Question

Answer the following question.
Explain how the government can use the budgetary policy in reducing inequalities in incomes.

Answer 1

Budgetary policy in reducing inequalities in incomes:

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.

Answer 2

The government through its budgetary policy attempts to promote the fair and right distribution of income in an economy. This is done through taxation and expenditure policy. On one hand, through its taxation policy, the government taxes the higher income group, and on the other hand, through the expenditure policy (subsidies, transfer payments, etc.), it transfers the purchasing power in the hands of the poor sections of society. With the help of these policies, the government aims at a fair distribution of income in society.