Public Sector in Spain: Budgets, Taxation, and Fiscal Policy

The National Public Sector Component

• Public Administrations

  Central-territorial administration and Social Security. All of these are financed by taxes.

• Public Enterprises

  They achieve certain mission-critical goals for the country's economy.

• European Union Institutions

  The institutions of the EU affect Spain through regulations and funding.

Public Budgets: Income and Expenditure

The public sector determines each year what it will spend and what revenue it will generate. These income and expenditure plans are public budgets.

• General State Budgets

  A document approved annually by law that determines the amount the state can spend and the necessary revenue to finance that spending.

• Autonomous and Municipal Budgets

  Every regional government draws up its budget, which is approved by its legislative assembly.

Budget Equilibrium

Budgets are balanced when revenues equal expenditures. A deficit occurs when expenses are greater than revenue, and a surplus occurs when revenues exceed expenses.

What is Public Spending Allocated To?

• Social protection, health services, general education.
• Economic affairs and investment.
• Public order and public safety.
• Recreational and cultural costs.
• Defense.
• Housing and community services.
• Environmental protection services.

How is Public Spending Allocated?

• Consumer spending.
• Investment.
• Transfers.

Actual expenditure = Current expenditure + Investment.

Transfer costs only redistribute money.

Taxes and Contributions

1. Taxes

   Payments required by law without direct benefits.

   • Direct Taxes

     Taxes on the income or wealth of individuals and companies, based on their economic circumstances (e.g., Income Tax, Corporate Tax, Wealth Tax).

   • Indirect Taxes

     Taxes on transactions, regardless of the identity or circumstances of the people paying for them.

2. Fees

   Taxes paid for the use of a specific good or service.

3. Special Contributions

   Taxes paid by those who benefit from a public work or service (e.g., building a sidewalk).

Principles of Taxation

All citizens have the same obligations, including contributing to common taxes. However, the amount paid is not equal for all; it is determined according to their economic situation and family circumstances.

Economic Capacity

A person's economic capacity is manifested through their income, wealth, and expenses. Generally, the greater the economic capacity, the more they contribute.

Personal Income Tax Customization

Personal Income Tax (PIT) takes into account the personal and family circumstances of individuals to establish their economic capacity. For this purpose, exemptions, deductions, and reductions are established.

Fiscal Policy

Fiscal policy consists of the measures governments take regarding public spending and taxes to facilitate economic growth and employment, ensure price stability, and control the public deficit.

• Expansionary Fiscal Policy

  When aggregate demand is insufficient, productive capacity is unused, and unemployment is generated. The government:

  • Increases public spending.
  • Reduces taxes.

• Contractionary Fiscal Policy

  When there is excess demand and a risk of rising prices, the government:

  • Reduces public spending.
  • Increases taxes.

Automatic Stabilizers

Automatic stabilizers are economic measures that are activated automatically. Taxes and unemployment benefits have an automatic stabilizing effect. For example, in times of crisis, tax revenues decrease as a result of lower economic activity, while public spending increases due to higher unemployment benefits.