Explain the role of government budget in fighting inflationary and deflationary tendencies.
One of the basic objectives of government budget is to fight inflationary and deflationary tendencies in the economy.
In case of deflationary tendencies the following steps can be taken.
1. Deficit budget policy can be followed. Under this, the government would increase expenditure on development works, such as construction of infrastructure, schools, hospitals, etc. Expenditure on such projects have long-run effect on the economic growth of a country. Besides this, the presence of such infrastructure will facilitate future growth and development.
2. Taxes can be reduced so that there is an increase in purchasing power of people. This results in increase in consumption expenditure.
3. Steps can also be taken increase public expenditure and provide social security.
As against this in case of inflationary tendencies, following steps can be taken.
i. Reducing the public expenditure so that it leads to a decline in the demand for goods and services in the economy, causing a fall in the price level.
ii. Reduction in public borrowings reduces the purchasing power of the people, reducing their demand for goods and services. This reduction in demand, in turn, leads to a fall in the price level.
iii. Increase in taxes reduces the disposable income in the hands of the people,which in turn lowers the demand for goods and services and leads to a fall in the prices.
iv. Creating a surplus budget by lowering public expenditure and/or increasing government revenue by increasing taxes reduces the demand for goods and services in an economy and helps in reducing inflation.