Understanding Economic Policies and Fiscal Instruments

Posted on Jan 10, 2025 in Economy

Economic Policy

Economic policy refers to state intervention to achieve objectives related to economic production, employment, and prices. It uses variables such as public spending, taxes, and the cost of money.

A. Objectives

  • Sustainable economic growth (increasing production of goods and services) – GDP, GNP.
  • Full employment, economic activity, and reduced unemployment.
  • Price stability (price control) – CPI, inflation rate (this improves the welfare of citizens).

B. Media

  • Direct: Organizations that produce and put economic policy into practice.
  • Indirect: Banks, large multinational corporations, associations, or unions.

C. Types of Economic Policy

  • Fiscal policy (taxes and public spending).
  • Monetary policy (interest rates, quantity of money).
  • Foreign policy (currency exchange rate).
  • Income policy (inflation control, controlling wages and prices).

[They target economic growth, sustainable full employment, and price stability].

Fiscal Policy

The public sector’s fiscal action involves collecting taxes and applying resources in public spending to achieve the objectives pursued by the State.

Fiscal Policy Instruments

Discretionary Fiscal Policies

  • Public works programs (infrastructure).
  • Employment and training plans (labor insertion).
  • Transfer programs (allowances and pensions).
  • Changing tax rates.

Automatic Stabilizers

These weaken during economic phrases:

  • Proportional tax.
  • Progressive taxes.
  • Social security contributions.
  • Unemployment benefits.

The General Budget of the State

These are the State’s spending plans and revenue.

State Budget Revenues

  • Social security contributions.
  • Taxes: Direct and indirect taxes.
  • Other income: Current transfers, income from assets, disposal of property investments, capital transfers.

State Budget Expenses

  • Current: Purchase of goods and services, payments to employees.
  • Investment (infrastructure).
  • Transfers and subsidies.

A. Public Income of the General Budget of the State

Resources to perform social functions:

  • Social security contributions (amounts that workers pay to Social Security so that they and their families are entitled to coverage if needed).
  • Taxes.
  • Other income:
    • Current transfers (state lotteries and gambling).
    • Income from assets (profits of public enterprises).
    • From disposal of investments (sale of state assets).
    • Capital transfers (from the EU to finance investment projects).

B. Public Expenditure of the General Budget of the State

Set of expenses made by the government:

  • Current expenditure (health, education, justice).
  • Investment costs (infrastructure: schools, hospitals).
  • Transfers and grants (pensions, disability benefits, study grants).

C. Budget Balance

It can be:

  • Balanced (expenditure = income).
  • Deficit (expenditure > income).
  • Surplus (income > expenditure).

Types of Deficit

  • Cyclical: Alternating recession phases will inevitably occur in the economic cycle. It is transient and disappears during economic growth.
  • Structural: It is a permanent deficit, even during full employment.

In order to finance the public debt:

  • Issue public debt.
  • Raise taxes.
  • Increase the money in circulation.

Economic Policies

  • Keynesian model: The State should incur debt to achieve full employment.
  • Neoliberal:
    • Critics of borrowing because the State generates inflation.
    • They believe the market should be self-regulated.