![]() ![]() The Keynesian theory suggested that government spending program is just to provide a short-term boost to help overcome a recession or depression like- situation in the economy. This mechanism did not necessarily mean that government should be big. The government can borrow money from the private sector and return the same through different spending programs. ![]() Keynes also believed that the government has the power to improve the situation of economic downturn through borrowing money. John Keynes in 1930’s stated that government spending boosts growth by injecting purchasing power in the economy. The understanding of government spending is not restricted to cost-benefit analysis. India recorded a Government Budget deficit equal to 3.50 percent of the country’s Gross Domestic Product for the financial year ended on March 2018. The government tries to fulfill this gap through borrowing which it does so by issuing bonds or borrowing from the foreign government. It is the sum of Revenue Account Deficit and Capital Account Deficit. Now since we are aware of the source of income and expenditure of the government, let’s understand about the deficit.Ī Budget Deficit is an indicator of financial health in which expenditures exceed revenue. Capital expenditure leads to the formation of assets in the economy like the building of roads, bridges, schools etc. Revenue expenditure includes payment of salaries to government employees, payment to ministers etc. The government spends can be classified as Revenue and Capital Expenditure. Taxes include Income tax, Corporation tax, and Indirect taxes while the Non-Tax revenue comes from Public Sector units like income from Railways or Public sector Banks etc. The main sources of income for the government are Tax and Non-Tax revenue. He was of the view that government’s role is very important when the economy is in recession or depression like situation and the government should increase spending to have a pickup in the economic activity. This was one of the philosophies given by one of the renowned economist John Maynard Keynes. Stimulate the economy by increasing the government spending:. The government needs to think about trade policies with foreign countries, regulation on natural resources available in our country etc. There should be certain regulations to ensure that the economy does not drift to the monopolistic situation. Lays regulatory role to provide a competitive market:. It’s very important on the part of the government to provide good legal and political framework. The government needs to make sure that there is a stable political environment. Moreover, there is uncertainty in the economy and people are also unwilling to invest. Provides a well functioning legal and political system:-Īny economy facing political or economic turmoil is not conducive to economic growth since it has very little trust in the economy. The Government has a huge role to play in the economy. Impact of government spending on the economy With so much spending going in this area, it becomes important for the policy-makers to review whether the spends made by the government is actually promoting economic growth or not.īefore we discuss the topic in-depth, you need to be familiar with the terms like fiscal deficit, government spends, economic growth to create understanding of Macroeconomics required for financial markets. In response to the financial slowdown and its impact on the economy, the government plays a key role by increasing its spending in order to boost economic growth. ![]()
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