State Intervention, Fiscal Policy, and the Basque Economy
The State and the Economy
The state represents democracy and it’s important to control the economy. Here’s a look at the differences between classic and Keynesian economics:
Classical vs. Keynesian Economics
- Classical Economics: Believes in a competitive market where the flexibility of prices and wages guarantees full employment.
- Keynesian Economics: Emerged during the Great Depression of the 1930s. Keynesians criticize classical economics because they see the private economy as unstable. They don’t trust in automatic adjustments and advocate for state intervention through public spending.
Market Fundamentalism vs. State Intervention
Market fundamentalism, common in the US and UK, reduces state participation in the economy by privatizing economic and social activities and reducing taxes and social welfare.
However, the state’s role is now considered more important. It involves:
- Macroeconomic policy
- Industrial policy
- Regulation of markets
- Financial policy
Fiscal Policy
Fiscal policy involves public spending and taxes. There are fewer differences within the European Union.
The fiscal multiplier is very important in macroeconomics. It measures the impact of government investment on the country’s economy. If the multiplier is greater than one, public expenses will increase the GDP.
Progressivity in Taxation
- Progressive Tax: When income increases, the amount of tax payable increases in a greater proportion.
- Regressive Tax: When income increases, the amount of tax payable increases in a smaller proportion.
The state increases taxes to finance public spending.
Fiscal Balance and Automatic Stabilizers
Fiscal Balance is income minus expenses.
Automatic stabilizers are certain items of income and expenses that react automatically to changes in the level of income. When the economy shrinks, they trigger an expansionary fiscal policy. When the economy grows, they have a restrictive behavior. During a depressive phase, automatic stabilizers increase consumption and investment, reducing the fall in demand.
Maastricht Treaty vs. Keynesianism
- Maastricht Treaty: Focuses on reducing budget deficits.
- Keynesianism: Focuses on increasing demand.
Economic Sectors
There are three parts to the economy: the domestic sector, the external sector, and the public sector. Two rules apply:
- All three sectors cannot be in deficit or surplus at the same time.
- The private sector must remain in surplus.
The Basque Country’s Economic Autonomy
Historical Context
The Basque Country has characteristics of an independent country, including its own language and culture. After the loss of Navarre, the Basque Country maintained its autonomy due to the fueros. During the dictatorship, Bizkaia and Gipuzkoa lost their fueros for being considered “traitor provinces,” while Alava and Navarre maintained theirs.
Statute of Autonomy (1979)
The Estatuto de Autonomía del País Vasco (1979) is an organizational document for the Autonomous Community of the Basque Country. It demonstrates a strong identity and allows for the development of the Basque people’s freedom. It recognizes historical rights, and the fueros are acknowledged in the Spanish Constitution. The Basque Parliament must trust in the Lehendakari (President).
Law of Historical Territories
The Ley de Territorios Históricos defines the competencies between councils, including roads, public works, agriculture, sports, etc.
The Basque Economic Agreement (Concierto Económico Vasco)
The four Basque provinces have tax autonomy, a system that was deemed moderate and affordable for any EU member in 1978. Euskadi initially had this ability, which was removed in 1971 but regained in 1981. Tax coordination was established in 1989. A portion of the taxes (6.24%) is sent to the central administration, representing the Spanish income.
Principle of Amortization
The principle of amortization is a Basque competence, coordinated with the state. For example, the tax burden in the Basque Country has to be similar to that of Spain.