Essays Government Intervention Economy

Essays Government Intervention Economy-46
Of course, there is contro­versy among economists regarding the optimal level of government intervention in the economy.How­ever, the fact remains that government expenditure and taxation programmes exert considerable influ­ence on national income, output and other key macro-economic variables.

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Thus in terms of equation (36.3) which de­fines national income equilibrium we get: S G or. We also observe that this equilibrium level of national in­come is achieved with a government budget deficit of Rs.

15 crore, which is equal to the difference between desired saving and desired investment.

As a result the equation for the uses of the national income becomes: Y = C S T where T stands for taxes paid to the government.

Here we ignore indirect taxes as also corporate taxes.

Moreover, there is often a conflict between full employment and price level stability.

The government planners and policy­makers have to make difficult but pragmatic compro­mises between the two social evils: unemployment and inflation.

On the other hand an exactly opposite type of fiscal action is called for when the economy is in deep depression.

So the gov­ernment has to reduce taxes and/or increase its own spending.

Taxes reduce aggregate demand by reducing disposable income of the community. Government expenditure on goods and ser­vices produced in the private sector add to aggregate demand by channelling purchasing power back into the flow of spending.

It logically follows from these two basic princi­ples that economic activity can be slowed down by raising taxes and/or reducing government expendi­tures.


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