A SHort not on Stabilisation Function of Government Budget for UPSC aspirants
What is government stabilisation? What Is Stabilization Policy? A stabilisation policy is a strategy enacted by a government or its central bank to maintain a healthy level of economic growth and minimal price changes. How does government stabilize economy? In the short term, governments may focus on macroeconomic stabilization—for example, expanding spending or cutting taxes to stimulate an ailing economy, or slashing spending or raising taxes to combat rising inflation or to help reduce external vulnerabilities. What are functions of government budget? Traditionally the budget is presented to allow scrutiny (by taxpayers, voters, and the legislature) of the resources raised by government and the uses to which these will be put. The publication of a budget thus performs the role of generating accountability for the actions of government at various levels.
The government may need to correct fluctuations in income and employment. The overall level of employment and prices in the economy depends upon the level of aggregate demand which depends on the spending decisions of millions of private economic agents apart from the government.
These decisions, in turn, depend on many factors such as income and credit availability. In any period, the level of demand may not be sufficient for the full utilisation of labour and other resources of the economy.
Since the wages and prices do not fall below a level, employment cannot automatically be brought back to the earlier level.
The government needs to intervene to raise the aggregate demand. On the other hand, there may be times when demand exceeds available output under conditions of high employment and thus may give rise to inflation.
In such situations, restrictive conditions may be needed to reduce demand. The government's intervention to expand demand or reduce it constitutes the stabilisation function.