Public Sector Functions and Fiscal Policy
Functions of the Public Sector
The public sector, in economic matters, strives to achieve three primary goals:
- Promote economic efficiency.
- Procure equality for citizens by improving income distribution.
- Encourage economic stability and growth.
To achieve these objectives, the public sector performs the following functions:
- Taxation: Establishing and collecting taxes.
- Regulation: Regulating economic activity by creating laws and regulations (e.g., competition laws, advertising laws).
- Provision of Goods and Services: Producing public goods and services (e.g., healthcare, roads), either because no one else produces them or the amount produced is insufficient.
- Income Redistribution: Attempting to divide the country’s income among people and regions more equally.
- Stabilization: Monitoring and influencing economic variables to avoid fluctuations and crises.
Fiscal Policy
Fiscal policy encompasses the set of measures a government can take to influence production and price levels by altering public expenditure, transfers, and taxes.
Fiscal policy can be either expansionary (if it aims to increase aggregate demand) or contractionary (if it aims to reduce it).
Expansionary Fiscal Policy
Increased public expenditure leads to higher income (Y), consumption, and aggregate demand. It may also affect the tax level (P).
Contractionary Fiscal Policy
Decreased public expenditure leads to lower income (Y), consumption, and aggregate demand. It may also affect the tax level (P) and prices (P).
Automatic Stabilizers and Discretionary Policies
These are the instruments that the government uses to implement fiscal policy.
Discretionary Policies
These are explicit measures taken by the government to influence public spending or consumption.
- Public Works Programs: Aim to provide jobs to the unemployed while improving the country’s infrastructure.
- Employment and Training Plans: Intended to recruit and train workers for short periods, enabling them to join the workforce.
- Transfer Programs: Include unemployment insurance, pensions, and subsidies to businesses. These aim to provide a minimum standard of living and encourage companies to hire unemployed individuals with specific characteristics (e.g., over 45 years old).
- Tax Rate Adjustments: Involve increasing or decreasing taxes (taxes are lowered if people need more disposable income).
A disadvantage of discretionary policies is that they take time to implement and are not always successful.
Automatic Stabilizers
These are inherent features of any economic system that automatically reduce the intensity of recessions and expansions in aggregate demand, without requiring discretionary policy measures.
- Progressive Taxes: Taxes that increase proportionally with income. They ensure that people pay a lower percentage of their income in taxes when they earn less and a higher percentage when they earn more. This helps maintain a higher income level during crises and moderates income growth during expansions.
- Unemployment Benefits (Transfers): Transfers increase during crises, providing income support, and decrease during economic expansions.