Understanding Economic Policies and Public Finances

Posted on Nov 30, 2024 in Economy

Economic Policies

Economic policies are actions taken by public administrations to improve the economic situation. These policies fall into several categories:

  1. Fiscal Policy: Utilizes public income and expenditure.
  2. Monetary Policy: Manages the money supply.
  3. External Policy: Handles international economic relations.
  4. Incomes Policy: Aims to control income earned by economic actors.

Fiscal Policy

Fiscal policy uses government revenue and spending to achieve economic goals.

Types of Fiscal Policy Instruments

  1. Discretionary Instruments: Direct actions taken by public authorities. These include:
  • Public Works: Construction of roads, hospitals, etc.
  • Employment Plans and Training Courses: Support for unemployed workers.
  • Transfers: Financial aid to specific social groups.
  • Tax Modifications: Adjustments to tax rates.
Automatic Fiscal Stabilizers: These instruments react to the economic cycle. They cushion economic downturns and limit excessive growth. Examples include:
  • Taxes: Higher taxes during economic booms control consumption, while lower taxes during downturns stimulate it.
  • Unemployment Benefits: Provide income support to unemployed individuals, maintaining consumption and reactivating the economy.

Classes of Fiscal Policy

  • Expansionary Fiscal Policy: Stimulates economic activity by lowering taxes or increasing government spending.
  • Recessive or Contractionary Fiscal Policy: Cools down the economy by decreasing public spending and increasing taxes, often to control inflation.

General State Budget (PGE)

The PGE outlines the central government’s revenue and expenditure for one year.

Public Revenue

Public revenue comes from three main sources:

  1. Social Contributions: Funds collected from employed individuals to finance social security programs like disability, pensions, and unemployment benefits.
  2. Tributes: The most important source of income, divided into two types:
  • Taxes: Payments made by individuals and businesses for accessing certain activities or services. There are two main categories:
    • Direct Taxes: Based on the taxpayer’s personal situation (e.g., income tax, property tax, corporate tax).
    • Indirect Taxes: Same rate for everyone regardless of personal circumstances (e.g., VAT, special taxes, property transfer tax).
  • Fees: Payments for specific public services (e.g., licenses, water purification).
Other Income: Includes current transfers (e.g., lottery income), property income (profits from public companies), sale of investments (land, buildings, companies), and capital transfers (funds received from the EU).

Public Expenditure in the PGE

Public spending is categorized into three groups:

  1. Current Expenses: Operating costs of public entities, including staff salaries and purchases of goods and services.
  2. Investment Expenses: Creation of new infrastructure.
  3. Transfers and Subsidies: Direct payments to individuals and businesses without receiving anything in return.

These expenditures can be classified as actual expenditure (G), which includes current and investment expenses, and transfers and grants. G represents public spending in aggregate demand.

The Fiscal Balance

The fiscal balance is the difference between public revenue and expenditure. There are three possible scenarios:

  • Surplus: Income exceeds expenses.
  • Balanced Budget: Income equals expenses.
  • Deficit: Income is less than expenses.

Types of Public Deficit

  1. Cyclical Deficit: Occurs during economic recessions due to expansionary policies. It disappears with economic growth as government revenues increase.
  2. Structural Deficit: Persists regardless of the economic situation.

Ways to Finance the Deficit

  1. Public Debt: The state borrows from economic agents by issuing bonds. This can lead to the “crowding-out effect,” where increased interest rates discourage private investment and consumption.
  2. Raising Taxes: Reduces the spending capacity of individuals and businesses.
  3. Increasing the Money Supply: Can lead to inflation.