You might have noticed that over the past decades there has been tremendous expansion in economic activities which has generated enormous increase in aggregate output and wealth. However, the outcomes of this growth have not spread evenly across the households. A major function of present-day governments therefore involves changing the pattern of distribution of income from what the market would offer to a more egalitarian one. The distribution responsibility of the government arises from the fact that, left to the market, the distribution of income and wealth among individuals in the society is likely to be skewed and therefore the government has to intervene to ensure a more desirable and just distribution.
The distributive function of budget is related to the basic question of for whom should an economy produce goods and services. As such, it is concerned with the adjustment of the distribution of income and wealth so as to ensure distributive justice namely, equity and fairness. The distribution function also relates to the manner in which the effective demand over the economic goods is divided among the various individual and family spending units of the society. Effective demand is determined by the level of income of the households and this in turn determines the distribution of real output among the population.
The distribution function of the government aims at:
- redistribution of income to achieve an equitable distribution of societal output among households
- advancing the well-being of those members of the society who suffer from deprivations of different types
- providing equality in income, wealth and opportunities
- providing security for people who have hardships, and
- ensuring that everyone enjoys a minimal standard of living
A few examples of the redistribution function (or market intervention for socio- economic reasons) performed by governments are:
- taxation policies of the government whereby progressive taxation of the rich is combined with provision of subsidy to the poor households
- proceeds from progressive taxes used for financing public services, especially those that benefit low-income households (example, supply of essential food grains at highly subsidized prices to BPL households)
- employment reservations and preferences to protect certain segments of the population,
- regulation of the manufacture and sale of certain products to ensure the health and well-being of consumers, and
- special schemes for backward regions and for the vulnerable sections of the population
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