1. “DEFICIT FINANCE”
FINAL TOPIC

2. OBJECTIVES: IDENTIFY THE THREE TYPES OF GOVERNMENT BUDGET.
DISCUSS THE MERITS AMD DEMERITS OF THE BUDGET TYPES.
PROVIDE AN OVERVIEW PHILIPPINE BUDGET DEFICIT

3. WHAT IS GOVERNMENT BUDGET?
A government budget is an annual financial statement which outlines the estimated government expenditure and expected government revenue for the forthcoming fiscal year.
A budget is an estimation of revenue and expenses over a specified future period of time and is utilized by governments, businesses, and individuals.

4. Spending Priorities L-aw, Public Order, and Safety
E-ducation and Social Protection
G-ood Governance and Justice
A-griculture, Environment, Natural Resources, and Risk Resiliency
C-onstruction and Economic Development
Y-outh and the Marginalized

5. THREE TYPES OF BUDGET
BALANCED BUDGET
BUDGET SURPLUS
BUDGET DEFICIT

6. WHAT IS BALANCED BUDGET?
A government budget is said to be a balanced budget if the estimated government expenditure is equal to expected government revenue in a particular financial year. Advocated by many classical economists, this type of budget is based on the principle of “living within means.” They believed the government’s expenditure should not exceed their revenue.

7. MERITS OF A BALANCED BUDGET
Ensures economic stability, if implemented successfully.
Ensures that the government refrains from imprudent expenditures.
a) It ensures financial stability.
b) It avoids wasteful expenditure.

8. DEMERITS OF A BALANCED BUDGET
Unviable at times of recession and does not offer any solution to problems such as unemployment.
Inapplicable in less developed countries as it limits the scope of economic growth.
Restricts the government from spending on public welfare.
Process of economic growth can be hindered.
Welfare activities may be restricted.

9. WHAT IS BUDGET SURPLUS
A government budget is said to be a surplus budget if the expected government revenues exceed the estimated government expenditure in a particular financial year. This means that the government’s earnings from taxes levied are greater than the amount the government spends on public welfare.

10. Advantages of a budget surplus
A surplus allows a government to repay some of their existing national debt
This might lead to a fall in bond yields which makes future government borrowing less expensive
A budget surplus gives a government scope for meeting a future crisis e.g. a fiscal stimulus during a downturn or in response to an external shock
Government might use a budget surplus to cut taxes to stimulate the supply- side of the economy
Surplus revenues might be used to fund an increase in public sector infrastructure spending

11. Potential drawbacks of a budget surplus
If taxes > government spending, this is a net leakage from the circular flow of income which can have a deflationary effect on real GDP.
Fiscal austerity to achieve a budget surplus can have damaging effects on the quality of public services and might increase inequality.

12. OVERVIEW OF BUDGET SURPLUS IN PHIL
The last year the Philippines saw a budget surplus for the national government was 1974, just after the first oil price shock. Since then the budget deficits have been chronic.

13. BUDGET DEFICIT
A government budget is said to be a budget deficit if the estimated government expenditures exceed the expected government revenue in a particular financial year.
This deficit can be viewed in two ways:
1. a case where the government is not earning enough
2. where it is spending too much.

14. MERITS OF A DEFICIT BUDGET
Helps in addressing public concerns such as unemployment at times of economic recession.
Enables the government to spend on public welfare.

15. DEMERITS OF A DEFICIT BUDGET
Can encourage imprudent expenditures by the government.
Increases burden on the government by accumulating debts.

16. 3 Types of Budget Deficits and their Measures
(i) Revenue deficit = Total revenue expenditure – Total revenue receipts.
(ii) Fiscal deficit and = Total expenditure – Total receipts excluding borrowings.
(iii) Primary deficit.= Fiscal deficit-Interest payments.

17. 1. Revenue deficit
signifies that government’s own earning is insufficient to meet normal functioning of government departments and provision of services. Revenue deficit results in borrowing. Simply put, when government spends more than what it collects by way of revenue, it incurs revenue deficit. Mind, revenue deficit includes only such transactions which affect current income and expenditure of the government.

18. Remedial measures:
A high revenue deficit warns the government either to curtail its expenditure or increase its tax and non-tax receipts. Thus, main remedies are:
Government should raise rate of taxes especially on rich people and any new taxes where possible,
Government should try to reduce its expenditure and avoid unnecessary expenditure.

19. 2. Fiscal Deficit:
Fiscal deficit is defined as excess of total budget expenditure over total budget receipts excluding borrowings during a fiscal year. In simple words, it is amount of borrowing the government has to resort to meet its expenses. A large deficit means a large amount of borrowing. Fiscal deficit is a measure of how much the government needs to borrow from the market to meet its expenditure when its resources are inadequate.

20. Can there be fiscal deficit without a Revenue deficit?
Yes, it is possible
(i) when revenue budget is balanced but capital budget shows a deficit or
(ii) when revenue budget is in surplus but deficit in capital budget is greater than the surplus of revenue budget.

21. Implications:
(i) Debt traps: Fiscal deficit is financed by borrowing. And borrowing creates problem of not only (a) payment of interest but also of (b) repayment of loans. As the government borrowing increases, its liability in future to repay loan amount along with interest thereon also increases. Payment of interest increases revenue expenditure leading to higher revenue deficit (ii) Wasteful expenditure: High fiscal deficit generally leads to wasteful and unnecessary expenditure by the government. It can create inflationary pressure in the economy. (iii) Retards future growth: Borrowing is in fact financial burden on future generation to pay loan and interest amount which retards growth of economy.

22. How is fiscal deficit met?
Since fiscal deficit is the excess of govt. total expenditure over its total receipts excluding borrowings, therefore borrowing is the only way to finance fiscal deficit.

23. 3. Primary Deficit:
Primary deficit is defined as fiscal deficit of current year minus interest payments on previous borrowings. In other words whereas fiscal deficit indicates borrowing requirement inclusive of interest payment, primary deficit indicates borrowing requirement exclusive of interest payment (i.e., amount of loan).

24. four basic methods of financing a budget deficit:
(a) the creation of currency, when the Central Bank holds part of the newly issued debt, thereby monetizing it, and it ends up in the hands of the public as freshly printed money or in bank vaults as excess reserves; (b) raising reserve requirements, when banks are made to hold additional required reserves in the form of cash, balances with the Central Bank, or eligible government securities; (c) domestic open-market borrowing, when government debt is voluntarily held by the banks or the public for the interest it pays; and (d) foreign borrowing, when the national government borrows abroad.

25. Deficit Financing
Deficit financing is defined as financing the budgetary deficit through public loans. Deficit financing is an approach to money management that involves spending more money than is collected during the same period

26. Objectives of Deficit Financing
To finance war.
Economic development.
Mobilization of resources.
To granting subsidies.
To increase in aggregate demand.
For payment of interest.

27. Adverse effect of deficit financing
Leads to inflation.
Adverse effect on saving.
Inequality.
Adverse effect on investment.
Problem of balance of payment.
Change in pattern of investment.

28. Adverse effect on Investment
Leads to inflation
Adverse effect on savings
Deficit financing may lead to inflation. Due to deficit financing money supply increases & the purchasing power of the people also increase which increases the aggregate demand and the prices also increase.
Deficit financing leads to inflation and inflation affects the habit of voluntary saving adversely. Infect it is not possible for the people to maintain the previous rate of saving in the state of rising prices.
Inequality
Adverse effect on Investment
In case of deficit financing income distribution becomes unequal. During deficit financing deflationary pressure can be seen on the economy which make the rich richer and the poor, poorer. The fix wage earners are badly effected and their standard of living detoriates thus no gap b/w rich & poor increases.
Deficit financing effects investment adversely when there is inflation in the economy trade unions make demand for higher wages for that they go for strikes and lock outs which decreases the efficiency of Labor and creates uncertainty in the business which a decreases the level of investment of the country.

29. Problem in BOP
Change in pattern of investment
Deficit financing leads to inflation. A
Deficit financing leads to inflation. During inflation prices rise and reach to a very high level in that case people instead of indulging into productive activities they start doing speculative activities.
high price level as compared to other countries will make the exports more expensive and thus they start declining. On the other hand rise in domestic income and price may encourage people to import more commodities from abroad. This will create a deficit in balance of payment and the balance of payment will become unfavorable.

30. Sources of Financing Deficit
(1) Bank borrowing. (2) Non-bank borrowing ] Domestic Borrowing. - through the sale of government. Treasury Bills. Short Term Federal Bonds, Defence Saving Certificate etc. (3) External borrowing.

31. HOW THE GOVERNMENT INFLUENCES THE ECONOMY
FISCAL POLICY – government use of taxation and spending to influence the economy.
MONETARY POLICY – government efforts to influence the economy by controlling the money supply.

32. QUIZ
Q-1 DEFINE BALANCED BUDGET. ANSWER: A government budget is said to be in balance if budget receipts are equal to the budget expenditure. Q.2- WHEN IS BUDGET SAID TO BE A ‘SURPLUS BUDGET’? ANSWER: If budget receipts are more than the budget expenditure, then the budget is termed as ‘Surplus Budget’ Q.3- WHEN IS BUDGET SAID TO BE A ‘DEFICIT BUDGET’? ANSWER: If budget receipts are less than the budget expenditure, then the budget is termed as ‘Deficit Budget’. Q-4 WHAT DO YOU UNDERSTAND BY THE TERM “UNBALANCED BUDGET”. ANSWER: A government budget is said to be unbalanced if estimated government receipts are not equal to the estimated government expenditure.

33. ASSIGNMENT
1. Assess THE government performance on external debt ON THE TERM OF FOLLOWING PRESIDENTS.
3.1 Ferdinand Marcos (Dec 1965 – Feb 1986)
3.2 Corazon Aquino (February 1986 – June 1992)
3.3 Fidel V. Ramos (June 1992 – June 1998)
3.4 Joseph Ejercito Estrada (June 1998 – Jan 2001)
3.5 Gloria Macapagal-Arroyo (Jan 2001 – June 2010)
3.6 Benigno "Noynoy" Aquino III (Jun 2010 – Jun 2016)
DISCUSS THE Risks of external debt to Philippine economy