State Intervention in the Economy: Types and Impacts

Posted on Mar 18, 2025 in Economy

The State’s Role in the Economy

The state intervenes to correct injustices, inefficiencies, and imbalances to increase social welfare.

Reviews of the Economic Role of the State

  • Neoliberals: Advocate for a reduction in the public sector, arguing that state intervention has negative effects on the economy.
  • Keynesians: Support public intervention in the economy.

Objectives of Public Intervention

  • Efficiency: Maximum use of resources.
  • Distributional Equity:
    • Horizontal: Equal opportunities and treatment of persons.
    • Vertical: Ensuring equal opportunities.
  • Macroeconomic Stability: Obtaining different objectives, such as achieving full employment.

Types of Intervention and Instruments

  1. The first function of the State is proportional to the economic system, providing the proper environment through structural rules.
  2. The State uses its power to adopt and enforce standards through regulatory measures of private activity.
  3. The State can intervene in the markets through financing.
  4. The State can take part in the supply of goods and services through public production.
  5. Income transfers.

Monetary Policy

Monetary policy is concerned with controlling the amount of money in the economy and interest rates.

Fiscal Policy Instruments

  • Discretionary: Amending taxes and public spending. Plays an essential role in stabilizing the economy through public action.
  • Automatic Stabilizers: Help smooth the economic cycle automatically without the need for budgetary policy measures.

The Budget

The budget is the quantification of the costs that an entity will make in a given period, along with the estimated revenue. It registers the deficit when expenditures are greater than income and a surplus when costs are lower than income. It has three characteristics:

  1. It is a document referring to a short and specific period (one year).
  2. It is a set of the expenses necessary to carry out the activities of the entity that writes it.
  3. Includes instruments for financing expenditure.

Types of Taxes

  • Direct Taxes: Tax a direct manifestation of the ability to pay, such as income or wealth, or possession of property (e.g., Personal Income Tax).
  • Indirect Taxes: Levied on goods and services, taxing indirect manifestations of the ability to pay (e.g., VAT).

The Fiscal Balance

The difference between revenues and expenditures.

Alternatives for the Public Sector to Solve the Public Deficit

  1. The Central Bank: (The public sector bank used in Spain. This increased the money in circulation and generated inflationary tensions. Spain’s intervention in the European Union entails the prohibition of this).
  2. Indebtedness: The Public sector borrows from citizens’ savings through bonds and treasury bills.

Problems of Indebtedness

  1. The public sector undertakes to repay the borrowed amount plus the interest generated, which requires an increase in public spending, leading to a greater deficit.
  2. Public debt securities compete in the market to capture private savings, generating two problems: an increase in interest rates and a reduction of available savings for the private sector.

The Public Sector

The public sector is a set of different legal institutions that share common features with the institutions of the private sector. The distinctive feature is the application of the principle of authority in making all public decisions. Entities created under public law are considered part of the public sector. These entities are classified according to whether they are totally or partially subject to the rules of budgetary law. There are three levels of public administration:

  • The State Public Sector: Composed of public entities such as the State and Social Security.
  • The Autonomous Communities: Composed of the 17 autonomous communities, Ceuta and Melilla, and agencies and corporate entities that depend directly on them.
  • Local: Constituted by various mandatory local entities such as municipalities, town councils, and government bodies of the Canary and Balearic Islands. Also included are local counties, commonwealths of municipalities, or minor local entities.