Question

Explain the following objectives of government budget.
(a) Allocation of resources
(b) Reducing income inequalities.

Answer 1

(a) The private sector is interested in industries that maximise profits, while the government aims at welfare maximisation. The government through its budgetary policy aims to reallocate the resources according to economic and social objectives. This is done through giving subsidies, tax concessions etc to encourage investment in socially important areas. The government can also discourage production of harmful goods like liquor etc through heavy tax duties.

(b) In India government uses progressive taxation i.e. people belonging to higher income levels have to pay more tax and people in lower income groups are levied less tax. People with income below a certain level are not required to pay tax altogether. The government uses these tax collections to provide basic amenities like healthcare, education etc to the poor at free of cost or at minimal charges.