I.

Early Public Finance

A. Ancient Finance: The Slave Societies
B. Medieval Public Finance: Feudalism
II. The Breakdown of Feudalism
A. The Rise of Central Government
B. Beginning of Capitalism
1. Mercantilism
2. Cameralism
3. Physiocracy
III. Capitalism: Public Finance and Free Enterprise
A. Adam Smith
B. David Recardo
C. John Stuart Mill
D. Adolf Wagner
› The development of public finance
institutions merely reflects the development
of organized society, particularly the state.
Public finance raises and spends revenues
for the functions of the state. These functions
have been changing with the development
of society.
› Under the primitive societies, there was not probably
much public finance to speak of. The primitive tribes
were on a subsistence basis, with hardly any surplus.
Whatever was acquired from hunting and fishing was
immediately consumed.
› The early public finance institutions of the slave
societies served as foundation for modern institutions
and practices. Ancient public finance provided some
of the basic instruments of public financial
management i.e., budget and expenditures, tax and
revenue administration, and debt and borrowings.
Medieval public finance further refined some of these
concepts, distilling their basic aspects by an
expanded application to medieval public goals and
conditions. It also introduce some basic tools like
accounting and auditing.
 The beginnings of public finance started
from the creation of the state. The state was
created by the necessity to protect and
purportedly promote the welfare of man.
Basically, the state was comprised of: the
government, the people, territory, and
sovereignty. Public finance was supposed
to preserve the state and promote the
goals of the society. In particular it financed
the activities of government.
 To protect and maintain the state system,
the government had to perform several
vital functions. Ancient public finance was
therefore characterized by enormous
public expenditures for defense and
aggression. The provision and maintenance
of armies and navies were basic allocations
of the public purse. This was the largest
single item of expenditures in ancient times.
Regimes literally driven into bankruptcy
because of war expenditures.
 Another function of the ancient government was
the preservation of internal peace, order, and
security and the administration of justice.
Considering the fact that a vast majority of the
population in slave empires were slaves who might
rebel any time, peace and order for ruling minority
was a primary concern.
 Maintenance of a state religion was also a function
of the ancient government. Religion helped
stabilized and rationalize the ruling order in slave
empires. In slave empires, as in Egypt, the rulers
were considered gods and goddesses; they were
looked upon as human manifestations of deities
and were considered religious as well as temporal
leaders.
 The maintenance of the king and his
household, was deemed the inalienable right of
the sovereign. It was the people’s obligation to
provide him with revenues and he to spent such
(as a divine obligation) for anything he
deemed good for the public welfare.
 Building and maintenance of public works was
also a common activity in the slave societies.
Roads, canals, irrigation systems, pyramids, and
fortifications were considered public concerns
to be financed from public resources.
 The term “public works” may not necessarily be
descriptive of the massive structures which were
built in ancient times since quite a few of them
were really tombs of rulers.
 To finance its public functions, the State had to
impose and collect revenues. Ancient taxes
and revenues were generally crude and simple
form.
 The slave state’s revenue were ordinarily limited
to: lootings and tributes from conquered
peoples, war chests, fines, and direct taxes
imposed on non-citizens of the State or on
conquered peoples. Other revenues consisted
of donations or gifts from the wealthy citizens of
the state.
 The most common sources of revenue were
from the ruler’s domain and tributes from
conquered provinces.
 Ancient governments had little need for direct
taxes since they levied tributes on conquered
people. The Greeks and Romans objected to
any direct taxes but nevertheless were forced
to practice direct taxation in times of
emergency. Of the direct taxes in ancient
times, the more important was the poll tax
which was levied on Egyptian male population
and on Roman non-citizens engaged in
business. This developed into a kind of personal
property tax in later times. One of the more
popular taxes was the tax on inheritance.
Originating from ancient Rome and Egypt, this
direct type of tax provided elaborate
exemptions. Significantly, it had a higher tax
rate for childless couples and unmarried
individuals, apparently in conformance with the
ancient high regard for fertility, especially in
Egypt.
 Since the ancient governments had several
functions to perform, it was logical that they
had to apportion revenues for each of these
functions. Budgeting was obviously
exercised because of the need to allocate
public revenues for specific purposes. Since
the public budget was merged with the
king’s purse, there was no distinction
between the public and the king’s private
expenditures.
 Public borrowings and debt management
were unheard of. Although there was
already a form of money lending, the
ancient state did not borrow money even in
emergencies. It only solicited gifts or levied
limited taxes. The ancient state was relatively
self-sufficient and public expenditures were
usually borne by the citizens and non-citizens
without recourse to loans.
 State audit was also an ancient and
respected branch of state administration.
The principle of accountability for those in
charge of government expenditures of
resources from public funds is perhaps as old
as organized government.
 Since ancient public finance was limited to
tax and expenditure aspects, state audit
was primarily concerned with the
maintenance and inspection of financial
records to ensure the regularity of accounts
and the legality of expenditures.
 The development of medieval public
finance closely followed the changes in the
political structure of the state during the
Middle Ages. These changes encompassed
the weakening of the monarchy(central
government) at the outset of the medieval
period, the subsequent fragmentation of
public authority resulting in the system of
feudalism, and the rise of limited monarchy
at the end of the era.
 In the face of changing conditions, the
form and structure of taxes and other
revenues instruments were adapted to
varying sources and subjects of levy. While
retaining its traditional purposes, i.e., for
public concerns, public expenditure
changed in terms of scope and
composition. Accounting and Auditing
gradually acquired tangible forms. Public
borrowings became institutionalized due to
increasing expenditures of the government,
evolving a semblance of debt
management.
 Feudalism was essentially the system of
economic relationship based upon land
tenure, among the king, the lord, and
the vassals. In England and France, it
developed to its fullest, embracing as
well thee political, social, and cultural
patterns of life. Some Western states
while not fully feudal also experienced
varying degrees of feudal life.
 The king still theoretically owned all lands
within his domain. He found it convenient
to charter parts of his land to his nobles.
Moreover, due to the rising expenditures
for defense against the invading
barbarians, aggravated by his prodigal
spending, the king was forced to grant
lands in return fro immediate revenues.
Inevitably, the public domains was
divided into numerous feudal jurisdictions
(fiefs) over which ruled, more or less
indepently, the feudal lords. The feudal
lords became vassals to the king
(suzerain), accepting the fief in promise
for aids and soldiers.
 Many lords parceled the lands to sub-
vassals or serfs to whom they granted
permission to cultivate, accorded
protection, and administered justice. In
return, the serfs cultivated the lord’s land,
served on his army and courts,
contributed aids in money or services on
special occasion, gave a part of their
produce, and paid taxes.
 More often, the king was increasingly
forced to subsist mainly upon the income
from the property he directly owned. The
king imposed fees on his subjects who
hunted or fished in his demesne and
imposed fines on trespassers. In addition,
the king derived revenues from the bona
vacantia, i.e., precious metals found,
stolen goods, stray cattle and wrecked
ships.
 The feudal lord became an important
and active fiscal manager. He assessed
and collected taxes from his serf. He
levied license fees on merchants and
traders who passed by his manor. He
collected gross produce taxes,
inheritance taxes and marriage fees for
the upkeep of his court. Tolls on rivers,
bridges or roads were also levied. He
also collected aids when his eldest son
was knighted or his eldest daughter
married when he set out on crusades,
and when the king requested
contributions on emergencies.
 The importance of land taxation was such that
the English king, in one of his assertions of
revenue powers, caused the preparation of
the Domesday Book in 1085 listing all lands and
owners for purposes of taxation. At best, the
book manifested the serious attempts of
feudal governments to improve revenue
administration.
 Central governments borrowed occasionally
but in small amount. Public borrowings were
more or less a personal transaction between
the monarch as borrower and the lender, who
was ordinarily a wealthy trader. Public
borrowings were difficult to secure because
the king, under feudalism, had limited power
to tax, thus to repay the loans. Loans were
usually short-term, at high interest rates, with
the king’s personal properties as collateral.
 One of the first post-feudal taxes
reintroduced by the English central
government was the poll tax. An ancient
form of levy, it was expanded to include
all male and female English citizens and
non-citizens over fifteen years of age.
The hearth tax was assessed by the
number of stoves and chimneys, and
the window tax upon the number of
windows in the houses.
 A wide variety of sales taxes were levied
on clothing, wares, food and drink, wool,
grains, tobacco, etc. The gabelle or salt
tax was almost universal, but was
resented everywhere. The net income
tax was introduce for the first time in
England in 1798 and became later an
integral part of the British revenue
system.
 The French Revolution in 1789 eliminated
most of the existing taxes under the feudal
system. The tithe or aid which was
compulsory under the land-vassal
relationship was abolished. The French
taille and its exemption for the privileged
clergy, wealthy bourgeoisie and the
nobles, were voided.
 The abolition of the feudal taxes was
accompanied by a severe restriction of
the king’s expenditure powers.
 The need for uniform taxation became one
of the first concerns of the newly rising
populist central governments. The more
modern features of tax systems and structures
were slowly realized with modernization and
updating of permanent financial records
which were “musts” for valid and effective
bases for assessment or levy.
 Increasingly, the need for technical skills in
the collection and organizing of information
became urgent. Near the end of medieval
period, some methods of accounting and
bookkeeping evolved.
 Later on, pressed by the need for more
elaborate records-keeping and inspection, audit
bodies began to bureaucratize. The growth of
permanent records further enhanced revenue
administration and the audit of royal revenue.
 It is noteworthy that the emergence of
formalized audit institutions during this period
was not confined to the West. In the East, public
finance institutions also developed. State
auditing was widely practiced by the Korean
dynasties. An inspector of the Korean ruler, who
was the equivalent of an auditor, carried a royal
medallion in order to gain access to financial
records in the course of his inspections.
 Factories were established to provide goods for
increasing populations. Technological advances
enabled man to explore other lands for raw
materials and food. Commercial trade increased
with the establishment of colonies. Increased
wealth accompanied by accelerated demand
for goods and services expanded the domestic
markets. These development demanded new
political and social systems which could
accommodate the increased scope and
complexities of modern life. From the extensive
literature on this concern evolved three school of
thought: mercantilism, cameralism and
physiocracy.
 Mercantilism refers to those policies
especially protectionist and monetary,
which the European states pursued
during the 16th, 17th and 18th centuries in
their efforts “to enrich a great nation by
trade and manufacturers than by the
improvement and cultivation of land,
rather by industry of towns than that of
the country”
 Mercantilist trade was mainly directed
towards the accumulation and control of
gold and silver bullions. Mercantile power
and wealth was then equated with how
much bullions the national treasury had or
the citizens possessed. The valuable uses of
money were countless: facilitation of
exchange, granting of aids or subsidies to
allies, payment for armies and preservation
of reserves in the national budget for
emergencies or wards, which served to
popularized the bullion policies of
mercantilism.
 Regarding tax and revenue
administration, the accumulation of
specie (metal) enabled the central
government to mint money for domestic
use. The use of money, in turn facilitated
the collection of taxes, customs duties
and other revenues, thereby increasing
collection and simplifying administration.
Cameralism was a German special case of
more widespread mercantilistic discourse
and policy during the 17th and 18th centuries,
taken literally, this Latin word refers to the
king’s or the prince’s treasure chamber and
its enrichment. It emphasis on taxation and
the administration of state finances reflected
the late formation of German territorial states
and their landlocked position and
consequent lack of both significant foreign
trade and a naval force.
 The physiocrasts were generally
concerned with taxation and its stability
and certainty. They agreed that the only
way to institute a stable system of
taxation was to base it on a sector which
produced a net profit or surplus.
 The development of capitalism, which had
been gradually building up with the decline of
feudalism, was accelerated by the industrial
revolution. The advent of machines and
numerous inventions which sped up the
productive process radically changed not only
in Europe where it started, but the world as well.
The mercantilist philosophy of government
intervention gave way to laissez faire policy of
minimum government interference. In
feudalism, the known world revolved around
the feudal lord; in capitalism, the man of the
hour was the capitalist or the entrepreneur.
 Under the philosophy of free enterprise, it
was postulated that government
interference in the economy should be
at minimum. Government services should
be limited to the “basics” – a throwback
to ancient public finance: defense,
public works, maintenance of the
bureaucracy, and limited services in
education and health. All other services
would be provided by the private sector,
which, under perfect competition would
result in the best goods at the lowest
prices.
 Smith favored compete
freedom for business
enterprises and strong
limitations on government.
He advocated the policy of
minimum governmental
control on business activities
(laissez-fare). Arguing that
regulation only reduced
wealth, he discredited the
mercantilist theory.
 Smith strongly advised against largescale
borrowing. Pointing out that public finance is
similar to the prudent management of a
household, Smith contended that borrowing
should only be resorted to in exceptional
circumstances and should be repaid as soon
as possible. He was consequently against
deficit spending and advocated the concept
of a balanced budget.
 The contributions of Adam Smith to capitalism
are not limited to public finance alone. As a
matter of fact, his ideas on the latter were
largely shaped by his stand on the moral
“rightness” of capitalism and the perceived
functions of government under such a system.
 Ricardo, a British economist,
contributed in no small
measure to the refinement of
modern fiscal administration
concepts and practices.
 He is credited for his theory of
distribution of tax burden which
he applied in his extensive
studies on the shifting and
incidence of taxes. His
concepts were to become one
of the bases for the institution of
equality and uniformity in
modern taxation and the
progressivity of tax structure.
 Adolf Wagner, another
important economist,
ascribed to the state the
function of eliminating the
inequalities of wealth through
fiscal measures. The use of
fiscal policies for distributive
goals in modern times partly
owes its origin to Wagner.
 A laissez-faire advocate, John Stuart Mill
contributed to public finance mainly
from his correlation of the functions of
the state to public expenditures. Mill
contended that governmental action
usually involved added expense which
was usually defrayed out of compulsory
contributions levied upon the persons
and properties of the state. The burden
of this expense, he argued, was one
reason why governments should
interfere as little as possible with the
private affairs of the people.
 Pre-Spanish Period
› The government was patriarchal in form, with
barangay as the basic unit of the
government. A king called datu or rajah,
ruled each barangay.
› A direct relationship existed between datu
and his subjects the subjects were required
to pay tribute, known as buiz, out of their
produce and to render personal services to
the ruler.
 For over 300 years, the Philippines was a
crown colony of Spain. However, the
Philippines was more of an economic
liability than an asset to Spain. The colonial
government was incapable of supporting
itself that Spanish crown had to send from
1572 to 1810 an annual subsidy of about
P400, 000.00 to Manila for the maintenance
of the Philippine Administration. At the head
of the centralized government was the
Governor and Captain-General who
symbolizes the knight and the majesty of
the Spanish Crown.
 For purposes of internal governement and
administration, the Philippines was divided
into provinces and districts. Each provinces
was under civil provincial executives called
alcaldes-mayor. The alcalde-mayor
exercised both executive and judicial
functions, and supervised the collection of
tributes in the provinces. The provinces
were subdivided into pueblos, under a
gobernadorcillo, ordinarily called captain.
The pueblos were divided into barangays
or villages, under the chief called cabeza
de barangay. The cabeza paid no tribute
and his chief duty was to collect taxes in his
barangay.
 When the United States took possession
of the Philippine Islands on August 13,
1898, the established military
government had only limited supervision
over matters of public finance. The
collection of customs duties in
accordance with the Spanish Tariff of
1891 continued, only with some
changes.
 The government of the First Republic was
supported by income from two principal
sources of revenue: taxes and license
fees, and military contributions or war
taxes.
 The reorganization of the system of handling government
finance began when the Civil Commission headed by
William Howard Taft came into being. The military
government was entirely superseded by a civil
government on July 4, 1901 with the appointment of Taft
as Civil Governor.
 On September 6, 1901, Philippine Civil Commission
passed an act providing for the organization of the
Departments of the Interior, Commerce and Police,
Finance and Justice, and Public Instruction. The
Department of Finance and Justice had within its
administrative control the Bureau of the Insular Treasury,
the Bureau of the Insular Auditor, the Bureau of Customs
and Immigration, the Bureau of Internal Revenue, the
Insular Cold Storage and Ice Plan, the Bureau of Banks,
Banking, Coinage and Currency, and the Bureau of
Justice.
 On November 18, 1916, the Philippine
Legislature passed the Reorganization Act
No. 26665 which increased the number of
executive departments from four to six. At
the same time the Department of Finance
and Justice was split into two separate
departments. The departments thus
created were the Department of Finance,
the Department of Justice, the Department
of Agriculture and the Natural Resources
and the Department Commerce and
Communications.
 On January 3, 1942, after the Japanese conquered
Manila, Lt. Gen. Homuna, Commander-in-Chief of
the Japanese Military forces in the Philippines,
proclaimed the establishment of the Japanese
Military Administration for the purpose of
“supervising the political, economic and cultural
affairs of land.” Subsequently, on October 14, 1943,
the Japanese-sponsored Republic was proclaimed,
with Jose P. Laurel as President. Economic Activities
during the Occupation were limited, as industry,
commerce and trade suffered a setback. There
was practically no production and agricultural
lands remained idle for a time, which caused the
exorbitant price of basic commodities, particularly
rice.
 Japanese authorities imposed luxury taxes
and license fees and printed Japanese war
notes during the three years of occupation.
The National Assembly of the Japanese-
Sponsored Republic authorized the
creation of a Central Bank which did not
actually come into being. On September 2,
1945, the Japanese signed its surrender to
the United States and the Occupation
finally ended.
Thank you
And
God Bless!!!