Economic and Fiscal Policies: Impact on Growth and Stability
Economic Policies
Economic policies are forms of state intervention in the economy to achieve specific economic objectives.
Objectives or Purposes
The most common objectives are:
- Sustainable Economic Growth: The state intervenes to increase the production of goods and services, sustained over time.
- Full Employment: Full employment is 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 uncertainty.
Means
To achieve these objectives, state agencies utilize institutions and negotiations:
- Direct: These are the agencies that develop and implement economic policy.
- Indirect: Banks, large multinational corporations, and trade unions have great power, so it is essential for the state to negotiate with them to achieve its goals.
Types of Economic Policy
The state uses different economic policies:
- Fiscal Policy: State action intended to increase or decrease economic activity.
- Monetary Policy: The set of measures taken by a nation’s central bank to maintain price stability.
- Foreign Policy: Intervention by the state to regulate transactions with other countries.
- Income Policy: Aims to achieve price stability by controlling inflation.
Fiscal Policy
Fiscal policy involves the public sector’s performance through fundraising and the implementation of public expenditure to achieve the objectives pursued by the state.
Types of Fiscal Policies
There are two major applications:
Fiscal Instruments
These are the instruments available to the state to achieve its objectives:
Discretionary Fiscal Policy: Policies applied when governments want to intentionally influence income or expenditure. The main ones are:
- Public works programs.
- Plans for employment and training.
- Transfer programs.
- Changes in tax rates.
Automatic Stabilizers: The main ones are:
- Proportional taxation.
- Progressive taxes.
- Social contributions.
- Unemployment benefits.
Effects on the Economy
When taxes are reduced or government spending is increased to stimulate demand, it is said that fiscal policy is expansive. When taxes are raised or public spending is reduced to achieve conflicting objectives, it is said to be restrictive.
The State Budgets
An inventory of expenditure and revenue estimates to carry out public finances during the relevant year.
Government Revenues from the PGE (General State Budget)
The state has the following ways to obtain them:
Social Contributions
These are the amounts that workers affiliated with social security pay so that in times of need, they and their families are entitled to coverage.
Tributes
Accounting for half of the proceeds. Depending on whether the taxpayer receives something in return, they can be classified into:
- Taxes: Payments required by the government, without the taxpayer receiving something directly in return. These may be direct or indirect.
- Fees: Payments for the use of a public service or activity that provides a direct benefit to the user.
Other Income
The most important are:
- Current transfers.
- Income property.
- Disposal of investments.
- Capital transfers.
Public Expenditure of PGE
Public expenditure is the total expenditure incurred by public administration. Expenditures can be classified as:
- Current Expenditure: Overheads intended to provide public services to society. These can be divided into:
- Salaries of civil servants.
- Purchases of goods and services from private companies.
- Investment Costs: Used to maintain and expand the country’s production capacity.
- Transfers and Subsidies: The state obtains resources through taxes and then transfers them to individuals or companies most in need. When the recipients are individuals, they are called transfers, while if the recipients are firms, they are called subsidies.
Two factors in the PGE analysis:
- Policies based on the Keynesian economic model: These argue that the state has to borrow to achieve full employment and stability.
- Neoliberal policies: These criticize state indebtedness, and their main objection is inflation.
The economy may have two types of deficits:
- Cyclical: Occurs during the inevitable downturns in the economic cycle.
- Structural: A permanent deficit.
To finance the deficit, the state can:
- Issue Public Debt: The state claims money from businesses and individuals in exchange for securities.
- Raise Taxes: This is unpopular and curbs the demand for goods and services.
- Increase the Money Supply: Causes an increase in prices.