The Role of the State in the Economy
The Composition of the Work
The state, for the development of its functions, consists of various organs, most notably:
The Parliament
The legislative body responsible for the elaboration and approval of laws.
Government and Administration
Responsible for the execution of laws.
Judges
The judicial organ whose function is to ensure compliance with laws.
State Budget
Prepared annually by the Ministry of Finance and approved in draft form at the Council of Ministers. The Government presents it to the Congress of Deputies, which votes first on general admission or amendments. Any amendments that prosper are returned to the government. Beyond that step, the ability to make alterations through individual amendments is subject to not altering the balance. They then go to the Senate, which makes a second reading, but whose ability to alter them is very limited, with a final referral to Congress.
Government Revenue (2.1)
Income and spending are the two major branches of financial law. Income refers to all the money received by the State and other public entities, whose primary purpose is to finance public expenditure. Therefore, public revenue is a sum of money; it does not include revenues or personal benefits in kind. These only contribute to satisfying public needs when they take the form of monetary resources. They must also be received by a public body, and their essential purpose is to finance public expenditure. However, the State may occasionally use revenue not only to finance public expenditures but also to pursue goals of monetary policy or economic policy.
Income Tax (2.1.1)
This refers to the income received by the public sector, usually consolidated within the national budget, which the central government uses to tackle its expenditures and those of its various agencies. Tax revenues come mainly from taxes charged to the population. Such taxes may be levied by the central government or regional and local governments, with the latter accounting for a greater or lesser proportion of them, as stipulated by current laws. This can be referred to as fiscal federalism or fiscal centralism. In addition to tax revenues, governments receive special rents they charge, such as those collected by customs or received through special grants, for rights registration, for the sale or lease of public property, and from central bank profits or autonomous agencies and public enterprises. From an accounting point of view, we must also add those from loans received, either through the issuance of public debt bonds or the use of international credit lines of various kinds.
Non-Income Tax
Asset Income
Derived from the exploitation of state assets.
Revenue from the Sale of State-Owned Assets
Includes both the sale of assets of state enterprises and the public.
Current and Capital Transfers Received by the State Without Any Consideration
Amounts of money that the State obtains without providing anything in return.
Tax Classification
Tax benefits are in cash or in kind, required by the State under the power of the empire, from those who are in situations considered by law as taxable events.
Taxation is based on the sovereignty of the nation, justified by the need to address social needs. It is undoubtedly the most important source of revenue received by the State to develop its purposes.
Direct Taxes
Those in which the legal subject responsible for the obligation and the economic subject that supports the tax are the same. Example: The Income Tax and Complementary. The declarant is the same taxpayer who pays the tax.
Excise
This is where the legal subject is not the same as the economic agent who pays the amount involved. Example: The sales tax: The person who declares (legal responsibility) is not the same as the one who pays the tax amount (the buyer).
Contributions
A mandatory compensation paid to a public body for work it performs with public purposes but which provides special benefits to private property owners.
Social Contributions
Charges levied by agencies designated to provide social security services, promote worker education, strengthen the family, etc.
Corporate Contributions
Paid to certain institutions for specific services that may be union-related. Some examples are: Payments for Chambers of Commerce, Superintendents, and Comptrollers.
Economic Contributions
Mandatory payments made by taxpayers with a more or less specific destination. Example: Contribution to Valuation.
Other Contributions
Despite their name, these include taxes on gasoline and the Coal Mine Mouth tax.
Fees
Refers to a tax with a lower degree of compulsion, which depends on the individual’s voluntary submission in deciding to use a state service. This service is known to imply an obligation to pay, and the existence of a public body provides direct consideration to the payer.
Within the National Tax System are:
- Income Tax and Additional
- Sales Tax
- Financial Tax Lien
- Tax Remittance
- National Stamp Tax
- Tax for the Preservation of Democratic Security
Public Expenditure
Costs of Production
Represent the amount of effort and capital invested in the formation of a product.
All industries intend to create value greater than the capital and labor consumed, which is why each product is decomposed into two parts: one that serves to reimburse the expenses incurred, and another that is the benefit, the real production or wealth achieved.
We can classify public expenditures as:
Expenses of People
Includes the amount of wages and salaries received by public officials and other staff of the Administration.
Spending on Current Goods and Services
The state, to offer public services to citizens, requires the acquisition of a range of goods.
Expenditure on Current Transfers
Amounts of money, without compensation, for current expenditures, which the State pays its citizens, such as unemployment benefits, alimony, retirement, etc.
Financial Expenses
Intended to meet unanticipated needs in the initially approved budget.
Contingency Fund
Intended to meet unanticipated needs in the initially approved budget.
Real Investment Expenditure
This item comprises all expenditure carried out by the State on public infrastructure works, such as the construction of a railway, etc.
Capital Expenditure Transfers
Non-cash advances intended for the realization of investment projects.
Financial Operations
Include costs for purchases of financial assets and financial liabilities depreciation.
Deficit
In economic terms, the deficit is the negative difference between income and expense records of public administration over a period of time.
To finance public deficits, the state can resort to the following mechanisms:
Raise Taxes
This measure provides substantial revenue to the public coffers and further reduces the deficit.
Issuing Money
This type of measure is quite undesirable because it causes inflation and may lead to a devaluation of the currency.
Issuance of Public Debt
The most commonly used mechanism to finance public deficits.
Functions of the State in the Economy
The main functions the State performs in a mixed market economy are the following:
Legislative Function
The State establishes all legal norms governing all individuals and rules of a society.
Promote Economic Efficiency When the Market Does Not Correctly Allocate Resources
Redistribution of Income
To achieve a more equitable distribution than that provided by the market when paying for productive factors.
Stabilizer
Tries to soften economic fluctuations, reduce unemployment in economic downturns, and control inflation during expansion, always trying to achieve stable economic growth.
Expansionary Fiscal Policy
When the goal is to stimulate aggregate demand, especially when the economy is undergoing a period of recession and needs a push to expand. As a result, it tends to create deficits or may even cause inflation. The mechanisms used are:
- Increasing public expenditure to increase production and reduce unemployment.
- Reducing taxes to increase the disposable income of individuals, which leads to increased consumption and increased business investment, resulting in an expansionary shift in aggregate demand.
In this sense, having more public spending and lower taxes generates a deficit in the state budget.
Restrictive Fiscal Policy
When the objective is to curb aggregate demand, for example, when the economy is in a period of excessive expansion and needs to slow down the excessive inflation being created. As a result, it tends to generate a surplus. The mechanisms are the opposite of the expansionary ones and are harder to implement:
- Reducing government spending to lower production.
- Raising taxes so that people and businesses spend less, and aggregate demand shifts to the left.
Application: You put a tax on consumers for this download.
Taxation and Public Expenditure as Automatic Stabilizers
An expression used in macroeconomics, in terms of economic aggregates and automatic monetary adjustments. These measures counteract fluctuations in economic conditions without conducting special fiscal or monetary measures. For example, the collection of taxes and unemployment benefits act by reducing the strength of expansions and recessions. Part of the federal budget for revenues and expenses changes automatically with the conditions of the economy, and its effect is to stabilize GDP.
Active Fiscal Policy and Redistribution of Income
Consists of state intervention in the economy to change the income distribution. The two ways to do this are:
- Taxes: One of the most important is income tax.
- Public Spending: The state can redistribute income through public expenditure, such as health, education, and pensions.
Positions of the Schools of Economic Thought on Fiscal Policy
Monetarists
A macroeconomic theory concerned with the analysis of the money supply. While monetarism is identified with a particular interpretation of how money supply affects other variables, such as prices, production, and employment, several schools of thought might be defined as ‘monetarist.’ They also agree on the belief that money supply is essential to explain the determination of the general price level. What they accept is the idea that monetary policy can have short-term effects on production and other less significant topics, such as the definition of money supply. Moreover, if monetarists were limited to saying that there is a proportional relationship between money supply and the general level of prices in the long run, most economists would accept this idea, provided that the long-term period is sufficiently long and other variables—such as the type of existing financial institutions—remain constant.
Keynesians
Believe that fiscal policy is the main instrument responsible for controlling aggregate demand and, consequently, economic growth and job creation.
Welfare State
There is general agreement that the development of the modern welfare state can be traced back to the period following the First World War. In this context, three general elements are usually cited: the development of Fordism, the precedent created by the war, and the continuation and deepening of economic crises. However, the continuation of classical liberal policies meant the continuation of cyclical economic crises, culminating in the Great Depression of the 1930s, which began to have political repercussions, undermining faith in the omnipotence of markets. This situation had two sources. One was the inability of classical liberal analysis to explain and resolve these crises due to the belief that these were due to a virtually infinite number of elements that could not be generalized.