Fiscal Policy: Taxes, Public Spending, and Economic Schools

Fiscal Policy: Taxes, Spending, and Economic Views

Tributes: Required mandatory payments to families and businesses to meet public expenditure.

Rates: A type of tax levied by the state for the provision of public services by public administration.

Taxes: A kind of tribute that does not obey the individual payment service offered by the public administration.

Public Deficit: Occurs when public expenditure generated by state action outweighs public revenue.

Fiscal Policy: The set of decisions taken by the government on tax and public spending levels to influence aggregate demand and, in turn, production, employment, and the general price level.

Expansionary Fiscal Policy: Its aim is to increase aggregate demand to increase production and employment rates, though it can generate a negative effect on price growth. The key variables the government uses to execute fiscal policy are public spending and taxes. Expansionary policy occurs when taxes are lowered, public spending is increased, or both measures are implemented simultaneously. Both raise the overall demand for goods and services: Da = C + GP + I + (XM).

Restrictive Fiscal Policy: Aims at halting the expansion of aggregate demand, which makes sense when reducing inflation is a priority. This can stifle non-economic growth and helps reduce the public deficit. In this case, the government increases taxes, reduces public expenditure, or uses both measures at once. Thus, the components of consumption and investment decline, and with them the aggregate demand. This will cause a decrease in production, employment, and the general price level.

Economic Schools' Positions on Fiscal Policy

Monetarists: Followers of the classical school, they defend the market's invisible hand as the most efficient allocator of resources. They believe that state intervention distorts efficiency. Therefore, they propose reducing state intervention in the economy. If intervention is necessary:

• They defend a balanced budget, doubting the role of fiscal policy in controlling aggregate demand.
• They attach greater importance to the use of monetary policy.
• They recognize that the budget influences the allocation of resources, determining what part of the national income is spent on the public sector versus the private sector.

Keynesian Economists: They consider fiscal policy the main instrument responsible for controlling aggregate demand and achieving economic growth and job creation. Monetary policies in times of deep depression cannot stimulate aggregate demand. Therefore, it becomes necessary for expansionary fiscal policy to drive economic growth through increased public spending. This justifies the use of the public deficit as a driver of economic activity. Keynesians believe politics should be used to balance the economy, not the budget.