Government can take advantage of the power of the multiplier and can help reduce
ID: 1215659 • Letter: G
Question
Government can take advantage of the power of the multiplier and can help reduce the unemployment rate by increasing Government Expenditures on goods and services or by reducing taxes. Between these two options that are available to the Government which one is a better option? Consider some of the following dimensions in your answer: What are the advantages and disadvantages of increasing expenditures versus reduction of taxes? Should the Government of Canada be selective in providing tax breaks to particular industries, sectors or groups? Should the same strategy be used for tax reduction? Can you suggest any other ways that the Government can spend money to reduce unemployment rate?
Explanation / Answer
1) Tax cut is a popular concept which tends to show the people that your disposable income has been raised. This creates a feel good effect and hepful in raising aggregate demand as well as aggregate supply. Recent examples in US, Poland, Hungary and Ireland has cemented the fact that tax cuts were able to reduce unepmloyment and raise the economic growt. However, scenario for the tax cuts also needs to considered. I
If the tax cut is financed by the cut in government spending of the similar magnitude then there might be no effect on the economy. If it is finaced in the boom period then government may end up crowding out effect.In recessionary period tax cut along with government spending proves highly effective. It also improves the labor productivity as their income will be worth of more today than tomorrow.
There is also a factor which needs to be considered and that is Ricardian Equivalance. People may consider that tax cut may be negated by rise in near future and then it fails to show desired effect.
Government expenditure is more suitable when there is need for big infrastructure spending to influence the structure of economy and it could create demand in the economy to pull it out of the recession. Howeverfinancing such spending is a big issue and in the long term it could create more problems if the government debt is already high or infrastructure is already at its satuartion level. Japan tried such thing in the 1990's but falling demographic advantage pushed the economy into deflation and increased spending did nothing to help it.
2) Tax breaks to sunrise industry,which is in nascant stage and could create massive employment as well growth opportunity should be given preference for tax breaks. India has adopted such strategy when it saw a big opportunity in ICE that is Information Technology, Communication and Electronics due to its skilled and cheap labor force. It has given tax breaks to such companies and that sector has developed very fast bringing army of software engineers.
In the era of globalization old economy sectors might not be that beneficial to continue and should be avoided. For example, manufacturing is almost impossible in USA and Western Europe due high wages and strict labor laws but in China labor laws are non-existent and wages are fraction of what are they in US or EU. In such cases there is need to structural shift in the economy and old sectors should be encoraged to be reinvented or abandoned.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.