Understanding the Public Sector: Budgets, Decentralization, and Fiscal Balance
The Public Sector: An Overview
The concept of the public sector is often identified with the State. The public sector encompasses a broad area controlled by politicians. Its components include:
- The State General Administration (central).
- Territorial administrations (regions and municipalities).
- Their respective agencies and autonomous entities.
- Public enterprises.
Budgets and Public Finance
General State Budgets are systematically organized and quantified in a document that outlines the public sector’s performance through a plan of income and expenses.
The Treasury and the State Budget
The Treasury, also known as the tax system, comprises tools for raising economic resources from citizens to fund public administrations. These actions are detailed in the annual State Budget, which reflects the economic performance of the government.
Budget preparation is based on previous year’s data, setting income and expense percentages, or using zero-based budgeting, which requires annual justification of all budget items, especially their public utility.
Taxation is crucial and can be direct or indirect:
- Direct taxes are paid based on wealth or income.
- Indirect taxes affect economic capacity through consumption.
Indirect taxes impact internal and international trade, such as customs duties or tariffs on imported/exported goods. Taxes are progressive when they are paid proportionally to the taxpayer’s economic capacity.
Decentralization and Public Expenditure
Public expenditures are classified by economic, organizational, and functional criteria. Social spending, including pensions and unemployment benefits, consumes over half of the state’s annual budget.
The state has been transferring powers and financial resources to autonomous communities, reducing the central government’s relative spending. This decentralization requires financial autonomy in managing political resources. Autonomous communities receive a partial assignment of income tax, value-added tax, and excise duties on products like tobacco, alcohol, and hydrocarbons.
Budgetary Balance, Deficit, and Debt
A balanced budget occurs when public sector expenditure equals income.
Deficit and Debt
When government spending exceeds income, the deficit must be funded, increasing the tax burden, which represents the proportion of GDP used to pay taxes.
Budgetary Balance and the Stability and Growth Pact
A public deficit can be an economic policy tool during crises or stagnation, allowing expenditures to exceed revenues and necessitating borrowing. However, deficits can lead to inflation, raising interest rates and hindering economic recovery.
Higher interest rates can attract foreign investors, increasing demand for the currency and causing appreciation against other currencies. Depreciation is the reduced value of one currency against another. A strong currency can make a country’s products more expensive for foreign consumers, impeding trade and hindering crisis recovery.
