The Role of the Public Sector and Fiscal Policy in Economic Stability
Decisions and State Intervention in the Economy
The Role of the Public Sector
Composition
The public sector comprises administrative agencies through which the State implements national policy. This includes the Legislative, Executive, Judiciary, and autonomous public bodies, institutions, companies, and individuals acting on behalf of the State. It encompasses all activities owned or controlled by the central and local government.
Role and Volume
The public sector’s role and size depend on the defined public interest. It typically constitutes a significant portion of a country’s economy, influencing global activity. For example, the government might limit civil servant wage growth to control inflation, implementing an informal prices and incomes policy. The public sector belongs to every citizen.
Economic Policy
Definition
Economic policy is the government’s strategy for managing the national economy. It employs tools to achieve specific economic outcomes.
Tools Used
These tools relate to fiscal, monetary, exchange rate, price, and external sector policies. Monetary policy influences growth, inflation, and interest rates through decisions on money supply. Fiscal policy impacts production and economic growth through public spending and taxes. Trade policy affects government revenue and spending.
Incentives and Constraints
State intervention aims to modify economic agent behavior through incentives, tax benefits, or prohibitions and restrictions.
Coordination
Coordination and integration between different policies are crucial to achieve desired objectives, which can sometimes be contradictory.
Short and Long-Term Results
Short-term measures address immediate economic situations like unemployment and inflation. Long-term measures, like promoting specific economic sectors or improving distribution, affect a country’s economic structure and require time to develop.
Analysis of Public Budget Components: Revenue and Expenditures
Definition of State Budget
The state budget is a quantified, comprehensive, and systematic representation of obligations (expenditures) and duties (revenues) for a given year.
Preparation and Approval
The Ministry of Economy and Finance prepares the annual budget, which the Council of Ministers approves. The government presents it to Congress, which votes on its acceptance or amendments. The Senate then reviews it, with limited alteration power, before final submission to Congress. If not approved, the previous year’s budget is extended.
Composition of State Budget
- The state budget (King, Parliament, Ombudsman, etc.)
- Budgets of autonomous bodies of Central Government
- The Social Security budget
- Budgets of state agencies
- Budgets of public bodies with specific credit limitations
- Budgets of state commercial companies
- Budgets of state sector Foundations
- Budgets of public business entities and other public bodies
- Budgets of funds without legal personality
Revenue
- Direct taxes and social contributions (income, capital, etc.)
- Indirect taxes (VAT, excise, etc.)
- Taxes, public fees, and other income
- Current transfers
- Capital income
- Disposal of real investments
- Capital transfers
- Financial assets
Public Expenditure
- Non-financial transactions (current operations, contingency fund, capital operations)
- Financial assets
- Financial liabilities
- Transfers between sub-sectors
Fiscal Policy and its Impact on Income Distribution
Definition of Fiscal Policy
Fiscal policy uses public spending and taxes to ensure economic stability, resulting in deficits or surpluses as needed.
Ultimate Objectives of Fiscal Policy
- Full employment
- Control of aggregate demand
- Manage deficit or surplus
Figure (Explanation of Fiscal Balance Graph)
The graph illustrates the relationship between taxes (T), government spending (G), and national product (GNP). The fiscal balance point is where T = G. The red zone represents a deficit (G > T), and the green zone represents a surplus (T > G).
Is a Deficit Bad?
A fiscal deficit is not inherently negative. Fiscal policy proponents advocate increased government spending (G > T) to stimulate the economy.
Keynesian Control Mechanisms
Variation of Public Expenditure
- Public expenditure (public investment) stimulates the economy by creating jobs and increasing production, leading to GDP growth.
- A deficit can be beneficial for economic growth.
Change in Tax
- Increased disposable income boosts consumption, potentially improving the economy through the multiplier effect.
- Reducing taxes increases national product, while raising taxes reduces it.
Fiscal Policy Types
Expansionary Fiscal Policy
- Increases aggregate demand, often during recessions, by increasing public expenditure and reducing taxes, leading to a deficit.
Restrictive Fiscal Policy
- Decreases aggregate demand, often during periods of high inflation, by reducing public expenditure and raising taxes, leading to a surplus.
History
- John Maynard Keynes challenged Say’s Law, advocating state intervention to address unemployment through fiscal policy.
Criticisms of Fiscal Policy
- Ineffectiveness during stagflation (high inflation and unemployment).
- Crowding out of private investment.
- Potential for trade deficits.
- Delays in impact.
- Inconsistent propensity to consume.
Public Sector Intervention in the Regional Economy
In Andalusia and Spain, the public sector intervenes to control the economy and mitigate issues associated with a pure market economy.
Assessment of the Welfare State’s Effects
Definition
The welfare state ensures social protection, including healthcare, housing, education, social services, pensions, and employment protection.
Debut
World Wars, the 1929 crisis, and political instability led to increased state intervention to ensure welfare and economic stability, marking the modern welfare state’s debut.
The Welfare State in Europe
Four distinct welfare state models exist within the EU:
- Nordic Model: Universal provision based on citizenship, high social protection, and active reemployment policies.
- Continental Model: Focus on pensions, security-based system, and less emphasis on active labor market policies.
- Anglo-Saxon Model: Lower welfare state, emphasis on social assistance, and conditional access to benefits.
- Mediterranean Model: Lower cost, strong focus on pensions and social assistance, and highly conditional access to benefits.