Understanding Welfare, Economic Policies, and Public Finance

Posted on Feb 18, 2025 in Economy

Wellness and Leisure State

The Welfare State ensures social protection (health, education, etc.). This theory is rooted in the works of Keynes and Beveridge. Beveridge’s system defends social security, while Titmuss emphasized that citizens provide resources to those most in need.

State Intervention in the Economy

The EU (Maastricht Treaty) limits a country’s contribution to 60% of GDP. Average expenditure in the EU is 27.6%.

  • Neoliberalism: Advocates for minimal state intervention, believing the market should operate freely. It argues that excessive public spending hinders saving and investment. Recessions are attributed to a decrease in supply caused by monetary factors. Privatization is seen as a solution to bureaucratic problems.
  • Keynesianism: Posits that the economy tends towards full employment. The state must intervene to maintain economic stability through fiscal and monetary policies. Increased public spending and low interest rates encourage investment and demand, leading to growth. Bureaucratization is addressed through modernization and efficiency improvements.

Public Sector Roles

  • Regulatory: Establishing the “rules of the game” (laws) that govern economic activity.
  • Resource Allocation: The state produces public goods and services (education, justice, etc.) – a core function of the welfare state.
  • Income Redistribution: Promoting an equitable distribution of wealth, where those with higher incomes contribute more, and those with lower incomes contribute less.
  • Stabilization: Mitigating economic fluctuations (unemployment, inflation).
  • Impetus for Growth and Development: The state invests in public projects to increase the country’s wealth.

Economic Policies

  • Conjunctural Policies: Short-term measures (e.g., adjusting public spending or interest rates).
  • Structural Policies: Long-term measures (e.g., improving infrastructure).
  • Monetary Policy: Actions taken by the central bank to control money supply and credit.
  • Fiscal Policy: Government measures to raise revenue (taxes, etc.) to meet economic policy objectives.
  • Trade Policy and Exchange: Utilizing export taxes and managing foreign exchange.

The State Budget

The state budget outlines expenditure provisions to carry out legal objectives. It is developed and presented by the government, followed by discussion and approval, and finally, execution over one year.

Public Expenditure

1. Economic Criterion:

  • Running Costs: State consumption, staff salaries, basic maintenance.
  • Investment Costs: Hospitals, trains, and other productive capital investments.

2. Functional Criterion:

  • General Services (GS): Maintaining the state’s structure (justice, police, etc.).
  • Real Preferential or Social Expenditure: Welfare state provisions (pensions, health, etc.).
  • Productive Activities: State investments in agriculture, industry, etc.
  • Territorial Transfers: State funds allocated to other government authorities.
  • Financial: Debt repayment.

Public Revenues

Funds that flow into the state’s coffers to meet its objectives.

Taxes
  • Taxes: Mandatory payments by taxpayers.
  • Fees: Charges for specific public law services.
  • Rates: Charges for services requested by the taxpayer (ID, passport, etc.).
  • Special Contributions: Partial financing of public works.
  • Taxes: Levied without a direct charge, based on property ownership, movement of goods, income, or expenses.
  • Parafiscal Charges: Rights and royalties collected by state administration.
Types of Taxes
  • Direct Taxes: Levied directly on income or wealth.
    • Personal Income Tax (PIT): On wages, interest, and property sales.
    • Corporation Tax (IS): On profits earned by corporations.
    • Property Tax (IP): On the wealth of individuals.
  • Indirect Taxes: Levied on the consumption or circulation of goods and services.
    • Value Added Tax (VAT): Imposed on the consumption of goods and services, ultimately borne by the consumer.
    • Excise Duties: On hydrocarbons, tobacco, alcohol, etc.
    • Transfer Taxes and Stamp Duty (ITP and AJD): On certain purchases and sales.
Effects of Taxes
  • Income Effect: Taxes reduce disposable income and potential consumer spending.
  • Substitution Effect: Indirect taxes can negatively impact consumers; if the tax on a good or service is higher than on alternatives, consumers may substitute them.
  • Fiscal Pressure: The relationship between tax revenue and GDP.
Tax Evasion and Fraud
  • Underground Economy: Activities not taxed because the state does not have legal commitments (social security, labor contracts, etc.).
  • Tax Fraud: Hiding a portion of income from the tax authorities to reduce tax liability.
Public Deficit

Occurs when state budget income is lower than expenditures.