Understanding Fiscal Policy: Taxes, Spending, and Economic Impact
Fiscal Policy and its Instruments
Employment and Training Programs
These programs aim to recruit and train workers for short periods, facilitating their integration into the workforce. Transfer programs, such as unemployment insurance, pensions, and enterprise subsidies, provide a minimum standard of living and encourage companies to hire individuals with specific characteristics (e.g., those over 45 years old).
Modifying Tax Rates
Adjusting tax percentages can influence consumer spending and economic activity. Lowering taxes can stimulate spending, while raising them can curb inflation.
Discretionary Policies
These policies require deliberate government action and may take time to implement and show results.
Automatic Stabilizers
These inherent economic mechanisms help mitigate the severity of recessions and expansions without requiring specific policy interventions.
Progressive Taxes
These taxes increase proportionally with income, ensuring that higher earners contribute a larger percentage of their income in taxes. This helps stabilize income levels during economic fluctuations.
Transfers (Unemployment Benefits)
These benefits provide income support during periods of unemployment, helping to maintain consumer spending and mitigate the impact of economic downturns.
The General Budget of the State
This detailed plan outlines the government’s projected revenues and expenditures for a one-year period.
Income (Revenue)
Interest Income
Revenue generated from loans provided by the state.
Non-Financial Income
Taxes
- Direct Taxes: Levied on income or assets (e.g., property tax, corporate tax).
- Indirect Taxes: Applied to the consumption of goods and services (e.g., VAT).
- Fees: Charges for public services (e.g., cremation fees, waste collection).
Non-Tax Revenue
- Current Transfers: Funds received from other government institutions.
- Asset Income (Lotteries): Revenue from state-owned assets (e.g., profits from public enterprises).
- Asset Sales: Proceeds from the sale of state assets (e.g., privatization of public enterprises or buildings).
- Capital Transfers: Funds received from entities like the European Union (e.g., structural funds).
Expenses (Expenditures)
Financial Expenses
Interest payments on government debt and loans.
Non-Financial Expenses
- Current Expenditure: Costs associated with providing public services and compensating government employees (e.g., utilities, salaries).
- Investment Expenses (Infrastructure): Spending on projects that enhance a country’s productive capacity (e.g., airports, roads).
- Other Expenses: Grants to businesses, transfer payments (e.g., unemployment benefits, family support).
Effects of Fiscal Policy
Crowding Out Effect
This phenomenon occurs when increased government spending displaces private investment. For example, if the state invests heavily in public schools and hospitals, it might discourage private investment in these sectors.
Government Deficit
A situation where government spending exceeds revenue.
- Cyclical Deficit: Arises during economic downturns due to reduced tax revenue and increased social welfare spending. Typically disappears as the economy recovers.
- Structural Deficit: Persists even during economic expansion, indicating a fundamental imbalance between government spending and revenue.
Financing the Deficit
Options for covering the deficit include raising taxes, issuing bonds (borrowing money), or printing money. Each approach has potential drawbacks, such as public disapproval, increased interest payments, or inflation. Addressing the structural deficit is crucial for long-term economic stability.