Key Economic & Public Finance Concepts Explained

Posted on Sep 8, 2025 in Economy

Essential Economic and Public Finance Concepts

Euribor: Euro Area Interbank Rate

Euribor (Euro Interbank Offered Rate) is the interest rate at which a large panel of European banks lend to one another in the euro wholesale money market. Depending on the loan term, different types of Euribor are used:

  • Euribor One Week
  • Euribor One Month
  • Euribor One Year

The one-year Euribor is a crucial financial market reference, significantly impacting mortgage loans and other bank financing. Its value is updated daily.

Inflation: Understanding Price Increases

Inflation is defined as a widespread and sustained rise in the general price level of goods and services in an economy. To quantify price increases, inflation rates are used, which measure price changes over a specific period. It’s important to note that during inflation, not all prices necessarily rise at the same rate.

Classes of Inflation:

  • Moderate Inflation: Prices increase slowly, typically less than 2% or 3% annually.
  • Runaway Inflation: Prices rise significantly, often above 10% annually.
  • Hyperinflation: Prices surge by more than 100% in a single year. This results in a loss of control over prices and can lead to the collapse of the monetary system, as money rapidly loses its value. In such cases, people often lose trust in their national currency and may seek refuge in barter or the use of stronger foreign currencies to prevent their purchasing power from diminishing so quickly.

Consumer Price Index (CPI): Measuring Household Costs

The Consumer Price Index (CPI) expresses the average price growth of a basket of goods and services consumed by households over a period of time.

To determine average household spending on consumed goods and services, the INE (National Statistics Institute) conducts a survey of household expenditure budgets. Using this information, a hypothetical basket of goods and services, representative of the country’s consumption patterns, is created. The INE selects items that are representative of the average consumer’s spending habits.

Public Debt: State Financial Obligations

Public debt reflects the total balance owed by the State at any given time, primarily due to deficits accumulated in previous years. It also refers to a form of funding used by the state or other public authorities through the issuance of securities (e.g., bonds).

General State Budget: Annual Financial Plan

The General State Budget is a document approved by law each year. It determines the amount the state can spend, specifies how it will be spent, and outlines the revenue needed to finance such expenditures. When this document refers to other public entities, such as municipalities or autonomous communities, it is generically known as a public budget.

Public Revenue: Funding Government Spending

Public revenue comprises the resources the public sector obtains to finance public expenditure. These resources are primarily obtained through three main categories:

  • Social Contributions: These are payments made to social security by those who acquire a right to receive certain benefits (e.g., pensions, unemployment benefits).
  • Tributes: These are compulsory payments required by law, for which the taxpayer does not receive a specific, direct benefit in return. They represent more than half of government revenue.

    Types of Tributes:

    • Taxes (Impuestos): These are compulsory payments without a specific benefit in return.
      Categories of Taxes:
      • Direct Taxes: Levied on the income or wealth of individuals and enterprises, considering their economic and family circumstances. Examples include income tax and corporate tax.
      • Indirect Taxes: Levied on transactions or consumption, regardless of the identity and circumstances of the person performing them. The main one is Value Added Tax (VAT), paid on product purchases or services. Excise duties are also paid on specific products like tobacco, alcohol, or gasoline.
    • Fees (Tasas): These are payments for the use of a specific good or service offered by the public administration (e.g., university tuition fees, driving license fees).
    • Special Contributions (Contribuciones Especiales): These are taxes paid by individuals or entities who benefit directly from a public work or service (e.g., a new road benefiting nearby properties).
  • Other Income Sources: This category includes current transfers, income from property, or capital transactions.