Economic Policies: Objectives, Types, and Instruments

Posted on Nov 9, 2024 in Economy

Economic Policies

Economic policies are the ways that the state is involved in a state’s economy to achieve specific goals.

Objectives

  • Sustainable economic growth: The state intervenes to support increased production of goods and services over time.
  • Full employment: Among rational economic decisions, it makes no sense to leave resources unused, which is applicable to the human factor.
  • Price stability: Controlling prices of goods and services is essential for consumers to maintain purchasing power and to avoid the uncertainty generated by inflation.

Media

  • Direct: These are agencies that produce and implement economic policy.
  • Indirect: Although not proper economic agents, there are several co-groups that have great weight in modern societies.

Types of Economic Policy

  • Fiscal policy: It involves the State’s intentional increase or decrease in economic activity, mainly by raising taxes or the application of public spending.
  • Monetary policy: Is the set of measures taken by the central bank of a nation with the primary objective of maintaining price stability through the variation of the amount of money in circulation.
  • Foreign policy: It is state intervention to regulate transactions with other countries or economies, such as the exchange rate of the currency, restrictions on imports, or export promotion.
  • Incomes policy: It intends to achieve price stability by controlling inflation.

Types of Fiscal Policy

Depending on the nature of the instruments applied, there are different types of fiscal policies.

Fiscal Instruments

  • Discretionary Fiscal Policies: Are those that apply when governments want to influence revenue or expenditure for a specific purpose. They are not regulated and require the government’s initiative.
    • Public works programs: Increase levels of production and employment and provide more infrastructure nationwide.
    • Employment and training plans: Aim to hire and train workers for short periods to help them join the workforce quickly.
    • Transfer programs: Protect disadvantaged groups with regular or permanent co-payments.
    • Modification of tax rates: Influences people’s consumption based on their disposable income.
  • Automatic stabilizers: They are the incomes and public spending that increase or decrease in parallel with the level of production of a country.
    • Proportional taxes, progressive taxes, social contributions, unemployment subsidies.

Effects on the Economy

When taxes are reduced or public spending is increased to stimulate aggregate demand, it is said to be expansionary fiscal policy. However, when taxes are increased or public spending is reduced to achieve the opposite objectives, it is said to be restrictive fiscal policy.

Public Revenue of the General State Budget (PGE)

  • Social contributions: These are the amounts that workers affiliated with Social Security pay so that, in situations of need, they and their families are entitled to coverage: sickness, disability, retirement.
  • Taxes: Taxes are the most important public revenue in the PGE, representing half of the total raised.
    • Taxes: Require payments to public authorities without the taxpayer receiving anything in return, i.e., it does not provide a direct benefit to those who pay.
    • Fees: Payments are made to use a public service or activity that provides a direct benefit to the user.
  • Other Income:
    • Current transfers: Resources from other entities, such as those generated by lotteries and state games.
    • Heritage revenues: Income that state-owned goods provide, such as the profits of public companies like Altadis or RENFE.
    • Disposal of investments: Sales derived from assets owned by the State, such as public companies.
    • Capital transfers: Come from the European Union structural funds and are used to finance specific investment projects.

Public Expenditure of the PGE

Public spending is the set of costs incurred by the public administration.

  • Current expenditure: Expenses with the goal of providing public services to society, such as health, education, justice, national defense, and many others.
    • Salaries of officials, purchases of goods and services from private companies.
  • Investment charges: Are those that are intended to maintain and expand the productive capacity of the country.
  • Transfers and subsidies: The State obtains funds in the form of taxes, social contributions, etc., and then transfers them to people or companies in need.

There are two factors to analyze in the PGE:

  • The amount of public spending is very important because it indicates the Government’s budgetary objectives.
  • The budget balance or difference between income and expenditure is subject to analysis in the next section.

The Budget Balance

  • Policies based on the Keynesian economic model argue that the state should borrow to achieve full employment and stability.
  • Neoliberal policies are critical of state debt.

In the economy, there can be two kinds of deficits:

  • Cyclical deficit: Occurs during the inevitable recession stages of the economic cycle.
  • Structural deficit: Is a deficit that remains constant even in situations close to full employment.
  • Issue public debt
  • Raise taxes
  • Increase money circulation