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Question
Explain the following objective of government budget:
Reducing income inequalities
Solution
Budgetary policy in reducing inequalities in income:
Fiscal policy implies the income and expenditure policy or the budgetary policy of the government. Income inequality has increased in both advanced and developing economies in recent decades. Evidence from public surveys indicates that widening income inequality has been accompanied by growing public demand for income redistribution. Governments can play a significant role in reducing inequality of income and wealth as well as inequality of opportunity through fiscal policies.
Both tax and spending policies can alter the distribution of income over both short-term and medium-term. For example, progressive income taxes and cash transfers can reduce the inequality of disposable incomes today. Spending on education has an impact on future earnings, and therefore, it could eventually increase the number of individuals earning a higher income.
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