Economic and Fiscal Policies: Impact and Instruments
Economic Policies: Objectives, Instruments, and Types
Economic policies are forms of state intervention in the economy designed to achieve specific economic objectives.
Objectives or Purposes
- Sustainable Economic Growth: The state intervenes to increase the production of goods and services, sustaining it over time. A key objective is to improve the welfare of citizens.
- Full Employment: Achieving full employment is challenging. It is generally considered to exist when 98% of the working population is employed.
- Price Stability: Controlling the prices of goods and services is essential to maintain consumer purchasing power and avoid inflation-related uncertainty.
Medium
Direct
These are the bodies that develop and implement economic policy. While the national government designs the general economic policy, implementation corresponds to all public sector institutions. Each agency has its own assigned role in economic policy and must coordinate with others.
Indirect
These are not direct operators but are groups with significant influence in modern societies, such as banks, large multinational corporations, business associations, and trade unions. They have broad social or economic support, making it essential for the state to negotiate with them to move forward in the same direction and achieve the desired objectives.
Types of Economic Policy
- Fiscal Policy: This is the deliberate action of the state to influence economic activity, mainly through tax collection and the implementation of public spending.
- Monetary Policy: This is the set of measures taken by a nation’s central bank, primarily aimed at maintaining price stability by varying the amount of money in circulation.
- Foreign Policy: This is the state’s intervention to regulate transactions with other countries or economies.
- Incomes Policy: This aims to achieve price stability by controlling inflation. When prices soar, the state may try to control the prices of the most unstable goods or services. It can also regulate the salaries of officials or recommend maximum and minimum wages for businesses.
Economic policies are forms of state intervention in the economy to attain objectives related to production, employment, and prices, driving variables such as taxes, government spending, and the price of money.
Fiscal Policy: Instruments and Impact
Fiscal policy is the deliberate action of the public sector, through fundraising and the implementation of public expenditure, to achieve the objectives pursued by the state.
Types of Fiscal Policy Instruments
Discretionary Fiscal Policies
These are applied by governments when they want to influence revenue or expenditure on purpose, i.e., they are activated on their own initiative because they are not regulated. They are designed to maintain the tone of economic activity and usually, in times of crisis, help prevent a fall in the level of production of goods and services.
- Public Works Programs: These have two purposes: to increase levels of production and employment and to provide more infrastructure in the country.
- Employment and Training Plans: These aim to recruit and train workers for short periods, aiming for quick job placement.
- Transfer Programs: These protect disadvantaged groups through periodic, temporary, or permanent assistance.
- Modification of Tax Rates: A variation of the rates of certain taxes changes the amounts available to families and businesses to consume or invest, which, in turn, affects aggregate demand and therefore production levels and employment.
Discretionary policies are slow to take effect and are not always implemented correctly. When the desired effect is achieved, it is difficult to say how much is due to these policies. Therefore, automatic stabilizers are also used.
Automatic Stabilizers
These are public revenues or expenditures that increase or decrease along with the production level of a country. The transitions between phases of economic cycles of boom and bust are shorter and less traumatic. Using an analogy, if the economy were an elevator that ascends or descends too fast, automatic stabilizers act as a brake on the descent and as a drag on the ascent.
- Proportional Taxes: Their rate does not vary with income level.
- Progressive Taxes: The tax rate rises gradually as the level of income increases.
- Social Security Contributions: Contributions that workers and firms make to Social Security in exchange for the social protection that the body gives them.
- Unemployment Benefits: Financial assistance granted by the state to meet the social needs and economic consequences of an unemployment situation.
Impact on the Economy
When taxes are reduced or government spending is increased to stimulate aggregate demand for goods and services, it is said that fiscal policy is expansive. However, when taxes are increased or public spending is reduced to achieve the opposite objectives, it is said to be restrictive.