government budget finances.ppt

© Edco 2012. Positive Economics
Chapter 23

How Does the Government
Intervene in the Economy?
 Collect taxes
 Pay social welfare
 Operate semi-state companies in possibly
unprofitable areas or sectors
 Impose laws and provide consumer protection
 Represent the Irish people at EU level
 Take action during national emergencies

 Current revenue is money collected via direct
and indirect taxes as well as other income
during the year, e.g. VAT, income tax revenues
and corporation tax.
 Taxation revenue is monies/incomes received
by the government in the form of direct and
indirect taxes and is used in running the
country.
 Current expenditure is spent on items used
up during the year on day-to-day items, i.e.
teachers’ salaries and social welfare
payments.

 Direct tax revenue
 Indirect tax revenue
 Profits of state companies
 Interest on loans to semi-state companies and
local authorities
 Fees charged for services
 State savings schemes, e.g. post office, Prize
Bonds, National Solidarity Bond
 Central Bank surplus income
Current Revenue

Capital Revenue
 Surplus from the current budget
 Loan repayments from local authorities and
semi-states
 Borrowing through national loans, i.e. the bond
market
 Grants and loans from foreign international
institutions and the EU
 Sale of state property

 The government’s capital budget outlines
the government’s planned expenditure on items
not used up during the year, but which increase
the productive capacity of the country. The
money to pay for capital expenditure is usually
funded through borrowings on the part of the
government, e.g. building a new road system.
Government’s Capital Budget

 Government current expenditure/
revenue: The current account is made up of
the day-to-day activities of the government, i.e.
current revenue (money in) minus current
expenditure (money out).
 Exchequer balance: The exchequer balance is
the difference between current and capital
receipts and current and capital expenditure,
i.e. the total receipts in the exchequer minus
the total expenditure.
Government Finances

 A current budget deficit is one in which current
planned government expenditure exceeds current
government revenue.
 A current budget surplus is one in which
current government revenue exceeds current
government expenditure.
 A balanced current budget is one in which
current government revenue equals current
government expenditure.
Current Budget Interpretation

 An inflationary budget is one where revenue
expenditure is increasing or taxation is
decreasing.
 A deflationary budget is one where revenue
expenditure is decreasing or taxation is
increasing.
 A neutral budget is neither inflationary nor
deflationary.
Current Budget Interpretation cont.

 Revenue buoyancy is the actual taxation
revenue collected during the year that is greater
than what had been planned for.
 Fiscal drag: In a period of revenue buoyancy,
when revenue is greater than expected,
government expenditure may remain at the
same level. This means that revenue is greater
than expenditure, which causes a decrease in
income and has a deflationary effect on the
economy.

 General government deficit: Combined deficit
(or surplus) of central and local government.
 Exchequer borrowing requirement:
Borrowing by the state to finance a current
budget deficit and borrowing for capital
purposes.
 Public sector borrowing requirement: The
exchequer borrowing requirement plus borrowing
for semi-state/state-sponsored bodies and local
authorities.

 National debt: This is the total amount/
accumulated total of outstanding borrowing by
the government.
 General government debt (GGD): The
general government debt consists of the national
debt, central and local government debt,
promissory notes issued to a number of financial
institutions as a means of providing state support
to these institutions and some minor government
liabilities.

 Domestic debt, which is money borrowed from
individuals and financial institutions within the
geographic borders of Ireland, e.g. post office
savings.
 External debt, which is money borrowed from
individuals and institutions outside of Ireland,
e.g. foreign bondholders.
Irish National Debt

Reasons for State Borrowing
 Productive investment
 Social investment
 Current budget deficit
 Default refers to not making good on a
financial agreement.

Irish National Debt – Advantages
 Maintained or better public services
 More spending on infrastructure
 Money is spent on creating employment
Irish National Debt – Disadvantages
 Opportunity costs
 An increased burden on taxpayers
 An increase in annual interest repayments
 Possible deterioration of public services

Principles of a Fair Tax System
 Taxes should be equitable
 Taxes should be certain
 Taxes should be convenient
 Taxes should be economical

Principles of a Fair Tax System
 Taxes should not be perceived as nor act as a
disincentive
 Taxes should assist the redistribution of income
 Tax rates should be consistent with and aid in
the achievement of national economic objectives
 Taxes should have a stabilising influence on the
economy (automatic stabilisers)
 Evasion should not be possible

Functions of Taxation
 To finance government activities
 To achieve economic objectives
 Redistribution of national wealth
 Automatic stabiliser
 Social objectives
 Promote enterprise

How can Taxation Help the Government
Achieve Its Economic and Social Aims?
 Increase taxes to decrease consumption,
e.g. smoking and drinking
 Impose a levy to discourage waste, e.g.
plastic bag levy
 Impose fines on anti-social behaviour,
e.g. litter fines

How can Taxation Help the Government
Achieve Its Economic and Social Aims? cont.
 Grant tax breaks to encourage activities, e.g.
research and development tax credits
 Give financial aid to boost enterprise, e.g. County
Enterprise Board grants
 Create the infrastructure to enable people and
companies to cohesively achieve national aims,
e.g. build better roads to empower companies to
deliver faster, better service

 Tax harmonisation refers to the aim of
members of the EU and other trading blocs
to move all tax rates to the same rates, i.e.
align with each member state/country.
 Tax avoidance is arranging one’s affairs
within the law so as to minimise tax
liabilities.

 Tax evasion is reducing tax liabilities by
making false returns or not making any
returns at all.
 Imposition of tax and incidence of tax:
The imposition or impact of taxation refers
to the people or companies on whom the
tax is actually levied or placed, i.e. imposed.

Adam Smith (1723–90)
 Author: An Inquiry into the Nature and Causes
of the Wealth of Nations in 1776
 Individual self-interest
 Labour theory of value
 Division and specialisation of labour
 Canons of taxation
 Perfect competition
 Free trade

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