FISCALPOLICY Government The government as an economic entity plays the roles which any individual citizen plays in the

economy: 1. Income-earner. The government, through its agencies and the so-called publicly-owned corporations (GOCCs), earns income. It collects taxes which serve as its main income. It also runs its own financial institutions like the Bangko Sentral ng Pilipinas (BSP), Development Bank of the Philippines (DBP), Land Bank of the Philippines (LBP), Government Service Insurance System (GSIS), and Social Security System (SSS). 2. Consumer. Government expenditures are reflected yearly in the GNP. The government is the biggest single buyer in the country. By spending, it supports thousands of local producers, suppliers and sellers. 3. Investor. The government invests on its own. By investing, it can spell a boom or a recession for various industries in the country that depend on the government for their sales. 4. Employer. The government employs around 5-10% of all our labor force. Its payment of wages and salaries represents purchasing power. 5. Borrower. The government borrows to finance public services or spending. It usually issues government securities to borrow money for its social and health services, infrastructure, defense, etc. The primary activities of the government that involve its exercise and implementation of fiscal policy measures are taxation and public spending. Government taxes and spending affect the level of income and employment. Increased government spending shifts aggregate demand schedule upward by the same amount as an equal increase in net investment. Decreased taxes cause upward shifts in aggregate demand because personal income taxes affect households disposable income which, in turn, alters the levels of saving and consumption. In the leakage-injection approach to income determination, increased government spending, an injection, shifts the investment plus government spending schedule upward while decreased taxes, a leakage, shifts saving plus taxes schedule to the right. Discretionary Fiscal Policy Discretionary fiscal policy involves deliberate changes in the level of government spending and/or governments net tax revenues in order to reach a desired level of income. Governments net tax revenues equal gross tax receipts less transfers. Net tax revenues fall when gross tax receipts decrease and/or government transfer payments increase. If a recessionary gap exists, the government can increase aggregate demand to the full employment level of income by increasing government spending or decreasing net tax revenues. Public Debt The government finances its expenditures by taxing, borrowing or printing money. Whenever money collected from taxation is not sufficient to meet government expenditures, government resorts to domestic (peso) and external (dollar) borrowings which have to be paid back with interest. - Compiled by Prof. Junard C. Benitez c/o junardbenitez@yahoo.com