Presentation on theme: "Kayla Niblock. Current Budget Deficit- When the government spends more than it receives, it must borrow money and increase the national debt."— Presentation transcript:
Current Budget Deficit- When the government spends more than it receives, it must borrow money and increase the national debt. Money borrowed for capital purposes.
What is Deadweight debt?
generating economic activity. Increasing the national debt allows the government to spend more money than it has. This allows the government to inject money into the economy therefore generating economic activity. Causing ; Increased employment Causing ; Increased employment Increased national income Increased national income Improved government services Improved government services
not a burden on the taxpayer. Money that is borrowed can be spent on self-liquidating projects and so is not a burden on the taxpayer.
2002. Higher Level. Q7. (a) Outline, using appropriate figures, how the Irish economy performed in the past twelve months in each of the following areas: (i) price inflation (ii) the national debt (iii) economic growth (iv) employment.
Inflation: 4.7% in May 2002. Irish inflation is the highest in the euro-zone at 2%. Since, the budget inflation rose due to higher electricity costs and cigarette, cider and petrol prices. In the year ended December. 2001 inflation had fallen to its lowest level in 2 years- resulting from falling mortgages rates and cheaper energy costs.
The national debt: At the end of march 2002 our national debt was €33.5 billion. The debt/GDP ratio has fallen from over 90% in the 1990’s to 34% at the end of 2001. A further decline in this ratio is expected by the end of 2002.
Economic Growth: GDP grew by 5.9% for the year 2001. This compares with an annual growth rate of 11.5% for 2000 and 10.8% in 1999. Since September 11 th, 2001 there has been a slow down in economic growth in Ireland.
Employment: 154,944 persons were recorded on the live register in May 2002. Represents 4.2% of the labour force in April 2002. The rate of unemployment has increased in the past year.
Something similar came up in 2007. Question 8. Outline, using appropriate figures, how the Irish economy performed in the past twelve months in each of the following areas: I.Employment; II.Interest rates; III.Price inflation; IV.Government taxation.
Employment 76,800 new jobs were created in the 12 months to the end of February. The number of people at work rose by 3.8 pc to 2.07 million at the end of February. With a slow down in the rate of economic growth job losses have and are being announced. 159,800 persons were recorded on the live register in May 2007. Represents approx. 4.5% of the labour force. The Central Bank predicts an average unemployment rate of 4.5% in 2007.
Interest rates Interest rates continue to rise. The ECB has increased the base interest rate six times in the past 12 months – the most recent increase being in June 2007. The current base rate is 4.0% with further increase expected in the Autumn. With the increase in interest rates the cost of repaying mortgages has increased and the market for property adversely affected.
Price Inflation Inflation continues to rise in Ireland. Inflation in Ireland is above (twice) the euro average of approx. 2.2 per cent. Inflation has risen partly due to the increase in the value of the Euro; increase in interest rates and the increase in international oil prices. 5% in May 2007 – a fall of 0.1% from the previous month.
Government taxation Income tax In the 2007 Budget the government reduced the higher rate of income tax from 42% to 41%. The tax bands were also widened. The standard rate of tax was left unchanged. Those on the minimum wage rate were removed from the tax net. Indirect taxes There was no change in VAT rates. Excise duty on cigarettes was increased by 50c per packet of 20 – an increase of 7.6%. Property Taxes Mortgage interest relief for 1st time house buyers was doubled. Some political parties plan to change the stamp duty arrangements for 1st time home buyers. Revenue from taxation continued to increase but at a slower rate – with a decline in the rate of increase in revenue collected from stamp duty and other property taxes
Question 8. 2007 Higher Level. (b)(i) State and explain FOUR economic aims of the Irish Government. (ii) Discuss TWO examples where economic policies introduced to achieve one economic aim, may make it more difficult to achieve one of the other aims.
Solution to (b)(i) 1.Achieve Full Employment. Ensure that we maintain our competitiveness and so maintain jobs in Ireland. 2. Control Price inflation. Government must try to reduce the pressure on rising prices within the economy. While oil prices are outside its control it can try to limit wage increase and through the introduction of competition encourage price competitiveness in services. 3. Achieve moderate economic growth. While a slowdown is expected the government must try to manage economic activity and ensure that growth takes place. It aims to do this through its taxation policies. 4. Encourage exports. The only measure available is to try to improve competitiveness for Irish exporting industries. 5. Control government finances / reduce borrowing / manage the national debt. While we have become accustomed to increasing tax revenues, this is expected to fall. So pressure exists on the government to control expenditure, in particular the cost of providing public services
6. Reduce taxation levels / achieve taxation equity. Current policy is to continue to reduce income tax but this may result in ‘stealth taxes’ and/or the deterioration in public services. 7. Promote balanced regional development. This is being pursued by the National Development Plan and focusing on the creation of regional gateways. 8. Improve infrastructure. The further development of the road infrastructure, provision of public transport, development of the airports and seaports etc. 9. Improve state services: health/education services / achieve a just social policy. Increasing emphasis is being placed on the improvement in health services, the provision of further places in primary schools, improvement in school buildings and the development of third level education. 10. Achieve a more equitable distribution of income. Increasing the levels of pensions and improving social welfare payments are attempts by the government to help re-distribute wealth
Solution to (b)(ii)
Statement: The National Debt/GDP ratio has fallen from over 90% during the first half of the 1990’s to an estimated 25.1% at the end of 2006’. (National Treasury Management Agency). Q. Briefly explain each of the underlined terms.
National Debt= This is the total amount / cumulative of government borrowing which is outstanding. 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. Measures the total income arising from productive activity within the state.
1. Reduced annual interest repayments. A declining national debt to GDP means that the annual cost of repaying our national debt is declining. 2. More funds available to the government for current use. With less funds being used to meet our annual interest repayments the government has more funds available for use for other purposes. 3. Reduced burden on future taxpayers. The decline will mean that the government will not have to contemplate increasing future taxes on future taxpayers. 4. Improved international credit-rating. Unlike other countries the fact that Ireland is seen to have a declining national debt as a percentage of GDP will mean that our credit-rating improves. 5. 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
6. Prudent management of economy by government. Citizens may be made aware that the government’s management of the economy is prudent and this may boost morale. 7. Possible deterioration in public services. If the reduced debt to GDP ratio is caused by a reduction in current borrowing the government may spend less on public services resulting in a deterioration of these services i.e. the health service. 8. Reduced spending on infrastructure. If the reduced debt to GDP ratio is caused by a reduction in capital borrowing then there may be less spending on the state’s infrastructure which may inhibit the future growth of the country.
2011 OL Question 5. Part (c)(i) ‘Irelands National Debt as a percentage of GDP is continuing to increase.’ Q. Explain the underlined term. National Debt: the total amount / cumulative of government borrowing which is outstanding.
Part (c)(ii) Q. What do the initials GDP stand for? GDP: Gross Domestic Product. (iii) State one reason why Ireland’s National Debt has been increasing in recent times. 1. Increased borrowing by the state for current budget deficit purposes. (reduced tax revenues / increased current spending) 2. Increased borrowing by the state for infrastructural projects. 3. Increased interest rates on the loans. 4. Borrowing to finance the state’s bailout of the banks
Q. State and Explain two economic disadvantages which may result from this increase in Ireland’s National Debt.
Opportunity costs involved. With more funds being used to meet our annual interest repayments the government has less funds available for other purposes. Increased burden on taxpayers. The increase will mean that the government will have to consider increasing future taxes; introduce new household charges etc resulting in a lower standard of living for citizens. Increased annual interest repayments. An increasing national debt means that the annual cost of repaying our national debt is rising.
Risk to provision of public services / cuts in government spending Due to an increase in the national debt the government has cut spending on public services, resulting in deterioration in the provision of some services e.g. the health service; education service. Reduced public confidence. Citizens may lose confidence in the economy and reduce their spending. This may further reduce economic growth. Diminished international credit-rating. The fact that Ireland is seen to have an increasing national debt means that our credit rating is deteriorating. EU / IMF: conditions applied to Ireland. The EU/IMF has attached conditions to our borrowing and so corrective action must be taken in economic policy matters and agreed by the EU / IMF.
Question 7. (a) In the case of each of the following types of taxes: A tax levied on a good or service; A tax on company profits; A tax on an employee’s wages. (i)Name the type of tax. TaxName of tax Direct TaxIndirect Tax Tax levied on goods or services VAT / Excise Duty Yes Tax on company profits Corporatio n Profits Tax Yes Tax on an employee’s wages Income Tax / PAYE Yes
(ii) State whether each of tax is an example of a direct tax or an indirect tax. TaxName of tax Direct TaxIndirect Tax Tax levied on goods or services VAT / Excise Duty Yes Tax on company profits Corporatio n Profits Tax Yes Tax on an employee’s wages Income Tax / PAYE Yes
Q. State and explain TWO reasons for taxation in the economy. a)To provide revenue for the government / Finance government activities. The government requires money to fund the operation of a modern state e.g. defence, policing etc. b)To provide essential goods and services. The government requires finance to provide services such as health care, schools etc. which are essential for citizens. c)To help re-distribute wealth. The government can re-distribute the taxation in the form of social welfare payments to those citizens who require it e.g. the dole; old age pensions; single parent allowances etc.
d)To develop the infrastructure. The revenue collected can help build roads, airports; hospitals etc. e)To help industry. Subsidies, grants and other services can be provided to help industry and encourage enterprise. f) Achieve desirable social objectives. To discourage smoking, drinking etc. To decrease pollution/damage to environment. g)To help achieve a favourable Balance of Payments. By placing a tax on imports, imports may fall, thereby improving the Balance of Payment position. h)To achieve other government objectives. To control inflation it may increase direct taxes to discourage spending
Outline ONE reason why the Minister Of Finance might increase taxes on goods such as alcohol, petrol and tobacco 1. To discourage smoking / alcohol. By increasing the price the Minister might encourage people to smoke less or drink less / leading to better health. 2. To reduce health care costs. If individuals become healthier they may not require as much health care, so the costs of providing health care falls. 3. To reduce absenteeism from work. If less people are ill, there will be less absenteeism from work and productivity should increase.
4. To increase revenue from these taxes. Because people may become addicted to smoking and consuming alcohol, the Minister knows that irrespective of the tax increase, the demand will not be significantly affected by higher prices. 5. To specifically target the consumption of alcohol and tobacco by young people. The Minister may wish to make the prices of these products prohibitive for young people so that they are discouraged from smoking / binge drinking. 6. To discourage private car transport and encourage public transport. By making petrol more expensive, the use of public transport may become more attractive and by encouraging its use, the environment is protected, by reduced emissions.
‘The government introduced a plastic bag tax in recent years.’ Discuss TWO advantages of this tax for the Irish economy. 1. Reduce litter / Protect the environment. The tax has encouraged consumers to reuse shopping bags. Litter has been reduced. 2. Less waste of resources. With reduced use, less scarce resources are used in the production of this commodity. 3. Greater consumer awareness of how we use resources. There is increased awareness of the misuse of scarce resources and how the misuse of these impact on the environment. 4. Government revenue. The plastic bag tax has resulted in increased tax revenue for the government
A minister for Finance prepares the following current budget for 2006. (i)Calculate the Current Budget balance for the above budget and state whether it is a surplus or a deficit. Current Budget-2006 Government Current Income €10,000m Government Current Spending €9,500m €10,000m − €9,500m = €500m Surplus
The actual figures for 2006 differed from the budgeted figures as follows: Current Income was lower by 5% Current Spending was higher by 10% Calculate the Current Account Balance, taking these changes into account. Show all your workings: Current income was lower by 5%: 5% x €10,000* = € 500*. €10,000 – €500* = €9,500* Current spending was higher by 10%: 10% x €9,500* = € 950* + €9,500*