Economic Policy Objectives and Fiscal Instruments

Economic Policies and State Intervention

Economic policies are the forms of state intervention in the economy to achieve economic targets. They represent the forms of state intervention in the economy towards the attainment of economic objectives related to production, employment, prices, and driving variables such as taxes, public spending, or the price of money.

Core Objectives of Economic Policy

• Sustainable economic growth: This is the state action to ensure that the increased production of goods and services is sustained over time. One of its key objectives is to improve the welfare of citizens. As economic growth can increase the quantity and quality of goods and services offered to society, the state intervenes to increase or at least maintain the level of production. The most significant economic indicators of economic growth are GDP and GNP.
• Full employment: It is considered that full employment exists when 98% of the working population is employed.
• Price stability: Checking the prices of goods and services is essential to maintain consumer purchasing power and to avoid the uncertainty that causes inflation.

Types of Political Economy

• Tax policy: This is the deliberate action of the state to increase or decrease economic activity, mainly through the collection of taxes and the implementation of public expenditure. Tax policy is the public sector's intentional action through fundraising (mainly taxes) and the implementation of public expenditure to achieve the objectives pursued by the state.
• Monetary policy: The set of measures taken by the central bank of a nation with the primary aim of maintaining price stability. In European countries, this is managed by the European Central Bank (ECB).
• Foreign policy: Since the adoption of the euro, Brussels makes decisions on international trade for all countries that form the EU.
• Incomes policy: It aims to achieve price stability by controlling inflation. When prices soar, the state tries to control the prices of products with more instability. It can also regulate the salaries of officials or recommend maximum and minimum salaries for firms.

Fiscal Policy Instruments

Public Expenditure

• Public works programs: These have two aims: to increase levels of production and employment and to provide more infrastructure for the country.
• Employment and training plans: They target or objectify programs to train workers.
• Transfers: The main transfers are state unemployment insurance benefits and retirement pensions.

Public Income

• Modification of tax rates: Tax changes alter the amounts available to households or businesses to consume or invest, which in turn affects demand.