The public sector's role in the economy varies based on societal and national expectations. It is crucial for development, with policies at different government levels playing fundamental roles. Authors like Ha Joon Chang and Mariana Mazzucato emphasize the state's role in promoting innovation and guiding private sector actions towards development. This raises several questions: What should the state do? What are its current functions? Has it maintained the same roles over time? Does it have the same form, size, and hierarchy globally? What economic functions does it serve? How does it finance its activities?

As the state takes on more roles, it needs more resources to fulfill them. Increased functions lead to higher spending and thus higher necessary income. The collection of necessary funds directly correlates with spending needs. This chapter will address these questions, acknowledging that state decisions create winners and losers, influenced by private interests, political alliances, and the groups they represent. The chapter is structured to analyze public spending and fiscal policy, tax policy and resources, the public budget, and the public sector's economic impact.

A Bit of History

After the global crisis of 1929, there was a significant shift in the functions of the State. The State took on new roles, including involvement in the production of goods and services, regulation of economic agents, and ensuring a fair redistribution of income. This contrasted with the pre-1929 era, where the State primarily focused on security, defense, and maintaining the legal system, embodying a "watchman" role as envisioned by political liberals, with limited functions and reliance on the market for growth and income distribution.

The 1930s global crisis led to unprecedented unemployment and poverty, redefining the State's role to include reactivating productive activity and protecting disadvantaged groups. This gave rise to the welfare state, organizing social protection systems and intervening in income redistribution, thus broadening consumption and prosperity beyond social origin or wealth ownership. Keynesian theory, emerging from this period, advocated for State participation in resource allocation to promote full employment, marking a paradigm shift in economic thought.

Despite acknowledging market failures like monopolies, negative externalities, and public goods, the neoclassical school only recognized State intervention in exceptional situations, not as a development promoter. Fiscal policy encompasses decisions on public revenues, expenditures, and budget deficits or surpluses, impacting national income, employment, and price levels. The State enacts fiscal policy through these decisions to achieve specific economic objectives.

Public Spending

Public spending encompasses more than just what is defined as G, which includes the State's purchases of goods and services, public sector salaries, and real investment but excludes transfers to the private sector. It is the total of all expenditures by public sector institutions, entities, and organizations, including public enterprises and social security. Countries can have either federal or unitary political-institutional organizations. In a federal country, public spending can be discussed at national, provincial (regional or state), and municipal levels, as well as consolidated across all government levels.

Public sector spending can be analyzed from various perspectives, involving different budget classifications:

• Functional Classification: This details the allocation of resources among various spending purposes, such as health, education, defense, etc.

• Economic Classification: This helps understand the types of expenses, distinguishing between current expenditure (e.g., salaries, input purchases, interest payments) and investment or capital expenditure (e.g., infrastructure development, machinery purchases, debt amortization). It also differentiates expenditures with or without compensation by the recipient, with transfers (e.g., pensions, social plans) being non-compensatory.

• Institutional Classification: This allows analysis of the funds allocated to each ministry or state agency.

State expenditures can generally be classified into:

• Current or Operating Expenses: These cover ongoing expenses for the State to perform its functions, including salaries and wages of public administrations and purchases of inputs and services.

• Capital Expenditures: These are mainly aimed at expanding or improving the country's infrastructure, including public works, roads, bridges, and sanitation works. This category also includes capital contributions to public organizations or companies and public financial institutions.

• Transfers: These are unilateral State expenditures without compensation from the beneficiaries, such as subsidies for social plans and pensions.

Spending and Fiscal Policy

A significant part of fiscal policy is implemented through public spending. The Keynesian school emphasizes the crucial role of fiscal policy, particularly public spending, as a tool to stimulate the economy by increasing aggregate demand, GDP, and employment. An expansionary fiscal policy involves growing public spending, which injects more money into the economy than the State withdraws through taxes. This can be achieved by expanding public investment, such as financing new infrastructure projects like roads and bridges, which require labor and thereby boost aggregate demand through new salaries and the multiplier effect of increased consumption.

The State can also enhance aggregate demand by directly increasing salaries (e.g., expanding its workforce) or by increasing the coverage or amount of social plans or subsidies, including pensions. While different methods of increasing public spending might yield similar short-term results, their medium and long-term impacts on productive capacity (potential GDP) will differ. Social plans, although productive, have varying impacts depending on the broader economic context.

Conversely, a contractionary fiscal policy involves the State reducing its expenses relative to its income, thus contracting aggregate demand. In other words, all State spending at different levels translates to income for the private sector. Public works spending results in income for private companies, while increasing the workforce or social plans boosts individuals' incomes in the private sector. These new incomes are primarily spent on consumption, leading to an increase in aggregate demand. Therefore, variations in aggregate demand significantly impact national output and employment.

Public Resources

Public Goods and Services in Argentina

The State provides various goods and services that are generally not sold in a market but are instead available to society for free. This provision is based on two key characteristics that define public goods:

• Non-excludability: Public goods are available to everyone without exclusion. This means that no one can be prevented from using the good or service.

• Non-rivalry: One person's use of the good does not reduce its availability to others.

Examples of such services include national security and border control, where beneficiaries cannot be individually identified, and public education, which is provided free of charge due to social consensus and cultural tradition.

These services are funded by the State primarily through general revenues, mainly taxes. However, the State also relies on non-tax sources like fees and public credit to finance these services.

In Argentina, the National Constitution (NC) determines the tax powers of the Nation and the provinces.

 Tax Powers

The National Constitution of Argentina (1994, art. 121) outlines the tax powers between the Nation and the provinces. The provinces retain all powers not delegated to the Federal Government, including broad tax powers. The Nation's tax powers are derived from the provinces, making them somewhat limited and delegated.

Types of Payments to the State

• Taxes: Mandatory payments made by citizens to the State without a direct benefit to the payer. These funds are used to finance various state functions such as security, education, and infrastructure.

• Contributions: Payments made by citizens that are linked to the benefits derived from public works or state activities. An example is an improvement contribution paid when the State paves the street, increasing the property's value.

• Rates: Payments associated with the provision of a specific public service to the taxpayer. Examples include street lighting and cleaning services.

Basically, a tax is a broad economic support mechanism with a legal basis, encompassing taxes, contributions, and rates, used to finance the expenses of national, provincial, or municipal administrations.

Taxes in Argentina: Constitutional Framework and Types

Constitutional Tax Powers

According to Argentina's National Constitution (NC), tax powers are distributed among the Nation, provinces, and municipalities:

• National Power:

• Exclusively and permanently apply import and export duties.

• Concurrently and temporarily apply direct taxes when required for defense, common security, and general welfare (NC, 1994, art. 75).

• Concurrently and permanently apply indirect taxes, except customs taxes.

• Provincial Power:

• Exclusively and permanently apply direct taxes, except when shared with the Nation.

• Examples include personal property tax, income tax (national level), and automotive and real estate taxes (provincial level).

• Municipal Power:

• Primarily apply taxes for the provision of services, such as rates for street lighting, sweeping, cleaning, and the inspection and hygiene rate on businesses and industries.

Types of Taxes

• Direct Taxes:

• Imposed on individuals or legal entities, directly taxing economic capacity (wealth and income).

• Examples: personal property tax, income tax (national), automotive and real estate taxes (provincial).

• Paid directly by the person or entity responsible for the tax.

• Indirect Taxes:

• Imposed on goods, services, and transactions.

• Examples: VAT, gross income tax (provincial), internal taxes on specific goods (fuels, automobiles, beverages).

• Initially paid by one party but passed on to the consumer.

Classification by Impact on Income

• Progressive Taxes:

• Collect a higher proportion as income increases.

• Example: income tax with a non-taxable minimum and increasing rates for higher incomes.

• Regressive Taxes:

• Collect the same proportion regardless of income.

• Example: VAT and gross income tax, which tax all sales at the same rate.

Revenue-Sharing Regime

This regime ensures income distribution between different government levels:

• Primary Distribution:

• Forms a shared revenue pool by summing taxes collected under this system.

• Distributes the total amount between the Nation and the provinces (and the Autonomous City of Buenos Aires).

• Secondary Distribution:

• Allocates the portion designated for provinces among all provinces.

• The Federal Tax Sharing regime, regulated by Law No. 23,548, ensures the collection and distribution of shared taxes by the Federal Administration of Public Revenue (AFIP).

• Generally, the Nation receives 47.5% of the total, with the same percentage allocated to the provinces, distributed using secondary distribution indices.

In conclusion, Argentina's tax system is defined by constitutional provisions that allocate tax powers among the Nation, provinces, and municipalities. This structure supports a complex but organized revenue-sharing regime that facilitates the fair distribution of collected taxes to fund public services and infrastructure across different levels of government.

Public Services and Rates

Provision of Public Services

In Argentina, public services are either provided directly by the State or by private companies or cooperatives that have been granted a concession to operate these services. Historically, many services were state-run but have since been privatized:

• Fixed-line Telephone Service: Initially provided by the national company ENTeL, privatized in the 1990s to Telefónica and Telecom.

• Household Gas: Previously provided by Gas del Estado, now by Metrogas.

• Sanitary Services: Initially by Obras Sanitarias de la Nación, privatized to Aguas Argentinas.

• Electricity Distribution: Provided by SEGBA, later privatized to Edenor and Edesur in Greater Buenos Aires.

In other regions, these services were provided by provincial state companies or cooperatives. Regardless of the provider, users pay rates for these services, which are not taxes but fees calculated to offset production and distribution costs. Rates apply to services like fixed-line telephony, gas, electricity, and running water.

Rate Setting and Regulation

Rates for public services can be set by the concessionaire or regulated by the State. Changes in rates often undergo public hearings and depend on the legal framework governing the activity.

Public Credit

When the public sector's expenses exceed its revenues, resulting in a fiscal deficit, it can incur debt through various means:

• Issuing Bonds: These can be in local currency or foreign currencies and can be sold to the Central Bank, private sector, or foreign investors.

• Loans from Multilateral Credit Organizations: Such as the World Bank and the Inter-American Development Bank (IDB).

• Specific Funds from Countries: For example, the Kuwait Fund for Development.

• Delaying Payments: To suppliers, later consolidating that debt.

Debt instruments vary in duration and purpose, with medium and long-term debt typically financing public works and short-term instruments addressing immediate fiscal needs. Public borrowing influences both fiscal and monetary policy by affecting the money supply and economic activity.

The Public Budget

The public budget, defined by law, outlines the State's planned spending and projected revenues for a calendar year. It includes:

• Revenue Estimates: Projections of the resources the State will receive.

• Spending Authorizations: Maximum amounts that can be spent on various budget items.

Budget Process

• Initial Planning: The National Budget Office, under the Ministry of Economy, coordinates with different areas to draft budget plans.

• Executive Proposal: The draft budget is sent to the Executive Power, which forwards it to the Legislative Power.

• Legislative Debate: Congress debates and modifies the budget, which is then approved as law.

• Execution and Oversight: The Executive Power executes the budget, and the Investment Account reports the budget execution to Congress for review.

Budget Result

• Surplus: When estimated resources exceed expenses.

• Deficit: When expenses exceed estimated revenues.

Types of Budget Results

• Economic Result: Difference between current resources and current expenses.

• Primary Result: Difference between total resources and primary expenses (excluding debt interest payments).

• Financial Result: Difference between total resources and total expenses, including debt interest payments.

Fiscal Policy Debates

Economists debate whether the public sector should always maintain a balanced budget or allow deficits to stimulate economic recovery during downturns. This debate contrasts:

• Neoclassical Economists: Advocate for balanced budgets, limiting public spending to estimated revenues.

• Keynesian Economists: Support using public spending to stimulate economic activity, justifying deficits to expand the economy when necessary.

To come to the point, Argentina's approach to public services, public credit, and budgeting involves a mix of state and private provision of services, various debt instruments to manage fiscal deficits, and a structured budget process to plan and control government spending. The ongoing debate about fiscal policy reflects differing economic philosophies on managing public finances and economic cycles.