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The economic role of government can best be defined by a classification of its economic policy aims. Broadly speaking the political choices made by electorates in Western-type democracies influence governments to perform four functions.
The first is production of services which private firms are either unwilling to produce or for some reason are not allowed to produce (or at least not exclusively). This public provision may be to provide immediatebenefits (e.g. defence, law and order) or deferred benefits (e.g. investment in roads).
The Economic Role of Government
The economic role of government can best be defined by a classification of its economic policy aims. Broadly speaking the political choices made by electorates in Western-type democracies influence governments to perform four functions.
The first is production of services which private firms are either unwilling to produce or for some reason are not allowed to produce (or at least not exclusively). This public provision may be to provide immediatebenefits (e.g. defence, law and order) or deferred benefits (e.g. investment in roads).
These ‘production’ activities may be divided into two types.
The second function is the alteration of the structure of private production in order to conform with some conception of the allocation of resources which is considered ‘better’
The third function is to intervene in the distribution of income generated by private market transactions in order to conform with some acceptable criterion of equity, for example a minimum income guarantee. This will be reflected in the national accounts principally in the choice of taxes and in the provision of transfer payments to households against which there is no counterflow of current services. For example, state pension payments are transfer payments, and though pensioners do not render current services in order to receive them, they may have contributed to their finance through compulsory levies on their past incomes. Transfer payments do not form a direct link between government and industry but major efforts by government to alter income distribution have considerable influence on the structure of household purchases and therefore on the pattern of demand for industrial products.
The fourth function is the stabilization of the economy by attempting to reduce fluctuations in income and employment and to control movements in the general price level. The effects of this action can be seen in both the volume and the mix of transactions between the government and the rest of the economy. Policy models of the economy which place particular emphasis on the control of the money supply and interest rates will pay close attention to the size of the government budget deficit/surplus. Therefore, no particular transaction with the private sector is solely identified with this function except perhaps for the interest paid by government to firms and households as a payment for holding government debt accumulated in the course of financing past government deficits.
The Budget
Every year democratic countries present, for the approval of their parliaments, a budget alongside which there will be published extensive information on the central government's finances, including accounts of past years. In this respect governments have to achieve certain standards of accountability and audit. It is taken for granted here that these standards are being met and this enables us to concentrate on the method of presentation of accounting data by the government which gives us the best idea of its structure and size in relation to the rest of the economy. While accounting and audit standards will require the government to produce full information on the responsibility of each main administrative unit for its use of authorized funds, what is needed here is an economic classification which enables us to identify government transactions which have their counterpart in receipts and payments of other major sectors of the economy.
The Place of Government in the Economy