HISTORY 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.
 
THE DEVELOPMENT OF PUBLIC FINANCE

Man seeks the association of his fellow creatures. This leads to the need for
establishing and enforcing certain society‘s regulations. Governments came about to
safeguard people and institutional property to ensure the orderly conduct of community
life.
 
Government exercises the important function of providing or producing the
means of supplying the various needs and demands of the citizens. It creates the
materials and services or secures them from some already existing source. Among the
primitive peoples, the functions of governments are few and simple. With
civilized“states, tasks are numerous, complex but are well defined.
 

ONCE UPON A TIME

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.
 

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.

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.

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.
 
MERCANTILISM
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 “favorable”‖ 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.

CAMERALISM

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.

PHYSIOCRACY

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.

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.

MARXISM
Karl Marx, in "das Kapital" or Capital, sees
capitalism ultimately 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 upper-class) can make all
the profits without investing any labor
themselves.
 
Marx predicts 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 up 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 on the basis of 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.

SOCIALISM
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 becomes 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.
 

PUBLIC FINANCE EVOLUTION

A BEGINNING IN ITALY

The practice of Public Finance is much ahead of the study of economics. Early
economic discussions were around central issues of public finance.
 
Early on, the finances of the State had no distinction from those owned by the prince.
The initial appearance of the development of commerce and trade began in Italy which
dominated the world trade and became the commercial center of the world. The rapid
growth of city-states such as Florence and Naples influenced the growth in their fiscal
needs. It was in these Italian city-states of “of the fifteenth century that the first
systematic study of the principles of public finance and practice were conducted.
Concerned issues were progressive taxation, the administration of revenues, and a
systematic classification of expenditures and many more ideas were given much
attention.
 
THE FRENCH AND GERMAN SCHOLARS

Jean Bodin, a Frenchman, saw the need for a systematic study of the changing
political and fiscal conditions. He considered the state‘s proper management of its
expenditures and revenue and advocated honesty in the generation of revenues and
use for the good of the state.
 
For a time, there was not much activities in the field of public finance. But abuses
of governments in managing public money became widespread. In the works of
Montesquieu in 1748, he condemned the institution of public credit and discussed at
length on the influence of government upon fiscal systems.
 
German writers made their thoughts on public finance felt. As in public
expenditures, they considered that incomes from public properties should be the base
for a sound fiscal system and the economic and political effects of the various kinds of
taxes.

THE WEALTH OF NATIONS

Adam Smith espoused the concept that the state could obtain greater power of
wealth once it allowed trade and industry free of state controls. Instead of regulations,
the function of the government should be directed to supply facilities to aid industry,
commerce, and exchange thru sound systems of currency, banks, and credit.
 

PUBLIC FINANCE AND ITS ADMINISTRATION IN THE PHILIPPINES

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 accounting for their
barter business and also 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.
 
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 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.

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.
 
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.

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 move 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.
 
THE 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 anything 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.

TODAY: 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.