Public Budget and Economic Cycle: Deficits and Policies

Public Budget and the Economic Cycle

Understanding Deficits

• Deficit: A flow of new debt created when the state spends more than it collects in taxes.
• During recessions, public transfers increase and tax revenues decrease, leading to an increased budget deficit.
• Cyclical Deficit: The portion of the budget deficit that fluctuates with the economic cycle. It increases during recessions (when production is below potential GDP) and decreases during expansions (when production exceeds potential GDP).
• Structural Deficit: The portion of the budget deficit that remains independent of the economic cycle, stemming from structural imbalances between revenue and public expenditure. This is the deficit that persists even when production reaches its potential level.

Effects of Fiscal Policy

Fiscal policy can be discretionary or automatic.

• Discretionary Policies: These involve explicit measures, such as:
  • Public works programs and other expenses.
  • Public employment projects.
  • Transfer programs.
  • Alterations of tax rates.
• Automatic Stabilizers: These mechanisms automatically adjust to moderate economic fluctuations. For example, taxes increase during expansions, reducing the strength of demand, and decrease during recessions, boosting demand. An economic system with automatic stabilizers tends to mitigate the severity of recessions or expansions without requiring discretionary policy measures.

Crowding Out Effect

The crowding-out effect occurs when increased public spending or budget deficits or public debt reduces the amount of investment by companies.

Discretionary Sectoral Policies

• Housing: The goal is to provide housing for disadvantaged sectors of society.
• Health: The general system typically excludes officials, company employees, and marginalized populations. The aging population, increasing life expectancy, and demand for new medical techniques suggest that health spending will continue to increase.
• Environment: (See page 208 for more details)

Estimates of the Components of the State Budget

The state budget and the budgets of autonomous organizations have grown significantly in recent decades due to the expansion of the welfare state. Over half of total expenditure is now allocated to social services.

The security of the state companies, social security budgets, and other public budgets are also included.

The budgets include three general types of documents:

• United States
• Income
• Expenses
• Financial statements of companies
• State laws

Expenses are classified according to three criteria: program classification, organizational rank, and economic classification.

Expenses are also classified according to location:

• Expenses: Utilities that provide services to society, such as education. (211)
• Investment Costs: Investments in infrastructure, such as roads.
• Costs: Costs of public sector enterprises to individuals with or without compensation.

Classification of Revenue

Revenue is classified organically and economically.

• Economic Revenue:
  • Direct taxes
  • Indirect taxes
  • Fees
  • Non-tax revenue
  • Current transfers
  • Asset transfers
  • Generated by the alignment of real investments
  • Capital transfers

The State Budget Process

The state budget process involves:

• Preparation
• Approval
• Execution
• Intervention and control