The National Budget is a Financial Plan of Government or the Translation of Government

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The national budget is a financial plan of government or the translation of government’s programs in monetary terms. The annual budget contains the expenditures program which enumerates the different expenditure items and the respective amounts intended to be spent for each. These expenditures are supposed to achieve public purposes and be consistent with development objectives. The expenditure program, however, is just one dimension of the budget. Public expenditures are prepared and implemented with due consideration to the financial resources available to government to fund its expenditures. Thus, revenue and financing (borrowing) programs are drawn-up, along with the expenditure program, and form part of the budget. State policies highlight the role of the national budget as an instrument of national development. Section 3, Book VI, Executive Order 292 1 declares it a policy of the State to formulate and implement a national budget that is, among others: An instrument of national development, reflective of national objectives, strategies and plans;

Setting of overall budget policy. The overall budget policy for a given year is set by the Development Budget Coordination Committee or DBCC, an inter-agency body responsible for setting the fiscal policies of government. The DBCC is chaired by the DBM secretary and the members include the Department of Finance (DoF) secretary, director general of the National Economic Development Authority (NEDA), head of the Monetary Board of the Bangko Sentral ng Pilipinas (BSP) and a representative from the Office of the President. The composition of the DBCC reflects the different fiscal and socio-economic development concerns that are taken into consideration and harmonized in the formulation of the annual budget. The DBM ensures the appropriate allocation, management and control of public expenditures; the DoF provides the guidance on appropriate revenue, borrowing and cash management policies and targets that should support these expenditures; the NEDA ensures that the budget is supportive of the socio-economic development objectives and goals as set out in the country's Mediumterm Development Plan; the Monetary Board ensures that monetary policies are considered in setting budget policies. The DBCC decides on the overall budget policy which will guide the formulation of the budget. These decisions include the setting of the macroeconomic assumptions. These assumptions are crucial in the formulation of the budget since the level of revenues and expenditures are affected by these macroeconomic factors. Table 1 shows the assumptions for key macroeconomic variables as contained in the CY 2009 Budget Call issued on May 2008. While this was to be used in the preparation of the 2009 budget, not that actual and assumed projections for years immediately before and after 2009 are also reported. Table 1. Macroeconomic Assumptions

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Supportive of and consistent with the socio-economic development plan; and Oriented towards the achievement of explicit objectives and expected results.

The Philippine budget process The budget process consists of four phases, namely budget preparation (or formulation), budget legislation (or authorization), budget execution (or implementation) and budget accountability. These phases form a budget cycle which traces the evolution of the budget and leads to an evaluation of budget implementation. The last phase should serve as inputs for budget authorities, fiscal managers and Congress in their decisions regarding the budget for the succeeding year. Figure 1. Budget Process

Source: Budget Call CY 2009 The DBCC also establishes the overall fiscal program for the ensuing year. The fiscal program consists of an estimation of government revenues and setting the overall level of total expenditures, i.e., how much it plans to spend. In relation to this, a crucial decision of the DBCC is whether to aim for a balanced budget, generate surplus or pursue deficit spending. A balanced budget means that the level of expenditures to be programmed will be limited to the amount of estimated revenues. Generating surplus entails setting of expenditure levels below the estimated revenues while the reverse is true for deficit spending. The DBCC also decides the level of deficit and the financing or borrowing program that will augment estimated revenues. The Constitution provides that national budgets be prepared annually covering a calendar year. This implies that at any given period of the year, different budget phases for different annual budgets overlap. For example, as of June 2009, the 2009 budget is in its budget execution phase while at the same time, the 2010 budget is in its budget preparation phase. Further, the 2008 budget is in its budget accountability phase during this time. The process of allocating public funds involves the decisions of different fiscal decisionmakers at the various levels of government. Setting the overall allocation of national government expenditures across programs and projects of departments requires the enactment of an appropriation which would have to be approved by Congress and the President. Once an appropriation law is in place, budget authorities from the Department of Budget Management (DBM) and head of agencies exercise fiscal powers which determine where public funds and by how much are actually utilized. The intricate web of decision-making processes can be better understood using the framework of the budget process to have a working knowledge of how all these impact on the determination of allocation of national government resources. Budget Preparation Budget preparation phase involves activities linked to the formulation and consolidation of the national budget which will eventually be proposed by the President for approval by Congress. Preparation of the annual budget for a particular year is done in the preceding year. Generally, the major activities in this phase are: 1. 2. 3. 4. Setting of overall budget policy Agency-level budget formulation Executive review, deliberation and approval Preparation of budget documents and submission to Congress Table 2 shows the fiscal program for CY 2009 as reported in the CY 2009 Budget Call. It shows that as of May 2008 when the Budget Call was issued, the DBCC has targeted a balanced budget since total proposed disbursements equal the total projected revenues of PhP 1.337 trillion (USD 29 billion). Table 2. Fiscal Program for 2009 (in PhP million)

Source: CY 2009 Budget Call

It should be noted that key macroeconomic variables are considered not only because they have an impact on the budget but also because the budget is a powerful instrument for government to respond and promote macroeconomic objectives, i.e., stability, growth, equity and development. For instance, if government projects a slowdown in the economy, the DBCC may consider increasing expenditures to “stimulate” or “pump-prime” the economy to induce growth. Agency-level budget formulation. After the DBCC deliberates and decides on the overall budget policy, DBM issues the Budget Call to guide agencies in the preparation of their respective proposed budget. It defines the budget framework/priorities, the macroeconomic assumptions and fiscal targets. The Budget Call also prescribes the priority thrusts and spells out the detailed policies on agency-level budget preparation such as budget ceilings, resource allocation, required budget preparation documents and formats, and timeline of the budget preparation phase. Based on the Budget Call, the agency’s mandate, strategic plans and goals, the agencies set out formulating their budget. The process involves deciding the allocation of resources across programs and projects by determining the monetary requirements per objects of expenditures, i.e., current operating expenditures (personal services and maintenance and operating expenses) and capital outlay. Agencies also decide on the allocation of budget across the different bureaus, regional offices and attached agencies. The head of agency is responsible for the prioritization in the allocation of the agency’s budget subject to the budget policies prescribed in the Budget Call. In recent years, agencies have been required to prepare their budgets in relation to their Organizational Performance Indicator Framework (OPIF). 2 With the introduction of the OPIF, agencies are required to identify major final outputs (MFOs) and formulate appropriate performance indicators/targets relating to these MFOs. This initiative seeks to ensure that agency budgeting is output-oriented and that there are indicators against which the agency's performance can be evaluated. Executive review, deliberation and approval. The budgets formulated by agencies are submitted to the DBM and undergo a series of review and deliberation at the DBM, DBCC and Cabinet levels. The DBM reviews the submitted budgets for consistency with existing policies and guidelines. Technical budget hearings are conducted to discuss with agencies the justifications for their budget and appropriate adjustments to be made when warranted. The budget of the agencies are then reviewed and deliberated at the DBCC level and finally presented at the Cabinet level. Once the budget is cleared with the President, the DBM finalizes the budget documents which the President will submit to Congress for approval. Preparation of budget documents and submission to Congress. The budget documents prepared by the DBM consist of at least the following: The President's Budget Message 1. 2. 3. 4. Budget of Expenditures and Sources of Financing National Expenditures Program Details of Selected Programs/Projects Staffing Summary

this prerogative is not unrestricted. The Constitution provides limits to this prerogative of Congress. Among these restrictions are that: Congress may not increase the appropriations recommended by the President. This implies that any budget items which Congress wants to increase would have to be accompanied by concomitant cuts in other items. 1. 2. The budget of the Judiciary, which enjoys fiscal autonomy, may not be reduced to a level below the amount appropriated for the previous year. Education shall be assigned the highest budgetary priority.

Aside from these Constitutional restrictions, the existence of automatic appropriations effectively limits the share of the budget pie that is subject to realignments/amendments by the legislators. These automatic appropriations are provided under existing laws identifying certain shares of government revenues to automatically fund specific expenditure items in the budget. In terms of amounts, the most significant budgetary items which are subject to automatic appropriations are those for debt service-interest payments, the Internal Revenue Allotment or IRA which is the share of local government units (LGUs) from national government revenue 4, and the Retirement and Life Insurance Premiums (RLIP) which is the share of the national government in the premium payments to GSIS for the life insurance and retirement benefit fund of government employees. Bicameral Conference Committee. The general appropriations bills approved by the two chambers of Congress are not usually identical. Thus, the two chambers form a bicameral conference committee (or bicam committee) to iron out the differences in their respective budget bills. The bicam committee is tasked to come up with a consolidated version of the general appropriations bill which is contained in a bicam report. The bicam report is brought back to both houses for approval of their members. Approval of the consolidated budget by Congress does not yet complete the budget authorization phase. Just like any other legislative enactment, the budget bill is sent to the President for its signature for it to become the General Appropriations Act (GAA). The President is given thirty (30) days to review and sign the appropriations bill into law. If the President fails to take action after the said period, the appropriations bill is deemed approved and enacted. The President can sign the bill as is or he/she can exercise his/her veto power before signing. Line-item veto power is granted to the President which allows him/her to strike out specific budget items or special provisions in the budget bill and thus approve all other items which he/she does not object to. When veto power is exercised, a President’s Veto Message is issued wherein the items to be vetoed are identified and the justification for such a veto is explained. In the event that no appropriations bill has yet been signed at the start of the year in, the Constitution provides that the GAA for the previous year will be in effect until a GAA is signed for the new year. Budget Execution The GAA serves as the legal basis which allows for the use of funds from the national treasury for specified expenditure items provided therein. However, the existence of a GAA alone does not imply that agencies can start utilizing and drawing funds to finance their programs and activities. Agencies need to secure an allotment to be able to obligate amounts specified in their budgets; cash allocation should also be secured before disbursements can be made to settle these obligations. The budget execution phase is concerned with these operational aspects of budgeting which facilitates the translation of appropriations to disbursements, or more specifically the release of funds through allotments and Notice of Cash Allocation (NCA). Figure 2. Appropriations-Disbursement Continuum

The set of budget documents consolidates the budgets from different agencies of government. The President’s Budget Message provides information on the overall thrust of the budget being proposed and an explanation of the sectoral spending priorities and how it supports development goals. This constitutes the proposed budget which the President submits to Congress for approval. The Constitution provides that the President “submits to the Congress within 30 days from the opening of every regular session, as the basis of the general appropriation bill (GAB), a budget of expenditures and sources of financing including receipts from existing and proposed revenue measures.” 3 Budget Legislation Budget legislation starts once the President transmits the proposed budget to Congress. Congress plays a central role in this phase. Article VI, Sec. 29 of the Constitution provides that “No money shall be paid out of the Treasury except in pursuance of an appropriation made by law.” An appropriation is essentially an authorization made by law or other legislative enactment, directing payment out of government funds under specified conditions for specified purposes. The budget legislation is thus the process of securing an appropriation for the budget to be implemented. The general appropriations bill goes through roughly the same legislative process as the passage of any other bills. It undergoes three readings first at the House of Representatives (HOR) and later at the Senate. Committee-level deliberations are conducted through public hearings at the Committee of Appropriations at the HOR and the Committee on Finance at the Senate. In the course of Congressional deliberations and approval, legislators can make changes in the allocation of the budget for the various expenditure items. However,

Allotments. The DBM issue an allotment to implementing agencies which authorizes them to incur obligations for specified amounts contained in the legislative appropriation, e.g. GAA. The DBM requires agencies to submit documents it would review and would be part of the basis for releasing allotments. These requirements include the Agency Budget Matrix, and work and financial plans as contained in the Budget Execution Documents or (BEDs), consisting of: BED 1: Physical and Financial Plan (PFP) - overall physical (targeted outputs) and financial (estimated obligations/expenditures) plan of the agency consistent with their approved budget level for the year, broken down by quarters.

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BED 2: Monthly Cash Program - monthly disbursement requirements of the agency which is the basis for issuance of NCA, Cash Disbursement Ceiling and other disbursement authorities. BED 3: Estimate of Monthly Income - reflects the estimated income for the year by source, as contained under the Budget of Expenditures and Sources of Financing of the given year.



BED 4: List of Not Yet Due and Demandable Obligations - reflects the level of obligations/expenditures charged against prior years’ budget, for which goods/services/projects are not yet delivered/rendered/completed and accepted as of end of the preceding year.

Revenue Target (in P million)

1,393,336

Revised Revenue Target (in P million)* 1,239,152 Variance (in P million) (154,184) 7.79%

Not all the amounts appropriated to agencies are included in one allotment. Allotment releases are spread out throughout the year and are issued based on the cash requirements of agencies and the availability of funds in the national treasury. Succeeding release of allotments necessitates continuous performance review of agencies by the DBM and the submission of periodic Budget Accountability Reports (BARs): BAR 1: Quarterly Physical Report of Operation which reflects the agency’s actual accomplishments in terms of the performance measures indicated in its PFP.

% Increase/(Decrease) Notes:

1. Source of basic data: DBM and DBCC 2. * revised projections as of October 2009 Table 4 below shows the series of revisions on budget deficits the DBCC has made for the 2009 budget. It shows that as of May 2008, when the Budget Call was issued, a balanced budget was projected. A series of revisions have been made progressively increasing the expected budget deficit at the onset of the financial meltdown in the United States in August 2008. By year end, the actual budget deficit recorded has reached almost PhP 300 Billion (USD 6.5 billion).

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BAR 2: Quarterly Financial Report of Operation which reflects agency’s actual obligations corresponding to the reported physical accomplishment for the quarter. BAR 3: Quarterly Report of Income which reflects the agency’s actual income collections from all sources, classified into tax or non-tax, broken down by month. BAR 4: Statement of Allotment, Obligations and Balances (SAOB) which reflects the agency’s summary of allotment received and corresponding obligations/expenditures incurred during the month from all sources. BAR 5: Monthly Report of Disbursements which reflects the monthly disbursements by allotment class.

Table 4. Budget Deficit Projections, FY 2009
Deficit Target May 20081 0

Obligations and Disbursements. Obligations are liabilities legally incurred and committed to be paid for by the government immediately or in the future. Examples of obligations incurred are salaries due to agency employees or when the agency enters into contracts for the purchase of goods or services. Allotments issued to agencies essentially sets the ceiling of how much the agency can obligate. Disbursements, on the other hand, refer to the actual withdrawal of cash from the National Treasury due to the encashment of checks issued by the agencies as payment for obligations. Agencies are issued the NCA which specifies the amounts that can be withdrawn out of the allotments released to the same. The head of agency in the financial officers under him/her has the responsibility of ensuring that obligations incurred and the disbursement of cash satisfy legal requirements as prescribed in pertinent budgeting, procurement and accounting laws, rules and regulations. Why are total appropriations and disbursements not necessarily the same? Several factors account for the inequality of total appropriations with total disbursements. The formulation and authorization of the budget is based on projections or revenues by government. In the course of budget execution, changes in the macroeconomic scenarios and the performance of revenue generating agencies affect the actual revenue collections which may fall short of projections. These conditions necessitate adjustments on the expenditures of government by controlling the release of allotments. Actual macroeconomic trends can also lead to increase in debt serviceinterest payments to more that what was projected and since payment for this is automatically appropriated, it can cause an increase in expenditures. Re-enactment of previous year's budget due to delayed passage of a new GAA can also increase the disbursements for that particular year. The absorptive capacity of agencies can also affect the total allotments released to them (e.g. It may be counter-productive to continue releasing the full appropriated amounts to agencies exhibit poor utilization of their fund allotments.). The need to come up with realistic macroeconomic assumptions and fiscal targets cannot be overemphasized as it has significant impact on budget execution. Table 3 shows a sample of how far projections on GDP growth and revenue targets to the actual figures in the fiscal year 2008. The 2009 revised growth and revenue targets were based on adjustments by DBCC during the year. Table 3. Comparison Projected and Actual/Revised Growth and Revenue Targets

August 20082 November 20083 February 20094 March 20095 May 20096 June 20097

P40 billion

P102 billion P160 billion P177.2 billion P199.2 billion P250 billion

Sources: 1 Budget Call FY 2009 2 Budget of Expenditures and Sources of Financing FY 2009 3 “Gov’t jacks up borrowing ceiling” Philippine Daily Inquirer, November 14, 2008 http://archive.inquirer.net/view.php?db=1&story_id=172059 4 “Budget deficit set at P160b” Manila Standard Today, February 21, 2009 http://www.dbm.gov.ph/index.php?pid=3&nid=1592 5 “P177-B cap on budget deficit in 2009 stays” Manila Bulletin, March 26, 2009 6 Budget Call FY 2010 7 “Gov’t revamps targets” Business World, June 11, 2009 Budget Accountability Since government officials act as stewards of public resources, it is essential that mechanisms be put in place to promote accountability on how they use public resources entrusted to them and how they have exercised the fiscal powers which were granted to them by the Constitution and existing laws, rules and guidelines. There is a body of laws, rules and regulations instituting a government accounting and state audit system in the Philippines. The Commission on Audit and the DBM ensures that these systems are in place and that agencies comply with these accounting rules and are subjected to audit. The New Government Accounting System or NGAS was put in place which sets the comprehensive guidelines for agencies in accounting for budgetary accounts, accounting for all its receipts and incomes, accounting for its disbursements, and the financial reporting system. The COA conducts annual external audit of government agencies. The audit scope includes financial, compliance and performance audit. Financial audit are conducted to ensure that financial reports of agencies reflect a more-or-less realistic picture of the financial conditions of the agency. Compliance audit looks at the consistency of the agency’s financial management practices with those prescribes by pertinent laws, rules and regulations. Performance audit evaluates the operations of the agency in terms of economy, efficiency and effectiveness. Audit reports are a rich source of information on of the extent to which agencies are able to achieve the greatest value for money that has been entrusted to them. The existence of accounting and audit systems as well as the preparation of financial and audit reports promotes accountability in the budget process. But while they facilitate the generation of information regarding misuse of public resources, these reports need to be used by other agents of government to initiate appropriate administrative and/or legal actions to curb misuse of funds and deter abusive use of fiscal authority by concerned government officials. These reports should also be made

Particulars FY 2008 BESF GDP Growth Target (%) Actual GDP Growth (%) Revenue Target (in P million) Actual Revenue (in P million) Variance (in P million) FY 2009 BESF Growth Target (%) Revised GDP Growth Target (%)*

Amounts

6.1-6.8 3.8 1,236,228 1,202,905 (33,323)

6.1-7.1 0.8-1.8

accessible and understandable to the media and the general public to enhance accountability in the budget process. Local governments’ share of national revenues Under the Local Government Code of 1991 (Republic Act 7160), local government units are allotted shares from the national internal revenue taxes in the form of Internal Revenue Allotment (IRA). The Code prescribes that the IRA shall be forty (40) percent of the national internal revenue collections for the third fiscal year preceding the current fiscal year. The total IRA is further subdivided among the different levels of LGUs:

But apart from the limiting structure of the budgeting system, technical aspects of budgeting also hamper the involvement of the public in the process. Civil society organizations and even the media need to develop their knowledge on the technical aspects and intricacies of the budget system. Even if relevant budget records are provided, the public and media may not have the skills to understand and analyze the information contained therein. Attitudes of the public on public expenditures can also be a factor that can determine the extent of their involvement. It may be well appreciated by the public that government funds come from their pockets but the persistent and seemingly pervasive corruption in government may breed a sense of hopelessness and apathy. It is worth mentioning though that there are efforts from the civil society that have been focused on campaigning and lobbying for greater allocation for social development. The Alternative Budget Initiative, a network of NGOs in partnership with legislators and media group, has been engaging the technical and political aspects of the budget process. It conducts capacity building in budget analysis, formulation of alternative budget proposals for social development, lobbying for such proposals and conduct budget monitoring and tracking. ABI has made significant inroads such as successfully lobbying for the inclusion of over PhP 7 billion (USD 152 million) in the 2009 GAA for various programs for health, education, agriculture and environment. Philippine Public Transparency Reporting Project (The author is an assistant professor of the National College of Public Administration and Governance at the University of the Philippines.) [1] Administrative Code of 1987

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Provinces – 23 percent Cities – 23 percent Municipalities – 34 percent Barangays – 20 percent

The Code further prescribes that the share of each province, city and municipality shall be determined on the basis of the following formula:

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Population – 50 percent Land Area – 25 percent Equal sharing – 25 percent

The Code specifies that these shares of LGUs shall be automatically released. However, in the event that the national government incurs an unmanageable public sector deficit, the President, upon the recommendation of the Secretaries of DoF, DILG and DBM, to make the necessary adjustments in the IRA but cannot lower it further than 30 percent. The IRA is only one source of income of LGUs. The Code has granted several tax and revenue raising powers to LGUs such as the imposition of local taxes, fees and charges. Real property taxes is a rich source of LGU income as well as business taxes, especially for richer LGUs. The share from the IRA however represents a significant portion of the total income of poorer, less economically developed LGUs. Local Budget Process Local budgeting also undergoes the four phases of the budget process discussed above but the fiscal decisions and authorities are performed primarily by local government bodies and officials. Budget preparation is done by estimating the expected revenues and expenditures by the local treasurer and submitted to the local chief executive (e.g. provincial governor, city/municipal mayor). Heads of local offices do the statements of proposed expenditures while the chief executive consolidates and submits the proposed revenues and expenditures to the local legislative body for approval. Budget authorization is conducted to secure an appropriation which forms as the basis for spending of local funds. The local legislative bodies, i.e., local sanggunian or councils, deliberate and approve the proposed local budget with the end in view of adopting an appropriations ordinance. Budget execution and accountability are done with the technical assistance of local financial officers (ex. local treasurer, budget officer, accounting officer). The local chief executive releases the allotments to departments/offices of the LGUs. COA has promulgated accounting rules and guidelines for LGUs and barangays under the New Government Accounting System. COA also conducts audit of LGUs. Public participation in government budgeting Unfortunately, the budget process as shaped by current budgeting laws and practices leaves little room for the involvement of the general public. DBCC and the agencies are in charge of budget preparation and execution but generally do not have institutionalized mechanisms for participation in budget formulation and implementation. Budget authorization however affords the public and media to witness 5 budget deliberations during Congressional public hearings. The “grilling” of agency heads during these hearings are sometimes the subject of news coverage. The salient issues regarding COA’s audit is that their reports come out too late to be fully considered in the budget preparation and authorization phases. There are also issues on transparency or the degree of access and availability to budget records and financial documents from budget authorities and agencies. The DBM and COA have made use of their websites to makes available many budget documents, audit reports and policy guidelines. DBM however does not yet publish records on allotment and NCA releases. Access to agency documents is much more difficult due to reluctance of agency officers to share relevant financial information to the general public.

[2] The OPIF “is an approach to expenditure management that directs resources towards results or MFOs [major final outputs] and measures agency performance by key quality and quantity indicators. It is a process that demonstrates the direct relationship between agency programs and activities and the goods and services that the agency is mandated to deliver to its external clients to achieve organizational outcomes as well as sectoral and societal goals under the MTPDP [Medium-Term Philippine Development Plan].” -- Department of Budget and Management, National Budget Memorandum No. 101, May 2, 2008 [3] Article VII, Section 22

[4] A detailed discussion of the LGU share in national government revenue is contained in the latter part of this paper. [5] Historically, these hearings are scheduled for agencies to present and defend their budgets. However, during the deliberation of the 2008 budget, the HOR Committee on Appropriations broke tradition when it scheduled a budget hearing specifically for the Alternative Budget Initiative, a network of CSOs engaged in the budget process.

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