What is the role of Government?

Government, whether it is a system or institutions in operation, processes in use, or

group of people in charge, is the authority that sets, enforces and interprets certain rules
of social conduct and order, which are necessary for coexistence in a society. A
Government is given the exclusive power to administer over a particular area and its
inhabitants. This power includes:
a) legislative or the power to create laws and policies;
b) executive or the power to execute the law; and
c) judicial or the power to define and interpret the law.

A Government is the political administration of a country or State. Government manages

the State and keeps it running smoothly, securely and peacefully. The State grants
rights to its citizens and it is the legitimate duty of Government to protect these rights.

Government helps members of the society to relate to one another for mutual benefit.
Human societies are characterised by diversity of interests, preferences, values and
ideas. This can create a situation of inherent conflicts in the society, which, if left
unattended, would be detrimental to each and everybody’s interests. For the wellbeing
of the society, its members must therefore accept the social principles and laws defined
by Government.

A prime role of Government is to steer the economy of the State and guide it towards
the common welfare of all members of the society. Government functions as a non-
profit economic organisation and provides public goods and services to the society
without interruption. To promote national prosperity and quality of life, Government has
three distinctive economic roles, namely allocative, distribituve and stabilisation.
Allocative Role

When the competitive market system is unable or unwilling to provide certain goods and
services that are essential for consumers, Government has to provide these goods and
finance them through regulations, taxes or government subsidies. Since Government
invests in large-scale projects, such as healthcare, infrastructure and education which
require huge amount of money, Government must allocate expenditure efficiently. The
allocation function refers to Government’s decision making on what specific goods and
services government revenue must be spent so as to reap maximum benefits.

Distributive Role

The distributive role of Government deals with the distribution of wealth or income.
Market income, inherited wealth and opportunity or monopoly power result in an unfair
distribution of income among members of the society. This leads to an unequal
distribution of good and services. Government may feel the need to ensure everyone
has an equal opportunity in a society that is fair and just to everyone, for example
providing education so that even those from poor families have an equal opportunity to
get qualifications. Government will, therefore intervene to assure everyone has a
sufficient income, which will eventually lower poverty.

Government through progressive taxation, cash transfers and redistributive policies,

generates revenue and distributes them where it feels necessary. Progressive taxation
narrows the gap between high-income earners and low-income earners and reduces
inequality of income. Through old age pensions and social welfare benefits,
Government provides income support to those individuals who do not have any source
of earnings. Equal distribution of income creates a larger consumer market which has
adequate money to spend on goods. This ultimately contributes to the overall benefit of
society and economic growth of the country.
Stabilisation Role

Economy of a country is affected by economic fluctuations such as conditions of boom

and recession. As a result, Government will attempt to maintain a steady pace of
economic growth, achieve healthy levels of employment and stabilize prices and wages.
Both monetary and fiscal policies are used to regulate the economic activity of a
country. They can be used to accelerate growth when an economy starts to slow or to
moderate growth and activity. In addition, fiscal policy can be used to redistribute
income and wealth.

Through monetary policy, central banks exert power by controlling money supply and
changing level of interest rates. To stimulate a faltering economy, central banks will cut
out interest rates, making it less expensive to borrow while increasing money supply.
Private spending (consumption and investment) will increase, resulting in an increase
production and employment.

Fiscal policy determines the way in which the central government earns money through
taxation and how it spends money. To assist the economy during a recession,
Government will lower tax rates while increasing its own spending on the provision of
public goods and services. Such expansionary actions will increase the money supply
and put more money in the hands of businesses and consumers, encouraging
businesses to expand and consumers to buy more goods and services. By increasing
demand, firms have to produce more and therefore hire more workers. This will reduce
unemployment and help the economy out of recession.