Cambridge International as and a level Economics Ebook

201
Chapter 8: Government microeconomic intervention

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regardless of income and wealth. Th
us, these services are 
provided universally free: they are the material equivalent 
of monetary universal benefi ts.
It can also be argued that price stability
 
can assist in 
the redistribution of income. In such circumstances, the 
price level rises slowly and there is a steady rate of infl ation. 
As shown in 
Chapter 10
, this provides relatively stable 
conditions for the macroeconomy. Th
e income stream from 
taxation is secure, there is less pressure on government 
spending and likely to be more resources available to reduce 
income tax thresholds or the basic income tax rate. In a 
modest way, income inequalities may be reduced.
As referred to earlier, means-tested benefi ts can result in 
people on low incomes being trapped with little chance of 
becoming better off . Universal benefi ts overcome this problem 
but are invariably far too expensive to apply. One possible way 
around this problem is 
negative income tax
. Under such a 
system, there would be a fl at rate of taxation (say 25%) and 
SELF-ASSESSMENT TASK 
8.4
Income disparity: the very uneven rise 
in Pakistani incomes
The distribution of income in Pakistan continues to be 
an important economic and political issue. Since 2000, 
per capita income has increased rapidly but there is a 
very disturbing fact – household income for the growing 
urban middle class has continued to rise, yet the rural 
poor have seen their real incomes fall. This is oft en the 
case in emerging economies like that of Pakistan.
The widening disparity in incomes has got worse 
since 2000. It has persisted when the economy was 
expanding rapidly, when it has been slowing down 
and when it has been almost stagnant. This is diff icult 
to explain. Moreover, the implications for the poorest 
people are worrying economists and the government; 
for the poorest people the period of growth this 
century has meant nothing. Yet the rest of the country’s 
population has got richer, some stupendously so.
There have been wide geographical variations in 
income growth since 2002. The fastest growth has 
been in the Punjab and urban Khyber-Pakhtunkhwa 
regions where the incomes of the top 20% have risen 
in real terms by an average of 3.8% per annum. In 
contrast, the worst off have been in rural Sindh where 
the real incomes of the bottom 20% have fallen 
by 4.4% per annum. Interestingly, the very poor in 
Balochistan experienced real income growth of 4% a 
year, albeit from a very low base.
Over the past decade, the well-being of the 
overwhelming majority of Pakistan’s population has 
depended on how well the national economy has 
been performing. This majority is not the middle 
class, nor are they in the poorest class. These are the 
ones whose votes will count at the next election.
Read the feature below and then answer the questions that follow.