Q3. What is the meaning of the term tax-expenditure? Taking the housing sector as an example, discuss how it influences the budgetary policies of the government.
Model Answer:
Introduction
Tax expenditure refers to the revenue foregone by the government through tax exemptions, deductions, or credits, designed to incentivize certain economic activities and support specific societal sectors, such as housing. It’s common in sectors like housing, health, and education to encourage private investment.
Body
How does it influence the budgetary policies of the government
- Tax Expenditure in the Housing Sector: The government often provides tax incentives in housing through interest deductions on home loans and exemptions on rental income. These measures aim to make housing more affordable, stimulate real estate investment, and support construction activity.
- Influence on Budgetary Policiessome text
- Revenue Foregone: Housing-related tax exemptions reduce government revenue, affecting fiscal balance but are often justified as tools for economic stimulus.
- Public and Private Sector Engagement: Tax incentives can lower housing costs, thereby increasing public access to affordable housing. This minimizes the need for direct housing expenditures in the budget.
- Boosting Employment and Economic Growth: The housing sector, a labour-intensive industry, benefits from these tax incentives, creating jobs and increasing demand for related goods and services, which the government accounts for in budgetary allocations.
- Impact on Social Welfare: Tax expenditure for housing aligns with social welfare goals, aiming to improve living standards by supporting affordable housing projects and improving urban and rural housing quality.
Conclusion
Tax expenditure significantly influences budgetary policies by fostering housing access and affordability, encouraging private investment, and supporting growth. Effective use aligns budget policies with broader socio-economic objectives.
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