Define Government budget. Explain the various objectives of a government budget.

Sandeep Garg Macroeconomics Class 12 Solutions Circular flow of Income – Long Questions – Q.1 Define Government budget. Explain the various objectives of a government budget.

Solution:-

Government Budget is a yearly statement showing estimated receipts as well as estimated expenditures of the government for a financial/Fiscal year. Various objectives of Government budget are: –

• Reducing Inequalities in Income: – Government through its budget seeks to reduce the divide between the rich and the poor. This is done by increasing taxes on the rich and increasing government’s expenditure on the welfare schemes for the poor. Such a policy, reduces disposable income of the rich and results in increased quality of life of the poor, thereby reducing the effects of income divide.
• Reallocation of Resources: – Government through its budgetary policy relocates resources to maintain the balance between its objectives of profit maximization and social welfare. To achieve profit maximization and encourage investment, government invites private players by providing tax holidays, subsidies etc. but sometime private players hesitate to take up projects requiring heavy investment and having long gestation periods such as sanitation, building of roads etc. In such a situation government takes up these projects for social welfare.
• Economic Stability: – Government through its budget aims to prevent large scale fluctuations in prices. Such a situation, leads to anxiety and fear in minds of consumers and investors. Prices tend to rise when aggregate demand in the economy is higher than aggregate supply. In such a situation, government decreases its expenditures in order to reduce money supply in the economy which in turn reduces aggregate demand. Prices tend to fall when aggregate supply in the economy is more than aggregate demand in the economy. In such a situation, government increases its expenditures in order to increase money supply in the economy which in turn increases aggregate demand.
• Economic Growth: – The growth rate of an economy depends upon the volume of production of goods and services in an economy. Budget acts as a effective tool for the government to stimulate savings and investment in the economy. It diverts its resources and expenditure into productive ventures and projects. This induces growth and increases investment levels in the economy thereby achieving economic growth.
• Reducing Regional Disparities: – Government budget aims at reducing disparities with regards to development between different parts of country. This is done by promoting trade and commerce in the backward areas of the country by increasing government expenditure, providing tax holidays, subsidies etc.
• Employment Generation: – Government through its budget aims at providing and increasing employment opportunities for the citizens of the country. Governments expenditure on various projects like railways, bridges, flyovers provide employment to skilled and unskilled labor. Also, government in its budget introduces various schemes like Mahatma Gandhi national rural employment guarantee act (MNREGA), Pradhan Mantri Rojgar Yojana (PMRY) in order to provide employment to its citizens.

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