Question

• Compare and contrast the use of government spending changes versus tax changes as a means of influencing the course of the economy. Is one or the other preferable in specific situations?

Answer 1

Government has to play a very active role in promoting economic development and the fiscal policy (changes in government spending and taxation ) is the instrument that the state must use. During inflation government should use lower government spending and increase the taxation during recession, government should increase government spending and lower the taxation to stabilize the economy.
Higher goverment spending promote private investment in the economy. There by it provides wide range of job opprtunities in the economy. It increases employment rate in the economy. As a result, income and consumption level increases. Government expenditure redistributes income in favour of poor and thus reduce inequalities. Government expenditure is incurred on investment projects for capital formation, like building of canals, railways ans other infrastructural facilities, it will expand productive capacity and generate long term economic growth. It will ensure progress in technology and raise productivity of workers. Government spending on education and public health helps in building human capital, which also enhances productivity of workers
Lowering tax rates promtes labour supply and it encourages saving ans investment in the economy. Thereby it results mobilisation of resources of economic growth, especially for the public sector. It provides incentives to save and investment in private sector.Higher taxation restrain inflationary forces in the economy in order to ensure price stability. It ensure equitable distribution of income and wealth so that fruits of economic growth are fairly distributed