Poverty and unemployment misbalance the economic scene of a state. Poverty is directly responsible for the crime in society and it blocks the creative edge. The state, nevertheless plays an important role in the alleviation of poverty and the creation of employment. Government spending in that regard is an important phenomenon. Where the state places a cap on spending, unemployment increases and many social evils emerge. Equitable distribution of wealth thus becomes important in public finance. This paper accordingly examines the issues of equitable distribution of income.
When trade or markets are not flourishing and the same are pressed down, we say that markets or the economy is depressed. It is a period of low business and industrial activity accompanied by a rise in unemployment. And an important contributory reason for this state of affairs or in other words, factors in our continuing economic weakness is the unbalanced economic policy perused by the state, which leads to money contraction in the market. But having said that, it may be noted that often states do what the economic theory and history tells them not to do, that is, cutting down government spending while confronting a weak economy.
Two general reasons are advanced for government action to alter the market-determined distribution of income. First, income redistribution is a public good; and private efforts at redistribution will be inefficient because of the free-rider problem. Second, the market-determined distribution of income is unacceptable for ethical and other reasons. In the first case, redistribution is based on the preferences of taxpayers, with the objective being a Pareto-optimal distribution of income. In the second case, the preferences of taxpayers who finance the transfers need not to be considered.
In the income redistribution mechanisms, transfers play an important role for achieving the objective of raising the incomes of the poor segment of population, while minimising resource allocation effects. As is evident, other policies miss a segment of the population and create unpredictable or undesirable market effects.
Transfers may take the form of cash or goods and services, with the choice depending on whether the sovereignty of taxpayers or income recipients is to be respected. But the fact is that all this underlines government spending, particularly at the local government level, because spending at that level creates employment and thereby reduce poverty lines. Hence an equitable distribution of income is the goal in development policies.
There is undoubtedly significant disagreement about the answer to this question, with opinions ranging from absolute equality in incomes to whatever income distribution is determined by individual effort and luck. Economists are no more equipped to say how incomes should be distributed than anyone else, but they can say something about the economic effects of achieving particular equity objectives by one means or another. For example, the economic effects of equalising incomes absolutely will bring different consequences from the effects of guaranteeing households a minimum income. And redistribution of incomes through a negative income tax may have different effects from instituting an organised system.
Allocation and distribution decisions are necessarily interdependent. This interdependence is apparent in many ways. An allocation of more resources to education will increase some people's productive capacities and incomes and may change the income distribution patterns. For hiring factors of production and in selling goods to consumers for profit, private business firms compete with each other. And for purchasing goods and in return supplying their services or other resources to businesses, households compete with each other. In such a system, resources are allocated to the production of those goods for which consumers preference exists, at a price that enables a firm to compete for productive resources and earn a satisfactory profit. And consumer's purchases depend on household incomes, which in turn depend on the amount of services and other resources offered by households. And for sale and on the price (wages, interest rates, rents) these resources can command acceptance in the market.
The goals of full employment and price stability are commonly referred to as stabilisation objectives. They are usually considered in addition to and independent of the objectives of efficiency in the allocation of resources and equity in the distribution of income. But full employment and price stability can be viewed as particular aspects of the more general efficiency and equity objectives. Alternatively, they are instruments by which these more fundamental objectives are achieved.
In the event of unemployment some resources simply are not allocated to the production of anything, and incomes are distributed among the population in a different pattern than would prevail under conditions of full employment. Thus, concern about unemployment derives from dislike of the waste (inefficiency) implicit in unemployment and the hardships caused by the loss of income to the unemployed.
Inflation is of concern because of its effects on the distribution of income and the allocation of resources. Some people gain from inflation; others lose. Inflation may increase speculative buying and hoarding of goods, exports may fall and imports rise, the structure of investment may be altered, etc. Thus, inflation usually causes a change in the allocation of resources - a world-wide shift in allocation if international trade is affected.
Economic growth, like stability, is sometimes considered as a distinct objective of economic activity, it too is an aspect of the general objectives of efficiency in resource allocation and equity in income distribution. This becomes clear when we recognise that investment expenditures influence economic growth and that society must determine the allocation of resources between investment and consumption of goods. Efficiency is one criterion that is employed in judging whether provision for the future is satisfactory. But an equity criteria may also be used in deciding how much growth (investment) will take place and in distributing the costs and benefits of growth within and among generations of the population.
The states can reduce the poverty levels. This decrease in poverty caps the rising trends in crime, since poverty has eventually made criminals of everyone. We are following an austerity program, and this destructive fiscal austerity has raised the unemployment rate to an alarming level. Its impact is now being felt as crimes are rising and economic activity abating.
The government has been pursuing all through what amounts to contractionary policies, big cuts in spending have come at the federal, provincial and local level. These cuts at the provincial and local level have led to a sharp fall in both employment and spending on goods and services, exerting a powerful drag on the economy as a whole.
Just look at government purchases of goods and services as distinct from transfers to individuals, like unemployment benefits. And the gap persists even when you do include transfers, some of which have stayed high precisely because unemployment is still so high. Making adjustment for inflation, and rise in spending will lead to economic recovery, and where spending is curtailed, it leads to fall in economic growth and it further leads to rise in unemployment. All negative steps create an increase in poverty levels and poverty eventually makes criminals. Thus caps in state spending and unequal distribution of income may create more chaos and disorder.
(The writer is an advocate and is currently working as an associate with Azim-ud-Din Law Associates)