Objectives of Government Budget
The government plays a very important role in increasing the welfare of
the people. In order to do that the government intervenes in the economy
in the following ways.
Allocation Function of Government Budget
Government provides certain goods and services which cannot be provided
by the market mechanism that is, by exchange between individual consumers
and producers. Examples of such goods are national defence, roads,
government administration etc. which are referred to as public goods.
To understand why public goods need to be provided by the government, we must understand the difference between private goods such as clothes, cars, food items etc. and public goods. There are two
major differences. One, the benefits of public goods are available to all
and are not only restricted to one particular consumer. For example, if
a person eats a chocolate or wears a shirt, these will not be available to others. It is said that this person’s consumption stands in rival relationship to the consumption of others. However, if we consider a public park or measures to reduce air pollution, the benefits will be
available to all. One person’s consumption of a good does not reduce the amount available for consumption for others and so several people can enjoy the benefits, that is, the consumption of many people is not‘rivalrous’.
Two, in case of private goods anyone who does not pay for the goods
can be excluded from enjoying its benefits. However, in case of public goods, there is no feasible way of excluding anyone
from enjoying the benefits of the good. That is why public goods are
called non-excludable. Even if some users do not pay, it is difficult and sometimes impossible to collect fees for the public good. These non- paying users are known as ‘free-riders’. Consumers will not voluntarily pay for what they can get for free and for which there is no exclusive
title to the property being enjoyed. The link between the producer and
consumer which occurs through the payment process is broken and the
government must step in to provide for such goods.
There is, however, a difference between public provision and public production. Public provision means that they are financed through the budget and can be used without any direct payment. Public goods may be produced by the government or the private sector. When goods are produced directly by the government it is called public production.
Redistribution Function of Government Budget.
The total national income of the country goes to either the private sector, that is, firms and households (known
as private income) or the government (known as public income). Out of
private income, what finally reaches the households is known as personal
income and the amount that can be spent is the personal disposable income. The government sector affects the personal disposable income of households by making transfers and collecting taxes. It is through this that the government can change the distribution of income and
bring about a distribution that is considered ‘fair’ by society. This is the
Stabilisation Function of Government Budget
The government may need to correct fluctuations in income and employment.
The overall level of employment and prices in the economy depends upon the
level of aggregate demand which depends on the spending decisions of millions
of private economic agents apart from the government. These decisions, in turn,
depend on many factors such as income and credit availability. In any period,
the level of demand may not be sufficient for full utilisation of labour and other
resources of the economy. Since wages and prices do not fall below a level,
employment cannot be brought back to the earlier level automatically. The
government needs to intervene to raise the aggregate demand.
On the other hand, there may be times when demand exceeds available output
under conditions of high employment and thus may give rise to inflation. In
such situations, restrictive conditions may be needed to reduce demand.
The intervention of the government whether to expand demand or reduce it
constitutes the stabilisation function.
It all serves the purpose directly in this field.