State Intervention in the Economy: Objectives and Instruments
State Intervention in the Economy
State intervention in the economy aims for economic progress and social development, often measured by variables such as employment levels and inflation control. The most important instruments used by the public sector for intervention in the economy are public expenditure, taxation, and regulation of economic activity.
Taxes, as incomes rise, are divided into progressive, regressive, and proportional taxes. Taxes are also classified into direct and indirect taxes.
The work of John Maynard Keynes, particularly his General Theory of Employment, Interest, and Money, significantly influenced interventionist policies. However, interventionist ideas have been criticized by monetarists.
Public Sector Functions
The public sector has several key functions:
- Fiscal: Setting and collecting taxes.
- Regulatory: Implementing laws and administrative regulations that affect economic activity.
- Provider of Goods and Services: Providing goods and services through public enterprises. The state produces goods for consumption or production, pays pensions and other social insurance, and encourages investment in depressed areas.
- Redistributive: Modifying the distribution of income or wealth among individuals, regions, or groups to promote equality (e.g., minimum wage laws).
- Stabilizer: Controlling major economic aggregates, avoiding fluctuations, and mitigating the effects of economic downturns.
Objectives of State Intervention
The objectives include economic progress, social development, equitable income distribution, and a balanced trade with the rest of the world. To achieve these objectives, the following points are specified:
- The greatest possible level of employment.
- Price stability.
- Economic growth.
Instruments of State Intervention
- Fiscal Policy: Decisions concerning government spending and taxes. Fiscal policy can be expansionary (increasing government spending or reducing taxes) or contractionary (decreasing government spending or increasing taxes). Fiscal policy is reflected in the public sector budget, which is the difference between revenue and expenditure.
- Monetary Policy: Controlling the amount of money and relying on market forces to bring the economy near full employment.
Government Revenue
Taxes are revenues created by law and enforceable by the subjects covered in it.
Discretionary Fiscal Policies
Discretionary fiscal policies require significant explicit action. Examples include:
- Public works programs and other expenditures.
- Public employment projects.
- Transfer programs.
- Alteration of tax rates.
A depression is a prolonged period of low economic activity and high unemployment.
An automatic stabilizer is any mechanism in the economic system that tends to reduce the strength of recessions and/or expansions of demand without requiring discretionary economic policy.
Stabilizers
Tax revenue is a key stabilizer.
The Budget of the Public Sector
The budget of the public sector is a description of spending plans and financing, often accompanied by changes in public spending (i.e., taxes). It is the difference between public revenue and public expenditure.
If revenues are above public expenditure, there will be a budget surplus. Conversely, there will be a budget deficit.