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 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
ARGUMENTS AGAINST STATEINTERVENTION - BRAINSTORM
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,
ECONOMIC AIMS OF THE CURRENTIRISH GOVERNMENT – WHAT ARETHEY?
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.
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
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
OTHER POLICY INSTRUMENTSIMPLEMENTED BY THEGOVERNMENT
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
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
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
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
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
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
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
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
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)
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
DO YOU CONSIDER THE CANONS AREUSEFUL FOR ANALYSING THE TAXSYSTEM IN IRELAND ?
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
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
DIRECT TAXA tax on income or wealth PAYE, Corporation Tax, Capital Gains Tax
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
INDIRECT TAXESA tax on goods and services VAT, Excise Duties
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. ______________________
DEFINITIONS: Black economy Alleconomic activity that goes unrecorded in the National Income accounts Examples?
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?
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. _________________
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 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
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
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
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
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 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
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
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
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
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
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
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
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