman civilizations was analogous to Western feudalism, but much
less durable than the others. The Spanish rule in the Philippines for three
hundred years is highly characterized with feudal practices.
 c. Manorialism (Seignorialism)
 While feudalism is a system of military and political relationships among
the lords or equals only, seignorialism is a system of political, economic,
and social relations between seigneurs (lords) and their dependent farm
laborers. The manorial system is presided over by the lord who could be
a king, an ecclesiastical lord, a baron, or any lesser noble. The manor is
divided into arable, meadow (the commons), woodland, and waste held
by the peasants. The right to the property or to increase the dues and
rights of cultivation may be inherited by the peasants. The lord gives
military protection to the peasants.
 The manor is an administrative and political unit. Manorial courts, with the
lord presiding over the administration of justice, is also for raising taxes.
The advent of market economy weakened the economic basis of
manorialism. Excess products are sold by peasants and used to get
freedoms from their lords. The political power of the seigneurs is also
undermined by the growing jurisdiction of strong princes. The system,
with the birth of towns and rise of the middles class, is undermined.
 The Black Death of the later Middle Ages is a great blow to the manorial
system: labor and peasant become so valuable as workers in the land.
The lords remain with patriarchal influence, yet the peasants gain legal
freedom and lead to change of residence and employment.

New Schools of Thought on Public Finance The end of feudalism and the
manorial system are brought about by economic and political factors and natural
calamities. The concentration of power in the hands of a few or of an absolute
monarch is a great disruptive force in the feudal system. The rise of powerful
monarchs in France, Spain and England competed with the local administration of
the land lord. Wide development of towns and capitalistic commerce broke down
the small local economic unit based on land. At the end of feudalism emerged three
schools of thought: mercantilism, cameralism and physiocracy.

a. Mercantilism is an economic nationalism. It maintains wealth and power of

the state through restraint of imports and encouragement of exports. This
system dominated Western European economic thought and policies from
the sixteenth to the late eighteenth centuries. The mercantile system stands
for the interests of merchants and producers. They are protected or
encouraged by the states. Governments provides capital to new industries,
assists local industry by imposing tariffs, quotas and prohibitions on imported
goods, prohibits the export of tools and capital equipment, the emigration of
skilled labor allowing foreign countries to compete in the production of
manufactured goods. With much gold and silver in the treasury, the
government spends for armies and navies to secure its interest and
sovereignty. It is directed to achieve a “favourabl”’ balance of trade. In the
Philippines, during the colonial time, gold and silver were mined and brought
to the colonizing country. The main principle of mercantilism is that if one
nation gained, another lost.

b. Cameralism is concerned with the survival of the political regime by relying

on required military capacity. It also desires economic development,
 advanced technologies, improvement of the population, creation of new
enterprises. The cameralists are against taxation as an instrument of public
finance. They argued that taxes should support the activities of the military
while all other activities should be financed from the prince ‘s net commercial
and property revenues. The cameralists are consultants and administrators
of the rulers. The term cameralist was derived from camera or kammer and
refers to the room or chamber where the counsellors to the king or prince
gathered to do their work. The cameralists are not like contemporary
academic or plain consultants. They were partly economists, partly political
scientists, partly administrators, and partly lawyers rolled into one.

c. Physiocracy is the rule of nature. Pierre-Samuel du Pont de Nemours

coined the word (1767) to describe the doctrine of physician and economist
François Quesnay. Quesnay believed that economic process involves
natural law imposed on the sociopolitical order. He argued that monarchical
states require money not men, and the product of the land must have
monetary value. In physiocracy, nature determines taxation not man. The
land is the source of wealth and produces the only disposable national
economic surplus. The monarch is a co-proprietor of all lands in the
kingdom.

d. Capitalism the industrial revolution transformed Western Europe and North

America from agricultural and trading nations to bastions of industries. A
person self-employed as farmer is now an employee at a large factory. The
working class is born. This new industrial workforce, the proletariat, works
and lives in appalling overcrowding conditions. Poverty is rampant. The
cities are havens for crime and disease. The emerging working class gets
confused by the radical changes affecting them negatively. Industries and
cities grow rapidly.

Capitalism is a socio-economic system based on private ownership of the

means
of production. It is characterized with the concept of free enterprise. It occurs
when the government gives up control over trade and economies and allows
market forces to take over. Capitalism argues that government function
should be limited to the basics: defense, public works, maintenance of the
bureaucracy, and limited services in education and health. All other services
are to be provided by the private sector, and because of the model of perfect
competition, best goods at the lowest prices can be attained. The labor in a
capitalist system is wage labor. Wages are paid to the laborers Adam
Smith: He saw the market system as an "invisible hand" which leads people
to unintentionally promote society's interests while pursuing their own
Businesses are dependent on capital and capitalists have the capital which
can produce more wealth.

The time of capitalism is ushered through the works of the classical

economists who provided economic ideas now prevalent in the industrialized
countries and less developed countries (LDCs). They are:

 Adam Smith (Scotland, 1723-1791)

 Adam Smith's monumental work, An Inquiry Into the Causes Of The
Wealth of Nation (1776), started the Classical School of economic theory.
For him, land, labor, and capital are the three factors of production and
the major contributors to a nation's wealth. He believes that market
mechanism as an "invisible hand" leads all individuals with their own self-
interests, to produce the greatest benefit for society.

Smith believes that the government should provide public works, such as
roads, bridges and other civil works, and wanted the users of such public
works to pay user fees. His canons on taxation are founded on scientific
and equitable basis: equity, certainty, convenience and economy. He
likens public

finance to the prudent management of a household and argues that

borrowing should only be resorted to in exceptional circumstances. Smith
is against deficit spending and advocated the concept of a balanced
budget.

 David Ricardo (England, 1772 – 1823)

Ricardo is an early believer in the quantity theory of money, known today

as monetarism. He explains the growth of population and capital affecting
rents, wages and profits. Ricardo‘s analyses of public credit led to the
view of the utilization aspects of public borrowings. He tirelessly worked
for free trade as an economic policy.

 Thomas Robert Malthus (England, 1766-1834)

Thomas Robert Malthus explained low living standards through the idea
of diminishing return. He said population increases geometrically,
outstripping the production of food which increased arithmetically. The
rapidly growing population and the limited amount of land give
diminishing returns resulting in low wages.

Malthus questioned the tendency of a market economy to produce full

employment. Unemployment is blamed upon the tendency to limit
spending by saving too much.

 James Stuart Mill (England, 1806 – 1873)

In Principles of Political Economy, Mill elaborates on the ideas of Adam

Smith and David Ricardo and talks of economies of scale, opportunity
cost, and comparative advantage in trade. Mill differentiates between the
market's two roles: allocation of resources and distribution of income.
The market might be efficient in allocating resources but not in
distributing income.

This requires the state to intervene. He favors inheritance taxation, trade

protectionism and regulation of employees‘hours of work and mandatory
 education. He advocates a voucher system for schools and a state
system of exams to ensure that people have reached a minimum level of
learning. From this, the contemporary practice may have been patterned
and adopted.

 John Maynard Keynes

As a reaction to the severity of the worldwide depression in the 1930s,

John Maynard Keynes published The General Theory of Employment,
Interest, and Money. The Classical view admits that in a recession,
wages and prices would

decline to restore full employment. Keynes maintains the opposite.

Falling prices and wages would prevent a revival of spending by holding
down people's incomes. He insisted on direct government intervention to
increase spending with chronic unemployment amidst depressed
economies Keynes argues for the use of government spending and
taxing to stabilize the economy. Government spends and decreases
taxes when private spending is insufficient and threatens a recession; it
would reduce spending and increase taxes when private spending is too
much to result in inflation.

Keynesian economics has been the most influential economic

formulation of the 20th century. Although he favored controlled
investment and an active public sector, Keynes never wavered in his faith
in the capitalist free market. His theory states that government action is
designed to stimulate the market, not to eliminate it.

e. MARXISM Karl Marx, in “das Kapital” or Capital, sees capitalism destroying

itself and be succeeded by a world without private property. He maintains
that in a capitalist society the proletariat invests its labor so that the
bourgeoisie (or upperclass) can make all the profits without investing any
labor themselves.

Marxpredicts that capitalism would produce growing misery for workers

as competition for profit leads capitalists to adopt labor saving machinery,
creating a "reserve army of the unemployed" who would eventually rise and
seize the means of production.  Marx believes once workers recognize their
interests and become "class conscious," they begin the overthrow of
capitalism; the socialist society would emerge out of the revolution; people
would be aided based on social needs; a class- less society would be
advantageous for the vast majority of the population.  Marx‘s stress on the
economic factor in society and his analysis of classes has influenced public
finance in modern times.

f. SOCIALISM is explained in the key work of Karl Marx and Frederick Engel‘s
The
Communist Manifesto published in 1848. Socialism is a step between a
country‘s current state and its move to complete communism.
 Socialism is a social and economic system. Property and wealth are shared,
and their distribution is subject to the control of the people who exert equal
control of the government. The state owns the means of work production
and decides what is produced and its distribution.

Since the people control production, inequity between rich and poor is
lessened and a fair distribution of wealth from what will now be implemented.
Society be- comes a place for workers. Some of the ideas of socialism are
applied even to non-socialist states, such as government health care, social
welfare, public enterprises, or retirement plans.

Evolution of Public Finance in the Philippines

a. Pre-Spanish Period before the coming of foreign conquistadores, the

Philippines was already engaged in trade with countries of Asia. The medium
of exchange was barter system of commodities. It was based on trust and
honesty of participating parties. Commercial items were left at the shores in
the absence of buyers. The sellers would return months later for the
payments. Crude as it was, they had their own ways of ac- counting for their
barter business and auditing them.

Village societies, known as barangays, were headed by chieftains called
datus who exercised full power on the lives of people. Simple governance
included the communal allocation and distribution of resources to the
villagers. The “datus” collected tributes known as buwis from the people.
Nobles and freemen were free from paying tributes and exempted from
rendering services to the datu except in case of war.

b. Spanish Era the Spanish conquerors who defeated the local rulers
established settlement in Cebu and their capital in Manila. The location of the
Philippines was good for international trade with neighboring countries. The
Spanish Empire utilized the clergy of the religious orders of the Catholic
Church to reach the natives and influence them with Spanish culture, politics
and faith. Religious orders like Dominicans, Recoletos, Franciscans,
Augustinians and Jesuits worked hard for the conversion of the natives to
Christianity.

In the early part of the conquest, the Spanish treasury had to subsidize the
Philippines in the amount of P250,000.00 per annum because of the latter‘s
poor financial condition attributable to the poor revenue collection system. All
male Filipinos, from 16 to 60 years of age, rendered forced labor called “polo”
for 40 days a year. They worked in building and repairing roads, bridges and
churches, etc.; cutting timber in the forests, and working in artillery foundries
and shipyards.
 The tributes and the taxes, plus encomienda system (local version of feudal
estate) became the sources of Spanish resources and at the same time of
abuses and even state corruption. In 1583, the Audiencia Royal, functioning
as legislative-judicial body, was established, with added authority to audit.
Bartolome de Renteria was appointed the first auditor of accounts. The auditor
of accounts was appointed each year to avoid connivance with the auditee.
Later, the appointed Auditor was allowed longer tenure to hold office.

The government also established three tribunals of accounts, each was

composed of a governor and two auditors (oidores) who stayed in the
provinces to audit the accounts there. This may be looked upon as s similar to
the current practice of having resident auditors in government offices. These
improvements prevented large scale irregularities and fraud in the generation
and expense of colonial funds.

The Chief Royal Accountant served as the Chief Arbitrator whose decisions
on financial matters were final except until revoked by the Council of Indies.
The Philippines remained with Spain as colony for more than 300 years.

c. American Period the American regime in the Philippines (1898 to 1946)

lasted for almost 50 years. The country experienced military government, civil
government, and the Commonwealth. Many of the Spanish legal and business
practices were initially adopted until replaced with those of American
influence.

At the start of American rule in the Philippines, the position of auditor was
created by the Military Governor and Major Charles E. Kilbourne, Paymaster
of the Army, was appointed as the first Auditor of the American military
government in the Philippines on August 13, 1898. The office of Auditor was
formally established on May 8, 1899 by the U.S. President.

d. The Philippine Republic during the first Philippine Republic, the government
was financed from two principal sources of revenue: taxes and license fees,
and military contributions, or war taxes. Special payment for taxes was
allowed in the form of rice, edibles, etc. for the sustenance of the army.
Budget preparation on a yearly basis was practiced from the level of
municipalities to provincial and at the central government.

e. The Civil Commission the system of handling government finance was

reformed when the Civil Commission headed by William H. Taft was
established. The office of the auditor was reorganized with the passage of
Acts No. 90 and 91 by the Philippine Commission on July 4, 1901. Act No.
222 converting the office into a bureau known as the Bureau of Insular Auditor
under the Department of Finance and Justice. This moves finally reorganized
auditing as a permanent significant component of government operations.
 The local governments were provided with their own sources of income from
the real property tax. A system of inspection and examination of banks, an
accounting and audit system, an internal revenue system and a tariff system
under the Tariff Act of 1905 of Congress were created. The powers and duties
of the Secretary of Finance and Justice included administrative and legislative
matters.

Under the Jones Law in 1917, a budgetary system was introduced in the
Philippines which required the Governor-General to submit to the Philippine
Legislature within ten days after the opening of its regular session, a budget of
receipt and expenditures to be used as the basis of the annual appropriations
bill. The budget was prepared by the Secretary of Finance based on the
estimates of income and expenditures submitted to him by the different
department secretaries approved by the Governor-General. The Philippine
Legislature made the final action on the appropriation bill.
f. Japanese Occupation nothing much economic activities during the Japanese
Occupation. Industries, commerce and trade were almost on a standstill.
There was practically no production and agricultural lands remained idle for a
time, which caused the exorbitant price of basic commodities, particularly rice.
Most people engaged in the buy-and- sell business. It was a common
experience to see people exchanging almost any- thing just for a meager bag
of rice or flour. The Japanese printed Japanese paper money popularly known
as ―Mickey Mouse‖ money which flooded the Islands resulting in inflation
with everything sold at an exorbitant price.

Building A New Philippines

This time the government of the Sovereign State pursued an overall stabilization
program. This was directed to curb the growing government deficits brought about by
massive spending.

Tax Reform Program was introduced: the 35% single tax rate for corporations was
formulated and implemented; the Value Added Tax was replaced; a complicated
sales tax structure; restructuring tax on the downstream oil industry; shift from ad
valorem to specific tax on "sin" products. The National Government efforts directed
to sustain its fiscal position by continuously providing corrective measures in its
financial policy formulation and implementation.

ASSESSMENT EXERCISE
a. Give a summary of the development of public finance in general.
b. How does it differ with that in the Philippine context?
c. How can we strengthen accountability of government in spending public
money?