Public Finance and Economic Policy Mechanisms

Posted on Sep 22, 2025 in Economy

Understanding State Budgets and Public Finance

What are General State Budgets?

General State Budgets are a set of documents containing the planned expenditures and revenues that the central public sector has projected for a year. Public spending refers to commitments to pay for public sector contracts that arise from its intervention in the economy. A detailed analysis of both allows us to ascertain the political priorities of a country’s government program.

Classifying Public Spending

Classification of public spending is based on three criteria:

  • Agency Criterion: Expenditures are divided according to the organism that makes them.
  • Functional Criterion: Expenditures are classified according to the function they fulfill.
  • Economic Criterion: Costs are grouped according to their destination.

Economic Classification of Public Expenditure

Following the economic approach, public expenditure can be classified into the following subheadings:

  • Running Costs: These are generated each time the public sector buys goods and services.
  • Capital Expenditure: Investment to maintain and expand the productive capital of the country in infrastructure such as roads, ports, airports, etc.
  • Other Expenses: Includes expenditures by the public sector that are made without expecting anything in return.

Understanding Public Revenues

Public revenues are the resources that the public sector receives to meet expenditure commitments reflected in the budget, and thus fulfill the economic policy objectives that are proposed. They can be grouped by several criteria, including:

  • Income Tax or Taxes: These are payments the taxpayer is obligated to make to the public administration when performing certain acts established by law. They are binding but not punitive. In our country, taxes can be broadly categorized into:
    • Fees
    • Special Contributions
    • Taxes (general)

Government Economic Intervention and Policy

Interventionist Economic Policies

Interventionist economic policies involve government action in the economic affairs within a country to achieve certain policy objectives, such as economic freedom, material welfare, equity, solidarity, and peace and security. (An economic policy objective is a general aspiration that any society aims to achieve.)

Key Economic Policy Objectives

Governments typically pursue several key economic goals:

  • Economic Growth: Measured through the average annual GDP growth or GDP per capita.
  • Full Employment: Measured using the unemployment rate and the employment distribution by age, gender, etc.
  • Price Stability: Measured using indicators such as the Consumer Price Index (CPI), producer price index, etc.
  • Stability of the Balance of Payments: Measured by the current account balance, the evolution of the trade balance, and the evolution of exchange rates.
  • Income and Wealth Distribution: Measured through the distribution of total disposable income, the percentage of families with income less than the average, and the spatial distribution of income.

Instruments of Economic Policy

An instrument of economic policy refers to a variable that governments can control and use to achieve their set goals.

Fiscal Policy: Definition and Tools

Fiscal policy is the set of changes made in government revenues and expenditures to influence economic activity. The main instruments of fiscal policy are public expenditure and public revenue.

Expansionary Fiscal Policy

If we are in a situation of low production and high unemployment and want to raise the level of economic activity in the short term, it is necessary to apply an expansionary fiscal policy. This will use the following tools:

  • Increase public spending on goods and services.
  • Increase transfers.
  • Reduce taxes.
  • A combination of the above.

Contractionary Fiscal Policy

If we are in an inflationary situation due to excess aggregate demand and want to reduce the level of economic activity in the short term, we implement a contractionary fiscal policy. In this case, the government takes the following measures:

  • Reduce public expenditure on goods and services.
  • Reduce transfers.
  • Increase taxes.
  • A combination of the above.

As a result of these actions, disposable income will be reduced.