GOVERNMENT AND THEECONOMY
ECONOMIC SYSTEMS
IRISH ECONOMY – MOVINGTOWARDS FREE ENTERPRISE
IRELAND – MOVING TOWARDSCENTRAL PLANNING
KEY QUESTION?To   intervene or        not?
ARGUMENTS IN FAVOUR OFSTATE INTERVENTION IN THEECONOMY?
ARGUMENTS IN FAVOUR OF GOV.INTERFERENCE IN THE ECONOMY To provide essential services For Economic control I.e. creating ...
ARGUMENTS AGAINST STATEINTERVENTION - BRAINSTORM
ARGUMENTS AGAINST GOV.INTERFERENCE – EXPAND...
MERIT GOODS – EXAMPLES?
MERIT GOODS Goods     and services which gov.    feels obliged to provide rather than    leave to the free play of market...
ECONOMIC AIMS OF THE CURRENTIRISH GOVERNMENT – WHAT ARETHEY?
ECONOMIC AIMS OF THE GOVERNMENT1.   Improve infrastructure. The continued development     of the road infrastructure, prov...
5.   Control government finances/ reduce borrowing/ manage     the national debt. The gov. Must continue to reduce spendin...
EXAMPLE OF CONFLICT OFECONOMIC OBJECTIVES
CONFLICTS BETWEEN THEECONOMIC OBJECTIVES
SOCIAL AIMS OF THE GOVERNMENT More    equitable distribution of wealth   Taxation policy   Social welfare policy Contr...
GOVERNMENT POLICYINSTRUMENTS
OTHER POLICY INSTRUMENTSIMPLEMENTED BY THEGOVERNMENT
 Government                        funding of 3rd levelSOCIAL BENEFITS         education                         Improve...
SOCIAL COST         New roads being The price         built throughout society has to     Ireland pay as a result     I...
Private   cost    Private   benefit Of a good or a    Of a good or  service is the     service is the  cost to the    ...
BUDGET   Before Budget Day the Estimates of Receipts and    Expenditure are published. This documents shows    the estima...
BUDGET EXPENDITURECurrent expenditure        Capital expenditure Is spent on items used    Outlines gov. planned  up dur...
EXAMPLES:Current Expenditure                 Capital Expenditure   Supply Services                                      ...
BUDGET REVENUECurrent revenue       Capital revenue Outlines the         Outlines government  governments           mone...
EXAMPLES:Current Revenue                Capital Revenue Tax revenue (VAT,             Surplus from the Current  PAYE, Co...
IRELAND AND THE CURRENTBUDGET
REDUCING A CURRENT BUDGET DEFICIT   Increase tax revenue     Direct (PAYE)     Indirect (VAT)   Reduce gov. expenditur...
ECONOMIC EFFECTS OF REDUCING THECBD
BUDGET SURPLUS
TAXATION: CANONS OF TAXATION Equity   Takes   a higher proportion of income in tax as income    rises (the ability of ea...
DO YOU CONSIDER THE CANONS AREUSEFUL FOR ANALYSING THE TAXSYSTEM IN IRELAND ?
CHARACTERISTICS OF A GOOD SYSTEMOF TAXATION
MAIN FUNCTIONS OF TAXATION Finance    government activities     e.g. running the civil service, wages of Public      Sec...
   Achieve desirable social objectives     To discourage smoking, drinking etc. to decrease      pollution/ damage to th...
DIRECT TAXA tax on income or wealth PAYE, Corporation Tax, Capital  Gains Tax
DIRECT TAXAdvantages Equity                                   Disadvantages                                    If tax ra...
INDIRECT TAXESA tax on goods and services VAT, Excise Duties
Advantages                             Disadvantages Evasion is difficult                  Can cause inflation       Wh...
DEFINITIONS:   Black economy     Alleconomic activity that goes unrecorded in the      National Income accounts    Exam...
   Tax avoidance     Arranging    ones affairs within the law to minimise      tax liabilities. It is legal.   Tax evas...
   A progressive tax     Isone which takes proportionately more in tax as a      persons income increases     E,g. inco...
DISCUSS THE EFFECTS WHICH AREDUCTION IN INCOME TAX MAYHAVE ON THE IRISH ECONOMY
GOV. POLICY TO INCREASE PUBLICSERVICE CHARGESpositive Less pressure to increase taxes     By raising public charges ther...
Negative Increased cost of living     Prices   for services will increase   Increased inflation     Thiswill affect th...
 The   imposition of taxation   The imposition or impact of taxation refers to   the people or companies on whom the tax...
RELATIONSHIP BETWEENCBD AND NATIONAL DEBT:The amount the government has to borrow to fund a current Budget Deficit plus BO...
THE NATIONAL DEBT Is   the total amount of government borrowing which is outstanding   2007   – 39 billion euro
REASONS FOR THE NATIONAL DEBT Productive investment   Spending on projects which  are self financing. These    investmen...
NATIONAL TREASURY MANAGEMENTAGENCY (NTMA) Borrowing   on behalf of the Irish  government/ sale of government bonds Manag...
   The National Debt / GDP ratio has fallen from    over 90% during the first half of the 1990s to an    estimated 25.1% ...
ECONOMIC BENEFITS OF A REDUCEDDEBT/ GDP RATIO Reduced   annual interest repayments  A declining debt to GDP means that t...
 Improved     international credit rating   Unlike   other countries our ratio is declining Adhering  to requirements o...
   Possible deterioration of state services     Ifthe reduced debt to GDP ratio is caused by a      reduction in current...
POSITIVE ECONOMICCONSEQUENCES OF INCURRINGTHE NATIONAL DEBT   Infrastructural developments     Help   with the national ...
NEGATIVE ECONOMICCONSEQUENCES OF INCURRINGTHE NATIONAL DEBT   Deferred taxation     Our national debt must be paid for b...
Government & the Economy
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Transcript of "Government & the Economy"

  1. 1. GOVERNMENT AND THEECONOMY
  2. 2. ECONOMIC SYSTEMS
  3. 3. IRISH ECONOMY – MOVINGTOWARDS FREE ENTERPRISE
  4. 4. IRELAND – MOVING TOWARDSCENTRAL PLANNING
  5. 5. KEY QUESTION?To intervene or not?
  6. 6. ARGUMENTS IN FAVOUR OFSTATE INTERVENTION IN THEECONOMY?
  7. 7. ARGUMENTS IN FAVOUR OF GOV.INTERFERENCE IN THE ECONOMY To provide essential services For Economic control I.e. creating employment, stabilising prices etc To provide merit wants To intervene in a particular sector of the economy  Which might require a large capital investment  Or because certain goods may not be produced if left to the free play of market forces because private enterprise may lack skills/ expertise or back up services which the gov. can avail of  For strategic reasons
  8. 8. ARGUMENTS AGAINST STATEINTERVENTION - BRAINSTORM
  9. 9. ARGUMENTS AGAINST GOV.INTERFERENCE – EXPAND...
  10. 10. MERIT GOODS – EXAMPLES?
  11. 11. MERIT GOODS Goods and services which gov. feels obliged to provide rather than leave to the free play of market forces. Gov. control of these goods is considered desirable because  They are essential to the basic welfare of society generally  It is in the interests of social justice and equity that a certain minimum amount of such goods and services be made available to all citizens regardless of their income Examples of such goods = health, education,
  12. 12. ECONOMIC AIMS OF THE CURRENTIRISH GOVERNMENT – WHAT ARETHEY?
  13. 13. ECONOMIC AIMS OF THE GOVERNMENT1. Improve infrastructure. The continued development of the road infrastructure, provision of improved public transport, continued development of the airports and seaports etc is essential so that our standard of living is maintained.2. Achievement of full employment. However, most gov. would be happy now to reduce unemployment. Pursue policies which will improve our competitiveness, boost exports and so help create jobs in Ireland.3. Control of inflation to keep exports competitive and to encourage MNC’s to come to Ireland. Also inflation discourages saving (not currently main aim of gov)4. Achievement of moderate economic growth. The gov. Must try to manage the current downturn in economic activity and ensure that we return to a position of some economic growth. Appropriate fiscal policy may help towards achieving this.5. Broaden the tax base. Many believe that we relied too much on the property boom for taxation revenues. The gov must now plan to introduce new taxes, eliminate tax evasion; bring more workers into the income tax net and so generate a greater flow of tax revenues.
  14. 14. 5. Control government finances/ reduce borrowing/ manage the national debt. The gov. Must continue to reduce spending. It must also widen the tax base so as to increase taxation revenues. These measures will help reduce borrowing and help reduce the national debt.6. Stability in the banking sector. The state guarantee on depositers saving, the nationalisation of Anglo Irish bank and the establishment of NAMA are all aimed at restoring confidence to the banking sector, restore credit availability, generate confidence in domestic and international investors and so encourage investment.7. Achievement of a just social policy. Refers to efforts to treat all citizens fairly. Covers housing, education, social welfare, health (merit goods) . The governmnet must continue to ensure that social welfare recipients standard of living is maintained that it provides adequately for future pensions and helps redistribute income within the state, given the current contraints on gov. Spending.8. Promote Balanced Regional Development. Some regions less developed than others. Gov. needs to discriminate in favour of these regions e.g. West of Ireland. The National Development Plan aims to do this.The government must develop broadband, ensure the continuity of regional airports, develop or promote educational opportunities inthe regions so as to stimulate economic activity and encourage economic growth.9. Maintain state services. Even though taxation revenues are declining the gov must ensure that our health services are maintained and made more efficient, that schools are built and staffed and that practices are developed to ensure the long term
  15. 15. EXAMPLE OF CONFLICT OFECONOMIC OBJECTIVES
  16. 16. CONFLICTS BETWEEN THEECONOMIC OBJECTIVES
  17. 17. SOCIAL AIMS OF THE GOVERNMENT More equitable distribution of wealth  Taxation policy  Social welfare policy Controlling pollution  Legislation to control and standardise the manufacture of products  Legislation imposing fines and prison sentences  Promoting among citizens and businesses an awareness being eco friendly Provision of merit wants  See notes, e.g. health, education, housing
  18. 18. GOVERNMENT POLICYINSTRUMENTS
  19. 19. OTHER POLICY INSTRUMENTSIMPLEMENTED BY THEGOVERNMENT
  20. 20.  Government funding of 3rd levelSOCIAL BENEFITS education  Improves the skills/ quality/Social productivity/ mobility of the labour force Benefit  Acts as an incentive to  The attracting FDI benefits  Possible increase in present/ which accrue to future living standards society as a  New roads being whole as a result of an individual built throughout consuming a Ireland  Toll road revenue commodity which is  Easing of traffic congestion not measured in  Time saved getting to work the price system  Safety  Attraction of FDI into IRL
  21. 21. SOCIAL COST  New roads being The price built throughout society has to Ireland pay as a result  Increased pollution  Disfiguration of the of any landscape economic  Land prices rise close to development of the road activity  Disruption of community life in villages
  22. 22. Private cost Private benefit Of a good or a Of a good or service is the service is the cost to the benefit to the person or firm person or firm using the using the product or product or service service
  23. 23. BUDGET Before Budget Day the Estimates of Receipts and Expenditure are published. This documents shows the estimates of receipts and expenditure for the coming year assuming that tax levels were to remain unchanged. The Budget itself is then presented to the Dail by the Minister for Finance. This is then followed by the passing of two acts  The finance Act which allows for funds to be raised  The Appropriation Act which allows for the funds to be spent. The comptroller and Auditor General will issue a report of the Committee on Public Accounts to verify that the money was raised correctly and spent in accordance with the provisions of the Budget
  24. 24. BUDGET EXPENDITURECurrent expenditure Capital expenditure Is spent on items used  Outlines gov. planned up during the year/ expenditure on items day to day items not used up during the year but which increases the productive capacity of the country
  25. 25. EXAMPLES:Current Expenditure Capital Expenditure Supply Services  Loans and grants to  I.e. salaries of civil private enterprise and service, army, gardai local authorities for the  The costs of running the production of capital goods civil service  Social welfare payments  Physical capital formation: money spent Debt Service and other directly by the gov. on capital Central Fund Services goods e.g. building offices,  Interest on the National Debt Infrastructural dev  Grants to local authorities for current expendiure  Loan repayments  Contribution to the EU Budget  Judicial Salaries and  Foreign repayments pensions
  26. 26. BUDGET REVENUECurrent revenue Capital revenue Outlines the  Outlines government governments money used to pay expected/ planned for capital revenues for the expenditure usually forthcoming year received through borrowing by the gov
  27. 27. EXAMPLES:Current Revenue Capital Revenue Tax revenue (VAT,  Surplus from the Current PAYE, Corporation Budget  Loan repayments: local Tax, Capital Gains Tax, Excise duties, authorities and SSB’s repaying loans they received Non Tax Revenue from gov  Proceeds from the  Borrowing: money borrowed National Lottery from the public from selling  Interest on loans given securities e.g National loans to semi state bodies and  Grants and loans from local authorities international financial institutions and foreign gov
  28. 28. IRELAND AND THE CURRENTBUDGET
  29. 29. REDUCING A CURRENT BUDGET DEFICIT Increase tax revenue  Direct (PAYE)  Indirect (VAT) Reduce gov. expenditure  Limiting pay increases in the public sector  Reduce numbers employed in the public sector  Cutbacks on services provided by government e.g. education, health (current spending)
  30. 30. ECONOMIC EFFECTS OF REDUCING THECBD
  31. 31. BUDGET SURPLUS
  32. 32. TAXATION: CANONS OF TAXATION Equity  Takes a higher proportion of income in tax as income rises (the ability of each person to pay must be taken into account) Economy  The revenue collected should exceed the costs of collection Certainty  The amount they should pay should be certain and clear Convenience  The tax should be collected in a way and at a time which suits the taxpayer
  33. 33. DO YOU CONSIDER THE CANONS AREUSEFUL FOR ANALYSING THE TAXSYSTEM IN IRELAND ?
  34. 34. CHARACTERISTICS OF A GOOD SYSTEMOF TAXATION
  35. 35. MAIN FUNCTIONS OF TAXATION Finance government activities  e.g. running the civil service, wages of Public Sector workers Economic objectives  Reducing inflation, favourable B/P Redistribution of National Wealth  Social welfare payments paid for with taxation Automatic stabiliser  It helps to avoid wide fluctuations in the economic cycle by automatically taking more tax when the economy is doing well and taking less when the economy is performing poorly
  36. 36.  Achieve desirable social objectives  To discourage smoking, drinking etc. to decrease pollution/ damage to the environment To encourage enterprise  To help industry through subsidies; grants and other services can be provided to help industry and encourage enterprise
  37. 37. DIRECT TAXA tax on income or wealth PAYE, Corporation Tax, Capital Gains Tax
  38. 38. DIRECT TAXAdvantages Equity Disadvantages  If tax rates are too high,  _____________________ people may be Certainty discouraged from  _____________________ working Economy  It is difficult to introduce  _____________________ a system which is simple Predictability and equitable  ________________________  High taxes encourage ____________________ the growth of the black Evasion is difficult economy  ______________________  High taxes discourage Acts as an automatic investment in Ireland stabiliser  High DIRT discourages people from saving
  39. 39. INDIRECT TAXESA tax on goods and services VAT, Excise Duties
  40. 40. Advantages Disadvantages Evasion is difficult  Can cause inflation  Why? _____________________  _________________________  These taxes can be Cost of collection is low regressive  Why? _____________________  _________________________  There is a lot of extra Doesn’t act as a disincentive to administrative work for work retailers and businesses  Why? _____________________  Difficult for the gov. to The burden of tax is light predict accurately how much  Why? _____________________ revenue will be collected from indirect taxes as it depends on _______________________ Can be used to encourage/discourage consumption of certain goods  E.g. ______________________
  41. 41. DEFINITIONS: Black economy  Alleconomic activity that goes unrecorded in the National Income accounts Examples?   
  42. 42.  Tax avoidance  Arranging ones affairs within the law to minimise tax liabilities. It is legal. Tax evasion  Reducing ones tax liabilities by making false returns or no returnsQuestion:How can the government reduce tax evasion?  
  43. 43.  A progressive tax  Isone which takes proportionately more in tax as a persons income increases  E,g. income tax  Another e.g.? _______________ A regressive tax  Isone which takes proportionately more in tax as a persons income decreases  E.g. VAT  Another e.g. _________________
  44. 44. DISCUSS THE EFFECTS WHICH AREDUCTION IN INCOME TAX MAYHAVE ON THE IRISH ECONOMY
  45. 45. GOV. POLICY TO INCREASE PUBLICSERVICE CHARGESpositive Less pressure to increase taxes  By raising public charges there will be less pressure on the gov. To raise additional revenue by increasing tax More efficient use of services  Where people pay for services it may encourage greater efficiency in their use e.g. Encouraging people to recycle Saving scarce resources  Those people who can afford to pay for these services now do so, hence the resources which were being used to finance these services would no longer be necessary Pressure to improve the quality of service  Better frequency of service, more recycling centres. Lower tax base – which will encourage investment Use of revenue collected – can be targeted to achieve further aims
  46. 46. Negative Increased cost of living  Prices for services will increase Increased inflation  Thiswill affect the economy negatively : reduced competitiveness; demand for compensatory wage increases Affects lower income groups most  The increased charges will have the greatest impact on lower income groups – those with the least ability to cope with the higher prices – standard of living deteriorates Higher costs for business  They must now pay higher toll charges; refuse charges; water charges – increasing costs which may require higher prices or reduction in jobs
  47. 47.  The imposition of taxation  The imposition or impact of taxation refers to the people or companies on whom the tax is actually levied I.e. imposed. They have to pay the tax directly to the government e.g. the excise duty on petrol is levied on the petrol companies The effective incidence of a tax  Refers to the people who bear the burden of the tax, e.g. the tax on petrol is levied on the petrol companies. They pass this on to the motorists in the form of increased prices. The effective incidence of the tax is on the motorists
  48. 48. RELATIONSHIP BETWEENCBD AND NATIONAL DEBT:The amount the government has to borrow to fund a current Budget Deficit plus BORROWING FOR CAPITAL PURPOSES=EXCHEQUER BORROWING REQUIREMENT+BORROWINGS OF SEMI-STATE AND LOCAL AUTHORITIES=PUBLIC SECTOR BORROWING REQUIREMENTNATIONAL DEBT IS THE ACCUMULATION OF ALL
  49. 49. THE NATIONAL DEBT Is the total amount of government borrowing which is outstanding  2007 – 39 billion euro
  50. 50. REASONS FOR THE NATIONAL DEBT Productive investment  Spending on projects which are self financing. These investments create incomes which are then taxed to repay the borrowings . This form of borrowing causes no problems for the country in the long term Social investment  Non- productive; financing projects which can never be self financing but which are desired and required by society e.g. expenditure on schools and hospitals. This type of expenditure could benefit the economy in the long run if it results in a better educated and healthier workforce Current budget deficit – undesirable - simply delays taxation to a future date Interest on the national debt
  51. 51. NATIONAL TREASURY MANAGEMENTAGENCY (NTMA) Borrowing on behalf of the Irish government/ sale of government bonds Managing the Irish debt on behalf of the gov Management of the National Pension Reserve Fund Management of other gov. funds such as the Social Insurance Fund and Dormant Account Fund Provision of financial advice, possibly funding and providing guarantees for all major public investment projects
  52. 52.  The National Debt / GDP ratio has fallen from over 90% during the first half of the 1990s to an estimated 25.1% at the end of 2006. (NTMA) GDP – the output produced by the factors of production in the domestic economy irrespective of whether the factors are owned by Irish nationals or foreigners
  53. 53. ECONOMIC BENEFITS OF A REDUCEDDEBT/ GDP RATIO Reduced annual interest repayments A declining debt to GDP means that the annual cost of repaying our national debt is declining More funds available to the government for current use  With less funds being used to meet our annual interest repayments the gov. has more funds available for other purposes Reduced burden on future taxpayers  Thedecline will mean that the gov. will not have to contemplate increasing future taxes on future taxpayers
  54. 54.  Improved international credit rating  Unlike other countries our ratio is declining Adhering to requirements of the Euro stability pact.  Unlike other members of the Euro Ireland does not have a difficulty in meeting the conditions of the stability pact and hence no corrective action need to be taken in economic policy matters Prudent management of economy by gov  Citizensmay be made aware that the gov. mgt of the economy is prudent and this may boost morale
  55. 55.  Possible deterioration of state services  Ifthe reduced debt to GDP ratio is caused by a reduction in current borrowing the gov. may spend less on public services resulting in a deterioration of these services Reduced spending on infrastructure  Ifreduction in capital borrowing, this may inhibit the future growth of the country
  56. 56. POSITIVE ECONOMICCONSEQUENCES OF INCURRINGTHE NATIONAL DEBT Infrastructural developments  Help with the national development plan Provision of improved services  E.g. Health, education, leisure etc Future economic growth  Boosts demand/ opportunities for further investment Self- liquidating debt  If the return on the borrowings is able to meet the cost of repayments then the borrowing has been self liquidating
  57. 57. NEGATIVE ECONOMICCONSEQUENCES OF INCURRINGTHE NATIONAL DEBT Deferred taxation  Our national debt must be paid for by future taxpayers Repayments of foreign element  Will result in a loss of income within the economy Repaying domestic element  May lead to a redistribution of wealth: funds go from taxpayers to the lenders as repayments Lenders may be able to influence government policies Opportunity costs  The funds may have been put to better use in the private sector

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