Republic of the Philippines

BATANGAS STATE UNIVERSITY

COLLEGE OF ACCOUNTANCY BUSINESS, ECONOMICS AND
INTERNATIONAL HOSPITALITY MANAGEMENT

GRADUATE SCHOOL DEPARTMENT

MASTER IN BUSINESS ADMINISTRATION
BA 505 (Economic Theories and Policies)
CITE Building, Pablo Borbon Main 1, Rizal Avenue, Batangas City

POSITION PAPER ENTITLED

“SHOULD THE GOVERNMENT BALANCE ITS BUDGET?”

Presented to:

Asst. Prof. INESIO H. SADIANGCOLOR

BA 505 (Economic Theories and Policies)

Presented by:

1. Arellano, Chrisalyn C.
2. De Joya, Shaira Mae J.
 Republic of the Philippines
BATANGAS STATE UNIVERSITY
COLLEGE OF ACCOUNTANCY BUSINESS, ECONOMICS AND
INTERNATIONAL HOSPITALITY MANAGEMENT

TABLE OF CONTENTS

I. Front page …………………………………………………………………… 1

II. Table of contents……………………………………………………………... 2
III. Summary……………………………………………………………………... 3
IV. Introduction…………………………………………………………………... 4
V. Issues and research questions……………………………………………….... 5
VI. Method considerations……………………………………………………….. 6
VII. Theory and analytic framework (perhaps hypotheses)………………………. 7
VIII. Analysis………………………………………………………………………. 8
IX. Conclusion……………………………………………………………………. 9
X. References …………………………………………………………………… 10
XI. Appendices…………………………………………………………………… A-B
 Republic of the Philippines
BATANGAS STATE UNIVERSITY
COLLEGE OF ACCOUNTANCY BUSINESS, ECONOMICS AND
INTERNATIONAL HOSPITALITY MANAGEMENT

SUMMARY

INTRODUCTION

Michael MacMahon said in his article on November 15, 2017, “The fiscal budget is more than a
matter of balance”, as we approach the budget, there has been a lot of discussion about what the right path
for fiscal policy is. One question is whether the Chancellor will throw off the shackles of trying to achieve
budget balance over the coming years.

Balanced budget means change in government expenditure is exactly matched by a change in taxes.
Classical economists believed that a balanced budget is neutral in the sense that the levels of output or
income remain unchanged. However, Keynes and his followers argued that, in reality, its effect on income
will not be zero or neutral. In other words, we can find out the expansionary effect on national income of a
balanced budget.

The expansionary effect of a balanced budget is called the balanced budget multiplier (henceforth
BBM) or unit multiplier. Here an increase in government spending matched by an increase in taxes results
in a net increase in income by the same amount.

The BBM defined as the net increase in income caused by an increase in government spending and
increase in taxes will have a value of 1. This result is known as the balanced budget theorem or unit
multiplier theorem which must have a value of one, no matter whatever the value of multiplier propensity
to consume (MPC).

When a government’s spending exceeds its revenues, a budget deficit results. Governments
generally issue interest-earning bonds to finance their budget deficits. These bonds comprise the national
debt. A budget deficit increases the size of the national debt by the amount of the deficit. In contrast, a
budget surplus allows the government to pay off bondholders and thereby reduce the size of the national
debt. Basically, the national debt represents the cumulative effect of all the prior budget deficits and
surpluses.

In this paper, the presenter was tasked to resolve the question “should the government balance its
budget”. Our sources provides that proponents of a balanced budget argue that budget deficits saddle future
generations with untenable debt. Eventually, taxes must be raised or the money supply artificially increased
-- thus devaluing the currency -- to service this debt. Other economists feel budget deficits serve a valuable
purpose. Deficit spending represents a key tactic in the government's arsenal to fight recessions. During
economic contraction, demand falls, which leads to gross domestic product declines. Moreover, since
unemployment rises during a recession, the government's income tax revenue falls. In order to balance the
budget, it must cut spending to match lower tax receipts. This reduces demand and erodes GDP further,
potentially throwing the economy into a dangerous downward spiral. Deficit spending, proponents argue,
stimulates a lagging economy by infusing it with much-needed capital.

This paper will help readers to further understand and help them decide whether the government
should balance its budget or the unbalanced one will give the country a more secured future and financial
status.

ISSUES AND RESEARCH QUESTIONS

 Republic of the Philippines
BATANGAS STATE UNIVERSITY
COLLEGE OF ACCOUNTANCY BUSINESS, ECONOMICS AND
INTERNATIONAL HOSPITALITY MANAGEMENT

This paper mainly focus on the issue should the government balance its budget. The presenter aims
to answer and provide informative conclusion regarding the issue by answering the following questions;
1. What is a balanced and unbalanced budget?
2. Importance of a balanced or unbalanced budget?
3. How balanced and unbalanced budget affects the economic operations?
4. What are the possible solutions in effect of the chosen position?

METHOD CONSIDERATIONS

The presenter of this paper choose the qualitative approach to gather information to seek further
understand, explore or describe occurrences that will be beneficial in answering the issue as well as the
research questions rather than find a definitive answer. The presenter collects published and unpublished
articles such as journal, news and research studies that can be a helpful guide in arriving into analysis and
conclusion. The method of collecting or selecting the information was based on equal or fair perception
that balanced and unbalanced budget have advantage and disadvantage in the current condition of the
country.

THEORY AND ANALYTIC FRAMEWORK

In kalyan-city blog, Gaurav Akrani posted a diagram on February 25, 2011 showing the balance
and unbalanced budget.

A. Balanced Budget

Balanced budget is a situation, in which estimated revenue of the government during the year is equal to its
anticipated expenditure.

Governments estimated Revenue = Government's proposed Expenditure.

For individuals and families, it is always advisable to have a balanced budget. Most of the classical
economists advocated balanced budget, which was based on the policy of 'Live within means'. According
to them, government's revenue should not fall short of expenditure. They also favoured balanced budget
because they believed that government should not interfere in economic activities and should just
concentrate on the maintenance of internal and external security and provision of basic economic and social
 Republic of the Philippines
BATANGAS STATE UNIVERSITY
COLLEGE OF ACCOUNTANCY BUSINESS, ECONOMICS AND
INTERNATIONAL HOSPITALITY MANAGEMENT

overheads. To achieve this, government has to have enough fiscal discipline so that its expenditures are
equal to revenue.

B. Unbalanced Budget

The budget in which income & expenditure are not equal to each other is known as Unbalanced Budget.
Unbalanced budget is of two types: (1) surplus Budget (2) deficit Budget

1. Surplus Budget.
The budget is a surplus budget when the estimated revenues of the year are greater than anticipated
expenditures.

Government expected revenue > Government proposed Expenditure.

Surplus budget shows the financial soundness of the government. When there is too much inflation,
the government can adopt the policy of surplus budget as it will reduce aggregate demand. Increase in
revenue by levying taxes on people reduces their disposable incomes, which otherwise could have been
spend on consumption or saved and devoted to capital formation. Since government spending will be less
than its income, aggregate demand will decrease and help to reduce the price level. However, in modern
times, when governments have so many social economic & political responsibilities it is virtually
impossible to have a surplus budget.

2. Deficit Budget

Deficit budget is one where the estimated government expenditure is more than expected revenue.

Government's estimated Revenue < Government's proposed Expenditure.

According to Prof. Hugh Dalton, a British Labour Party economist and politician who served as
Chancellor of the Exchequer from 1945 to 1947, "If over a period of time expenditure exceeds revenue, the
budget is said to be unbalanced". Such deficit amount is generally covered through public borrowings or
withdrawing resources from the accumulated reserve surplus. In a way a deficit budget is a liability of the
government as it creates a burden of debt or it reduces the stock of reserves of the government. In developing
countries like India, where huge resources are needed for the purpose of economic growth & development
it is not possible to raise such resources through taxation, deficit budgeting is the only option. In
Underdeveloped countries deficit budget is used for financing planned development & in advanced
countries it is used as stability tool to control business & economic fluctuations.
 Republic of the Philippines
BATANGAS STATE UNIVERSITY
COLLEGE OF ACCOUNTANCY BUSINESS, ECONOMICS AND
INTERNATIONAL HOSPITALITY MANAGEMENT

At the Point E, budget is balanced. To the left of point E the government budget is in deficit and to
the right of point E, the budget is in surplus.

When the government incurs a budget deficit it is financed by borrowing. The government borrows
from the public by issuing government bonds. This gives rise to government debt or public debt.

HYPOTHESIS

Considering the theory proposed by Prof. Dalton, the hypotheses of the presenter in this study is
that the government should have a balance budget since it will be more helpful in the country to reduce
barrowings and properly allocate the budget. A balance budget will propose that the government should
“live within means” because an excess to that will result to debt or barrowings.

ANALYSIS

1. What is a balanced and unbalanced budget?

A balanced budget is a situation in financial planning or the budgeting process where total revenues
are equal to or greater than total expenses. A budget can be considered balanced in hindsight after a full
year's worth of revenues and expenses have been incurred and recorded. A company's operating budget for
an upcoming year can also be called balanced based on predictions or estimates. The phrase "balanced
budget" is commonly used in reference to official government budgets. For example, governments may
issue a press release stating that they have a balanced budget for the upcoming fiscal year, or politicians
may campaign on a promise to balance the budget once in office. It is important to understand that the
phrase "balanced budget" can refer to either a situation where revenues equal expenses or where revenues
exceed expenses, but not where expenses exceed revenues.

The term "budget surplus" is often used in conjunction with a balanced budget. A budget surplus
occurs when revenues exceed expenses, and the surplus amount represents the difference between the two.
In a business setting, a company can reinvest surpluses back into itself, such as for research and
development expenses, pay it out to employees in the form of bonuses, or distribute them to shareholders
as dividends. In a government setting, a budget surplus occurs when tax revenues in a calendar year exceed
government expenditures.

Balanced Budget Unbalanced Budget

1. In case of balanced budget, the proposed govt.
expenditure is equal to the estimated govt.
receipts in the budget year.
2. Balanced budget reduces unproductive and
extravagant expenditure of the govt.
3. It is ineffective during economic instability.
4. It fails to achieve full employment from
under-employment equilibrium.
5. It cannot solve the problems of under-
developed countries (UDCs).
1. In case of unbalanced budget, the proposed
expenditure and the estimated receipt are
unequal during the budget year.
2. Unbalanced (deficit) budget helps the govt. to
incur unproductive and extravagant
expenditure.
3. It is effective during economic instability
(surplus during inflation and deficit during
deflation).
4. Unbalanced (deficit) budget is a powerful
instrument to achieve full employment.
5. Unbalanced (deficit) budget is a powerful
instrument of resource mobilisation for
economic development of UDCs.
 Republic of the Philippines
BATANGAS STATE UNIVERSITY
COLLEGE OF ACCOUNTANCY BUSINESS, ECONOMICS AND
INTERNATIONAL HOSPITALITY MANAGEMENT

2. Importance of a balanced or unbalanced budget?

The phrasing "balanced budget" implies that the revenue and expenses columns of the budget are
equal, thereby achieving true balance. However, the balanced budget moniker only requires that revenues
are at least equal to expenses. Revenues can exceed expenses in a balanced budget. In fact, a budget with a
large surplus that is imbalanced outlandishly toward the revenue side of the balance sheet could still be
termed a balanced budget. The term can be misleading, too, depending on how an entity with a balanced
budget counts its expenses. For instance, an entity might choose to delay paying certain expenses until a
new budget year starts, using creative accounting to hide true expenses and achieve balance. The chief perk
of developing a balanced budget is that it is a method for keeping spending from growing beyond the means
of an entity. This helps avoid deficits, which occur when expenses do exceed revenues. In the case of a
formalized balanced budget for a government body, it restricts the spending that lawmakers can authorize.
This can be a positive or negative development, depending on the circumstances. On one hand, it can reduce
wasteful spending. On the other, it can prevent useful spending from being done. Or, to allow increased
spending, a balanced budget requirement can lead to tax hikes to increase revenues to match expenses.

Brie Hoffman wrote an article on February 1, 2017 entitled “Why a Balanced Budget is important
to America”. She mentioned in the article that a balanced budget keeps the country from over spending and
the absence of it enables congress to fund pet projects and black ops without the intense scrutiny of the
public. Having balanced budget will diminish and eventually remove the huge deficit hanging over the
country. On the contrary not having a balanced budget enables politicians and agencies to hide money.

Considering that our country, Philippines, have evidence of corruption, a balanced budget will set
the boundary in spending too much for underdeveloped projects and lead to conservation of every peso we
earn. The people are already paying high percentage of tax yet the country is still holding high amount of
debt. Despite of the increase in national income the country still incur deficit from the past years to present.
Per data of the Philippine Institute for Development Studies on March 2004, when the government needs
to spend but does not have enough in its pocket, it borrows either through foreign or local sources. Almost
all governments incur a deficit, and borrow— the Philippines is no exception. Further, they added that
budget deficits and debts are inseparable partners. The persistence of budget deficit over time has led to an
accumulation of debts. Whether foreign or local debt, this has to be paid. Thus, the government annually
allots a portion of its budget to pay for the interest and a portion of the debt incurred. Unfortunately, debt
servicing eats up a significant portion of the government's expenditure and puts additional pressure on the
government's already-depleted pockets. Thus, the build-up of debt caused by the persistence of budget
deficit increases debt service, which in turn adds pressure on the current year's expenditure. This results to
an even larger budget deficit. In essence, persistently large public sector deficits tend to contribute to a
lower level of national saving, which implies less money available for investments at the macro level, and
therefore slower economic growth over the long term.

3. How balanced and unbalanced budget affects the economic operations?

Many arguments had been observed by the presenter. On a Rappler article posted by Chrisee Dela
Paz entitled “Balanced budget 'impractical' for the PH until 2022 – Diokno”, it states that the Philippines is
not ready yet for a balanced budget as deficits will be needed in the next six (6) years to address
infrastructure backlog and eventually eradicate the nation’s high socioeconomic inequality. According to
the economic team of President Rodrigo Duterte the one thing certain for the Philippine economy in the
coming years is that deficits are not going away. Per Budget Secretary Benjamin Diokno, having a balanced
budget at this time is not smart and not advisable. He further states that we need deficit spending until 2022
since we are investing in the future of our people.

The Bangko Sentral ng Pilipinas cited on the speech of Gov. Rafael Buenaventura why deficit a
problem. First was impact on growth. The most obvious impact of large fiscal deficits over the medium
term is on economic growth. The decline in revenues has compelled our fiscal authorities to make
significant cutbacks in public spending. As a result, capital outlays by the National Government have been
 Republic of the Philippines
BATANGAS STATE UNIVERSITY
COLLEGE OF ACCOUNTANCY BUSINESS, ECONOMICS AND
INTERNATIONAL HOSPITALITY MANAGEMENT

pushed down from 2.0 percent of GDP in 1997 to only 1.6 percent in 2001. The reduction implies that the
Philippines is spending even less on infrastructure when it is already lagging behind its Asian counterparts.
Capital expenditures in the Philippines averaged at 16 percent of total government spending in the 1990’s,
compared with the Asian average of 25 percent for the same period. The lack of adequate public
infrastructure can significantly impede the expansion of private investments over the medium term, and can
therefore harm the prospects for overall growth in the economy. Next was the impact on inflation. Equally
important from the BSP’s perspective, the practical experience of many industrial and developing countries,
including the Philippines, suggests that large fiscal deficits also contribute to inflation. This is based on the
economic theory that governments running persistent deficits have to, sooner or later, finance those deficits
with money creation (or seigniorage), which produces inflation. This theory has been supported by
empirical evidence. A recent IMF study involving data on 107 countries (including the Philippines) over
the period 1960-2001 uncovered a strong positive correlation between fiscal deficits and inflation among
high-inflation and developing country groups, but not among low-inflation and advanced economies.
However, the ultimate impact of fiscal deficits on inflation depends on a number of factors, such as
monetary policy credibility and the presence of institutional safeguards against fiscal dominance. For
example, credible inflation-fighting central banks and deep financial markets tend to facilitate the
continuous rolling over of sizeable levels of public debt, thus avoiding the need for deficit financing through
money creation.

Let me also emphasize that the Philippines has enough institutional safeguards against excessive
deficit financing and seigniorage that help ensure the BSP’s independence from fiscal sector constraints.
The New Central Bank Act of 1993 (R.A. 7653) sets out clear limits on the size and the repayment period
of the BSP’s financial assistance to the National Government.

Impact on interest rates. Fiscal deficits also affect the economy through interest rates, particularly
in cases where large fiscal gaps compel the NG to borrow heavily from the market through the issuance of
government securities. Such a situation leads to not only unsustainably high levels of public debt but also
high level of interest rates. This, in turn, raises the cost of capital and dampens investments. Herein lies the
challenge to the next administration: The need to balance the budget and ensure fiscal sustainability over
the long term. These two priorities are closely interlinked. Closing the fiscal gap is a key component in the
strategy to ensure fiscal sustainability over the long term, because a balanced budget also helps reduce the
overall level of public debt. There will be less need for new borrowing and the debt burden will also be
lower. It goes without saying that lower public debt means lower interest payments that have to be
programmed into the annual budget. We need to attack the heart of the problem.

Impact on market and business confidence. The fiscal situation also has an international
dimension: It affects the confidence in the Philippine economy of foreign investors and financial markets.
The widening budget deficit was one of the main reasons cited for the threat of a pull-out of investments
by a U.S.-based investment fund manager as well as the recent credit rating downgrade of the Philippines
by an international rating agency. Lack of confidence in the government’s ability to manage the deficit
tends to keep foreign capital from flowing into the Philippines, since investors know that the government
will not have enough funds for the upgrading and maintenance of crucial public infrastructure including
road network and other forms of public works. Good public infrastructure, after all, is a key ingredient of a
sound business environment.

4. What are the possible solutions in effect of the chosen position?

At some point of having a balanced budget, government spending will be cut but it will give rise to
taxes being payed by the individual citizen. It will also hinder future projects for modernization which help
reduce unemployment.

In this case the government should focus in supporting and implementing rules that can help local
producers be encourage in increasing their production rather than planning on building infrastructure.

CONCLUSION
 Republic of the Philippines
BATANGAS STATE UNIVERSITY
COLLEGE OF ACCOUNTANCY BUSINESS, ECONOMICS AND
INTERNATIONAL HOSPITALITY MANAGEMENT

Per presenters’ point of view, most projects of the government are just sideline in making their own
money. In some ways it help the economy by employing lot of workers but in contrast it gives way to
corruption, underdeveloped project and even larger debt.

A balanced budget may seemed to be impossible at the current year but in the long run this may
help the economy in recovering from its debt. Despite of the effect of having a balanced budget on the
current situation of the country still it is the best way to lessen the deficit spending

REFERRENCES
https://www.niesr.ac.uk/blog/fiscal-budget-more-matter-balance
https://www.investopedia.com/terms/b/balanced-budget.asp
http://kalyan-city.blogspot.com/2011/02/types-of-government-budget-balanced-and.html
https://www.rappler.com/business/economy-watch/143849-dbcc-2017-national-budget-philippines
http://www.economicsdiscussion.net/income/balanced-budget-multiplier-with-diagram/6313
https://smallbusiness.chron.com/balanced-budget-42458.html
http://www.bsp.gov.ph/publications/speeches.asp?id=55&yr=2004