Question

Explain how government budget can be helpful in bringing economic stabilization in the economy.

Answer 1

Taxes and government expenditure can be influenced in bringing economic stabilisation in the following ways:

1) A tax is a legally compulsory payment imposed by the government on households and producers. The government imposes taxes on socially unsafe goods such as alcohol and tobacco. Thereby resources will be shifted to the production of socially essential goods.

2) Subsidies do not reduce the liability of the government and it does not add to the assets of the government. The government also provides subsidies for necessary goods such as wheat, rice and sugar. Thereby the resources are shifted from the production of goods for the rich to the production of goods for the poor. 

Thus, government budget can be helpful in bringing economic stabilisation in the economy.