Understanding State Finances and Public Debt

Posted on Mar 2, 2025 in Economy

State Revenues and Expenditures

Other income includes:

  • Current transfers: Resources from other units, such as those collected from state lotteries.
  • Property income: Income from state assets, such as RENFE.
  • Capital gains: Derived from investment sales of state assets, such as Iberia and Repsol.
  • Capital transfers: Funds from the EU for investment projects.

PGE Expenditures

Spending indicates the objectives of government budgets and can include:

  • Running costs: Aimed at providing public services to society. It is divided into staff salaries and purchases of goods and services from private companies.
  • Capital expenditure: To increase the country’s production, concentrated on infrastructure.
  • Transfers and subsidies: The state collects taxes for transfer to people (transfers) and corporations (subsidies).

Fiscal Balance and Public Deficits

Three situations can occur with the budget:

  • Revenues are equal to costs: Balanced budget.
  • Income is higher than expenditure: Budget surplus.
  • Receipts are lower than expenditure: Deficit.

There are several types of deficit:

  • Cyclical: Occurs in periods of crisis and is transitory, disappearing in times of growth.
  • Structural: Remains at a period close to full employment and is harmful because of the cost of debt.

Financing Public Deficit

When expenses exceed income, the state can do the following:

  • Issue public debt: Soliciting money from companies in exchange for a title with entitlement to a refund of the money plus interest.
  • Raise taxes: This slows the demand for goods and services, so it is done in times of expansion.
  • Increase the money supply: This causes inflation, and can only be executed by the European Central Bank.

The Stability and Growth Pact

EU countries that adopted the euro agreed on common criteria for raw materials to avoid deficits and decided that the maximum public deficit, including Spain, is 3% of GDP.

Public Debt

Debt is the set of agents that a state maintains with foreign economic agents, but it is also a way to address the lack of timely money, for example, when a minimum of treasury is needed, and to finance operations in the medium to long term. In Spain, there are several types of public debt:

  • Treasury Bills: Issued monthly, with a term of 3, 6, 12, or 18 months, with no withholding tax, and income tax is taxed at a fixed rate of 18% and a minimum value of 1000 €.
  • Government bonds: Auctioned at least once a month, with a repayment period of 3 to 5 years.

GDP from the Standpoint of Production

GDP from the standpoint of production is estimated by:

  1. Summing the value of all final goods and services produced by companies over a period of time. Final products are goods and services purchased by end-users without the intention of reselling or transforming them. Intermediate goods are resold or processed.
  2. Summing the added value generated by all productive activities of a country during the same period of time. Added value is the difference between the production value of a company and the cost of intermediate products incorporated into the production process.