Government Budgeting Experience in the Philippines

Budget (from French bougette) generally refers to a list of all planned expenses and revenue. A
budget is an important concept in economics, which uses a budget line to illustrate the trade-offs
between two or more goods.

Government budget is a legal document that is often passed by the legislature, and approved by
the chief executive. For example, only certain types of revenue may be imposed and collected.
Property tax is frequently the basis for local revenues, while sales tax (E-VAT), income tax, and
corporate tax are the basis for national revenues.

Government budgeting is the critical exercise of allocating revenues and borrowed funds to
attain the economic and social goals of the country. It also entails the management of
government expenditures in such a way that will create the most economic impact from the
production and delivery of goods and services while supporting a healthy fiscal position.
Government budgeting is important because it enables the government to plan and manage its
financial resources to support the implementation of various programs and projects that best
promote the development of the country. Through the budget, the government can prioritize and
put into action its plants, programs and policies within the constraints of its financial capability
as dictated by economic conditions

The two basic elements of a government budget are the revenues (receipts) and expenses
(outlays). A government budgets have an economic, political, and technical basis. Unlike a pure
economic budget, they are not entirely designed to allocate scarce resources for the best
economic use. They have a political basis wherein different interests push and pull in an attempt
to obtain benefits and avoid burdens. The technical element is the forecast of the likely levels of
revenues and expenses.

Background of Government Budgeting in the Philippines

At the beginning of the 20th Century, the Second Philippine Commission, acting as a legislative
body, enacted appropriations measures for the annual expenditures of the government. This was
in accordance with the Philippine Bill of 1902, which decreed that disbursements from the
National Treasury were to be authorized only in pursuance of appropriations made by law.

With the passage of the Jones Law in 1916, the Philippine Legislature was set up with two
chambers: the Philippine Senate and the House of Representative. The Governor-General was to
submit, within 10 days of the opening of the Legislature’s regular session, the annual budget.
Two years later, the Council of the State was formed to prepare the budget that the Governor-
General was required to submit to the Philippine Legislature.

A Budget Office was formed to assist in the preparation, enactment and implementation of such
appropriations made by law. Four divisions made up the Office: A Budget Division took charge
of agency regular budgets; an Expense-Central Division took care of special budgets; a Service
Inspection Division screened appointments and requests for the creation of positions; and an
Administrative Division handled routine administrative matters.
The Constitution of 1935 established both budget policy and procedure, which were amplified in
a series of laws and executive acts over the years.

The Budget Commission was established by Executive Order (EO) No. 25 issued on April 25,
1936. It became a Ministry by virtue of Presidential Decree (PD) No. 1405, signed on June 11,
1978. Following the pattern in the United States Federal Government, the Budget Commission
was, and the Ministry of the Budget continues to be, part of the Office of the President and
separate from the other fiscal agencies of government that form part of the Ministry of Finance.

The first Budget Law was passed on December 17, 1937 as Commonwealth Act (CA) No. 246. It
took effect on January 1, 1938, providing for a line-item budget as the framework of the
government’s budgeting system. CA No. 246 called for a “balanced budget” emphasizing
matching proposed expenditures with existing revenues.

On June 4, 1954, Republic Act (RA) No. 992, otherwise called the Revised Budget Act, was
enacted providing for an enhanced role of the Budget Commission as the fiscal arm and
budgeting adviser of the President. The preparation of the budget was to include the aggregation
of the programs of the different departments and agencies of the Government. At this point, a
performance budgeting system was introduced.

The Integrated Reorganization Plan of 1972, under Presidential Decree No. 1, implanted re-
organizational changes in the Budget Commission with four of its units retained: the Budget
Operations Office; National Accounting Office; Management Office; and Wage and Position
Classification Office (WAPCO). Five staff units were provided the Commission: for planning
service; for financial and administrative services; or training and information services; a
Legislative Staff; and a Data Processing Center.

The change to a parliamentary form of government was instituted by the 1973 Constitution. The
legislative branch of the government then referred to as the Batasang Pambansa; saw the minister
in charge of the budget, chairing the Committee on Appropriations and Reorganization. Through
the Budget Reform Decree of 1977, the planning, programming and budgeting linkages of the
Ministry were further strengthened.

The 1973 Philippine Constitution was superseded by the Provisional Constitution under
Proclamation No. 3 of President Corazon C. Aquino. The legislative power was temporarily
reposed on the President. Budgetary functions once more were exercised by the Office of Budget
and Management.

EO No. 292, issued pursuant to the 1987 Constitution, provided for major organizational
subdivisions of the Department of Budget and Management.

In 1992, under Fidel V. Ramos, government budgeting aimed to make the National Budget an
instrument for breaking the boom and bust cycle that had characterized the Philippine economy
in the past. Beyond sustaining the operations of government and its projects, the budget became
an economic stimulus and a means to disperse the gains of economic development.
At the outset of Joseph Estrada’s presidency, the Asian financial crisis that characterized the
period prompted the national leadership to take a second look at the country’s economic policies
and strategies. To maintain macroeconomic stability in light of the effects of the economic
turmoil, the government had to raise domestic demand by sustaining expenditures and pump-
priming the areas of public infrastructure and social services. It had to adopt an expansionary
fiscal policy by allowing a reasonable level of cyclical deficit to be financed largely through
foreign borrowing while offsetting the negative impact of deficit by introducing structural
reforms in the budget process.

During this period, from mid-1998 to end of 2000, the DBM continued to introduce budgeting
reforms that were meant to improve cash management, reduce uncertainty in allotment and cash
flow, and enhance transparency and accountability.

Under President Gloria Macapagal-Arroyo, the DBM focused its efforts on deepening fiscal
responsibility, enhancing the efficiency of public expenditures, and promoting good governance.
Along with these major areas of concern, it intensified efforts at strengthening inter-
governmental relations, eliciting increased participation from the private sector in the overall
budget process and in intensifying public information on the administration’s fiscal policy,
thrusts, and budget policies and procedures. It likewise stepped up efforts at enhancing internal
management in line with its vision to be seen as an organization that influences the spending
behavior and management of resources of agencies towards transparency, equity and
accountability.

Because the Philippines have a republican-presidential system of government, we need to

distinguish between different types of government: national and local government. Thus
government budget is prepared both in the local level and national level. But this report will
focus mainly on the government national budget.

Government national budget summarizes all three types of effects on aggregate demand:
purchases, transfers, and taxes. The overall budget totals do not distinguish between purchases
and transfers. Rather, purchases of goods and services and transfers are lumped together as
government outlays. And all taxes and duties collected are lumped together as government
receipts.

Government expenditure (outlays) consists of purchase and transfer. Purchases involve the use
of goods and services by the government, whereas transfers move funds to people outside the
government.

Government revenue (receipts) consists of tax and non-tax receipts of the government.

Budget Scenario

Balance budget when government outlays equals government receipts.

Budget deficit when government expenditure (outlay) exceeds government receipts. It is the
excess of government spending on goods and services over net tax revenue.
Budget surplus when government receipts exceed government expenditures (outlay).

Theories and Practice in Budgeting

Strong Aggregate Fiscal Discipline

Synchronized Planning and Programming-Budgeting System (1990) – Memorandum Order No.

295 was issued to enhance planning-programming-budgeting linkage.

Strengthening Oversight Control over Fiscal Program (1991)-the DBM and the DOF initiated the
creation of an inter-agency committee on cash programming composed of representatives from
the DBM, DOF, BTr, and the BSP. Notices of Cash Allocation (NCA) were issued based on the
level of disbursement ceilings determined by the committee.

Allocative Efficiency

Baseline Budgeting Scheme (1994) – this scheme was adopted to ensure a fair, transparent and
relatively simple methods of allocating government resources.

Technical Efficiency

Accountability reporting (1991) – the DBM issued National Budget Circular 442 requiring all
agencies for certain accountability reports on a regular basis.

Devolution of national government function (1992) – The passage of the Local Government
Code of 1991 provided for the devolution of national government functions to Local
Government Units in 1992 for more efficient and effective public service.

Extension of Validity of all Expenditures and Increase in Flexibility to Realign (1992 and 1996)
– in 1992, capital outlays was extended and made valid for two years. Provision to extend the
validity of unutilized appropriation including, MOOE up to the end of the succeeding year was
incorporated in the 1996 budget in order to encourage agencies to save and curb the tendency to
the spending of remaining appropriation at the end of the year.

Salary Standardization Law II (1993-1997) – this was implemented to raise the morale of civil
servants caused by pay disparity between private and public sectors.

Use of Information Technology by DBM (1994-onwards) – the DBM recognizing the role of IT
as an enabler in the improvement of the delivery of its services, developed as series of
computerization projects and improvements in the current systems.

Simplified Fund Release System (1995) – this system was implemented to expedite and
standardize the release of funds across agencies in line with the policy thrust of the government.
Approaches and Techniques in Budgeting

The adoption of baseline budgeting or costing of existing policies since 1993, the encouragement
of agency savings or efficiency gains by agencies to support new program was initiated. The
one-year budgeting framework was abandoned for lack of strategic prioritization system to
enable the restructuring of the budget towards priority and desired areas and the more gradual
adjustment towards fiscal consolidation. On the other hand a multi-year budgeting framework
was adopted to track the implications of multi-year expenditure approvals in view of the multi
year-projects funded by multilateral donors well beyond what can be supported by the annual
budget. The adoption of a public expenditure management program framework due to the
demand for better public services and the clamor transparency and conservatism in government
financial operations by the international investors amidst shrinking government revenues due to
trade liberalization.

Process and Procedures in Budgeting in the Philippines

Budgeting for the national government involves four (4) distinct processes or phases: budget
preparation, budget authorization, budget execution and accountability While distinctly separate,
these processes overlap in the implementation during a budget year.

Budget preparation for the next budget year proceeds while government agencies are executing
the budget for the current year and at the same time engaged in budget accountability and review
of the past year’s budget.

The preparation of the annual budget involves a series of steps that begins with the determination
of the overall economic targets, expenditure levels, revenue projection and the financing plan by
the Development Budget Coordinating Committee (DBCC). The DBCC is an inter-agency body
composed of the DBM Secretary as Chairman and the Bangko Sentral Governor, the Secretary of
the Department of Finance, the Director General of the National Economic and Development
Authority and a representative of the Office of the President as members. The major activities
involved in the preparation of the annual national budget include the following:

1. Determination of overall economic targets, expenditure levels and budget framework by

the DBCC;
2. Issuance by the DBM of the Budget Call which defines the budget framework; sets
economic and fiscal targets; prescribe the priority thrusts and budget levels; and spells
out the guidelines and procedures, technical instructions and the timetable for budget
preparation;
3. Preparation by various government agencies of their detailed budget estimates ranking
programs, projects and activities using the capital budgeting approach and submission of
the same to DBM;
4. Conduct a budget hearings were agencies are called to justify their proposed budgets
before DBM technical panels;
5. Submission of the proposed expenditure program of department/agencies/special for
confirmation by department/agency heads.
 6. Presentation of the proposed budget levels of department/agencies/special purpose funds
to the DBCC for approval.
7. Review and approval of the proposed budget by the President and the Cabinet;
8. Submission by the President of proposed budget to Congress.
9. To meet the Constitutional requirement for the submission of the President’s budget with
30 days from the opening of each regular session of Congress, the budget preparation
phase is guided by a budget calendar.

How does the budget become a law?

In accordance with the requirements of the Constitution, the President submits his/her proposed
annual budget in the form of Budget of Expenditure and Sources of Financing (BESF) supported
by details of proposed expenditures in the form of a National Expenditure Program (NEP) and
the President’s Budget Message, which summarizes the budget policy thrusts and priorities for
the year.

In Congress, the proposed budget goes first to the House of Representatives, which assigns the
task of initial budget review to its Appropriation Committee.

The Appropriation Committee together with the other House Sub-Committee conducts hearings
on the budgets of departments/agencies and scrutinizes their respective programs/projects.
Consequently, the amended budget proposal is presented to the House body as the General
Appropriations Bill.

While budget hearings are on going in the House of Representatives, the Senate Finance
Committee, through its different subcommittees also starts to conduct its own review and
scrutiny of the proposed budget and proposes amendments to the House Budget Bill to the
Senate body for approval.

To thresh out differences and arrive at a common version of the General Appropriations Bill, the
House and the Senate creates a Bicameral Conference Committee that finalizes the General
Appropriations Bill.

What is the General Appropriations Act?

The General Appropriations Act (GAA) is the legislative authorization that contains the new
appropriations in terms of specific amounts for salaries, wages and other personnel benefits;
maintenance and other operating expenses; and capital outlays authorized to be spent for the
implementation of various programs/projects and activities of all departments, bureaus and
offices of the government for a given year.

Budget Implementation

Budget implementation starts with the release of funds to the agencies. To accelerate the
implementation of government programs and projects and ensure the judicious use of budgeted
government funds, the government adopted the Simplified Fund Release System (SFRS)
beginning 1995.

In contrast to the previous system of releasing funds based on individual agency requests, the
SFRS is a policy-driven system, which standardized the release of funds across agencies, which
are similarly situated in line with specific policy initiatives of the government.

Following the SFRS, the agency budget matrix (ABM) is prepared by the DBM in consultation
with the agencies at the beginning of each budget year, upon approval of the annual General
Appropriations Act. The ABM is a disaggregation of all the programmed appropriations for each
agency into various expenditure categories. As such, the ABM serves as a blueprint, which
provides the basis for determining the timing, composition and magnitude of the release of the
budget.

Based on updated resources and economic development thrusts and consistent with the cash
budget program, the Allotment Release Program (ARP), which prescribes the guidelines in the
prioritization of fund releases, is prepared.

The ARP serves as basis for the issuance of either a General Allotment Release Order (GARO)
or a Special Allotment Release Order (SARO), as the case maybe, to authorize agencies to incur
obligations.

Subsequently, the DBM releases the Notice of Cash Allocation (NCA) on a monthly or quarterly
basis. The NCA specifies the maximum amount of withdrawal that an agency can make from a
government bank for the period indicated. The Bureau of the Treasury (BTr), replenishes daily
the government servicing banks with funds equivalent to the amount of negotiated checks
presented to the government servicing banks by implementing agencies.

The release of NCAs by the DBM is based on: 1) the financial requirements of agencies as
indicated in their ABMs, cash plans and reports such as the Summary List of Checks Issued
(SLCI); and 2) the cash budget program of government and updates on projected resources.

Agencies utilize the released NCAs following the “Common Fund” concept. Under this concept
of fund release, agencies are given a maximum flexibility in the use of their cash allocations
provided that the authorized allotment for a specific purpose is not exceeded. Project
implementation is thus made faster.

Adjustments on the Budget

Adjustments are made on the budget even during implementation primarily because of the
following:

 Enactment of new laws – Within the fiscal year, new legislations with corresponding
identified new revenue sources are passed which necessitate adjustments in the budget
program.
  Adjustments in macroeconomic parameters – The macroeconomic targets considered in
the budget are periodically reviewed and updated to reflect the impact of recent
developments in the projected performance of the national economy and on the set fiscal
program for the year. The relevant indicators affecting the budget aggregates include the
following: the Gross National Product (GNP), inflation rate, interest rate, foreign
exchange rate, oil prices, and the level of imports. Thus, a sensitivity measure on the
impact of these parameters on the budget will determine whether recent macroeconomic
developments have a negative or favorable effect on the budget.

Change in resources availabilities – a Budget adjustment is undertaken when additional resources

become available such as new grants, proceeds from newly negotiated loans and grants.
Corresponding budget adjustments are also made when resources generation falls below the
targets.

Budget Accountability

Cognizant of the fact that no propitious results can be obtained, even with maximum funding, if
agency efficiency is low and funds are wastefully spent, systems and procedures are set in place
to monitor and evaluate the performance and cost effectiveness of agencies. These activities are
subsumed within the fourth and the last phase of the budget process-the budget accountability
phase. At the agency level, budget accountability takes the form of management’s review of
actual performance or work accomplishment in relation to the work targets of the agency vis-à-
vis the financial resources made available.

Also, detailed examinations of each agency’s book of accounts are undertaken by a resident
representative of the Commission on Audit (COA) to ensure that all expenses have been
disbursed in accordance with accounting regulations and the purpose(s) for which the funds have
been authorized.

Role of DBM in the Budgeting Process

No, the role of the DBM in the budgeting process is not limited to national government agencies.
It coordinates all three levels of government-national government department/agencies,
government-owned and controlled corporations (GOCCs) and local government units (LGUs) –
in the preparation, execution and control of expenditures of their corresponding components
entities.

The DBM reviews the corporate operating budgets of GOCCs and ensures the proper allocation
of cash. The DBM likewise formulates and recommends the budget policy covering the
allowable deficit and the criteria for the determination of the appropriate subsidy and equity of
GOCCs.

For LGUs, the DBM reviews the annual and supplemental budgets of provinces, and highly
urbanized cities and manages the proper allocation and release of the Internal Revenue Allotment
(IRA) of LGUs and their share in the utilization of national wealth.
Philippine Expenditure Policies

The Department of Budget and Management has recently initiated a “Public Expenditure
Management Improvement Project”. The Project aims to build on the reforms of budgeting
systems and processes that have been accelerated in the last six years to complement efforts at
decentralization, privatization, and the increasing integration trade and trade-in-service with the
global economy.