question_answer

The government of a country is operating on 'zero primary deficit' and also follows 'Re-allocation of resources as an objective of budget'. Explain the above two concepts.

Answer:

Zero Primary Deficit It means that the government has to resort to borrowing only to fulfil its earlier commitments of interest payments. It is not adding to the existing loans for the purpose other than meeting its existing obligation of interest payments. It is a sign of fiscal discipline or fiscal responsibility on the part of the government. High primary deficit, on the other hand, reflects fiscal irresponsibility of the government. Reallocation of Resources Government budget can impact re-allocation of resources through its budgetary policy of carrots and sticks. Carrots mean incentives while sticks mean punishment or penalties. In its budget, the government can decide to raise taxes (stick) on commodities, the production of which, it wants to discourage. On the other hand, it can offer subsidies (carrots) on commodities, the production of which it likes to encourage. Such a policy is expected to shift the allocation of resources in favour of socially desirable goods and services.