Understanding Public Sector Economics and Fiscal Policy

Posted on Mar 28, 2025 in Economy

The public sector includes the economic activities of a nation that fall within the governmental sphere.

Economic Policy

Economic policy: government intervention in the economic affairs of a country in order to achieve certain objectives.

Goals of Economic Policy

A goal of economic policy is any general aspiration that a society seeks to achieve.

Economic Policy Objectives

  • Economic Growth: Increase of production without exhausting resources. It is measured by the average annual growth rate of GDP or GDP per capita.
  • Full Employment: Creation of jobs, reducing unemployment in the short-term cyclical and long-term structural unemployment.
  • Price Stability: Maintaining the general price level. Measurement indicators include the Consumer Price Index (CPI) and the Index of Wholesale Prices.
  • Equilibrium of the Balance of Payments: Deficit reduction over the medium term and maintaining the level of foreign exchange.
  • Distribution of Income and Wealth: Progressive reduction of the differences between personal income and decreased concentration of wealth.

Instruments of Economic Policy

Means any instrument of economic policy variable that governments can control and use to achieve the goals they set.

  • Direct Instruments: Those that restrict the free operation of the markets.
  • Indirect Instruments: They use the price system to alter the behavior of the markets.

Balanced Budget

When public expenditures are higher than income, there is a public deficit. In the opposite case, if revenues are greater than spending, the situation is in surplus.

Fiscal Policy

Fiscal policy is the set of modifications done in the government revenue and expenditures to influence economic activity.

Fiscal policy influences aggregate demand:

  1. If we are in a situation of low production and high unemployment and we want to raise the level of activity in the short term, it is necessary to apply an expansionary fiscal policy. Generating increases in production methods will bring an improvement in employment.
  2. If we are in an inflationary situation due to excess aggregate demand and we are lowering the level of activity in the short term, we are implementing a contractionary fiscal policy.

The State Budget

They are a set of documents that show the expenses and revenue to the central public sector has planned for a year.

Public Expenditure

Public expenditures are payment obligations that the public sector contracts because of its interference in the economy.

  • Running Costs: Are generated each time the public sector buys goods and services.
  • Capital Expenditure: Are the investments to maintain and expand the productive capital of the country in infrastructure such as roads.
  • Other Costs: This item includes expenditure that the public sector performed without receiving anything in return, such as transfers of funds that can be targeted to individuals or businesses.

Public Revenues

Resources are received by the public sector to meet expenditure commitments reflected in the budget.

  1. Income Tax and Taxes: Are payments that the taxpayer is required to make to public administration when it performs certain facts established by law.
  2. Social Security Contributions: Are contributions that workers and employers make to this organization in order to receive certain benefits.