Title Chapter 7 ( Unit 1 ).pdf ✅

UNIT – 1: FISCAL FUNCTIONS: AN OVERVIEW, CENTRE AND STATE FINANCE
Introduction The governments of all nations have important economic functions even where markets constitute the basic resource allocation mechanism. The primary goal of the state is to promote the general welfare of the society. What governments do, or do not do, will obviously have an important impact on the economic performance of an economy and the quality of life of its citizens. As we know, Macroeconomics is the study of the economy as a whole. There are three main macroeconomic goals for any nation: 1) The first is economic growth: If the real gross domestic product grows at a faster rate than population, then people can enjoy higher standard of living. 2) The second goal is high levels of employment: This will ensure higher income and higher output. When unemployment occurs, it harms not only the unemployed, but the society as a whole because there is loss of output that could have been produced 3) The third macroeconomic goal is stable price levels: Inflation reduces real incomes and purchasing power of some people, and disproportionately affects lower income families. On the contrary, deflation signals a downturn in economic activity which may cause recession or even depression and large scale unemployment. By ensuring stable prices, an economy can avoid prolonged inflation and deflation and achieve high levels of economic activity and employment. The purpose of this lesson is to examine the economic functions of the govt. and to understand why the government should invariably perform them.
THE ROLE OF GOVERNMENT IN AN ECONOMIC SYSTEM We shall first consider why an ‘economic system’ should be in place? The basic economic problem of scarcity arises from the fact that wants are unlimited and the resources available to any society are limited. Consequently an economy cannot produce all economic goods and services that its members desire to have. ➡ Therefore, an economic system by which a society (households, businesses, and government) makes decisions about allocating resources to produce products and about distributing those products should exist to answer the basic questions such as: What, How and for Whom to produce and how much resources should be set apart to ensure growth of productive capacity? There are three alternative Economic systems: 1) Market or Capitalism 2) Government or Socialism 3) Mixed Each with different degrees of state intervention in economic activities.
Adam Smith is often described as a bold advocate of free markets and minimal governmental activity. However, Smith saw an important resource allocation role for the government when he underlined the role of government in: National Defence to protect the nation from external violence and invasion Establishing a system of Justice to provide internal law and order and to protect property. Establishment and maintenance of highly beneficial public institutions and public works such as roads, bridges, canals, harbours, and postal system that profit-seeking individuals may not be able to efficiently build and operate. Since the 1930s, more specifically, as a consequence of the great depression, the state’s role in the economy has been distinctly gaining in importance, and therefore, the traditional functions of the state have been supplemented with what is referred to as economic functions (also called fiscal functions or public finance function) Richard Musgrave, in his classic treatise ‘The Theory of Public Finance’ (1959), introduced the three-branch taxonomy of the role of government in a market economy. Musgrave believed that the functions of the government are to be separated into three, namely, (a) Resource allocation (to ensure efficiency),- Microeconomic functions (b) Income redistribution (to guarantee fairness), Microeconomic functions (c) Macroeconmic stabilization (to ensure price stability) - Macroeconomic The National budget, in general, reflects the economic policy of a government and the government exercises its economic functions partly through the budget - 7 - - -