Public Sector Economics: Regulation and Fiscal Policy

Public Sector Institutions

Public sector institutions are characterized by activities that respond to political decisions. These are typically non-market institutions responsible for public administration.

They provide services to all citizens that often can only be acquired through collective political decisions, such as security and justice.

Types of Public Administration

• Central State Administration: Includes autonomous administrative bodies.
• Territorial Administration: Comprises autonomous regional and local administrations.
• Social Security Administration: Manages social welfare programs.

Decentralization aims to satisfy the right to self-government of the state's territories.

Functions of the Public Sector

• Regulate economic and social relations.
• Provide public goods and services.
• Apply regulations and establish standards.
• Implement economic policies.

Economic Regulation by the Public Sector

Regulation involves establishing standards that must be respected.

Reasons for Public Sector Regulation

• To compensate for market power imbalances.
• To guarantee security and the common good.
• To address market deficiencies (market failures).
• To ensure proper competition.

Deregulation

Deregulation involves eliminating laws and rules that affect consumption and production. However, this does not mean an absence of all rules, as specific areas often remain regulated.

Areas of Regulation

• Economic Regulation: Focuses on promoting competition, establishing a general economic framework, and influencing economic relationships.
• Social Regulation: Addresses social welfare, health, safety, and environmental concerns.
• System Regulation: Pertains to fundamental legal frameworks like labor laws, contract laws, and property laws.

Disadvantages of Regulation

• Can increase costs for businesses and consumers.
• May lead to bureaucracy and administrative burdens.
• Officials implementing regulations may not always have sufficient expertise.
• Precautionary measures and approval processes can cause delays.
• Regulation can be influenced by powerful interest groups seeking benefits.

Advantages of Regulation

• Provides security and predictability in economic relations.
• Helps internalize social costs (e.g., pollution) and benefits.

Economic Policy (EP)

Economic policy encompasses the set of measures adopted by public authorities to achieve specific economic objectives.

Economic Policy Objectives

• Economic growth
• Full employment
• Price stability
• External balance (balance of payments)
• Equitable distribution of income and wealth

Economic Policy Instruments

• Monetary Policy: Managing money supply and interest rates.
• Fiscal Policy: Using government spending and taxation.
• Direct Controls: Price or wage controls, quotas.
• Exchange Rate Policy: Managing the national currency's value.
• Institutional Changes: Reforms in laws or regulations.

Classifications of Economic Policy

Based on Mode of Action:

• Level: Macroeconomic or Microeconomic Policy.
• Duration: Short-term, Medium-term, or Long-term Policy.
• Orientation: Discretionary policy (process-oriented) or rule-based policy (e.g., planning).

Based on Field of Action:

• Fiscal (or Budgetary) Policy
• Monetary Policy
• Foreign Trade and Exchange Rate Policy

Fiscal Policy

Fiscal policy refers to government intervention in the economy through its programs of public expenditure and public revenue (taxation).

Public Expenditures

These are all payments made by the public sector over a period (typically a year) to carry out its various activities.

Classification of Public Expenditures:

• By Economic Function:
  • Current Expenditures: Purchase of goods and services.
  • Capital Expenditures: Investments in infrastructure, etc.
  • Transfer Payments: Payments made without receiving goods or services in return (e.g., social benefits, subsidies).
• By Spending Agency: Classified according to the government department or agency making the expenditure (e.g., defense, health, education).

Public Revenues

These are all the resources received by the public sector to finance its budgeted expenditures.

Types of Public Revenue:

• Tax Revenues: Compulsory payments made by individuals and companies.
  • Direct Taxes: Levied on income and wealth (e.g., income tax, corporate tax).
  • Indirect Taxes: Levied on consumption (e.g., Value Added Tax - VAT, sales tax).
• Social Contributions: Payments linked to social security systems.
• Other Revenues: Income from public property, fees, etc.

Macroeconomic Effects of the State Budget

The state budget influences macroeconomic developments in several ways:

1. Stabilizing Effect: Fiscal policy can be used to manage aggregate demand. For example, increasing government spending or cutting taxes during a recession can stimulate economic expansion. Conversely, decreasing spending or raising taxes can curb inflation.
2. Incentive Effect: Budgetary measures (taxes and subsidies) can encourage or discourage specific economic behaviors, such as investment, saving, or consumption of certain goods.
3. Redistributive Effect: The budget plays a crucial role in redistributing income and wealth through progressive taxation and targeted transfer payments and public services.