Chapter 23

1. Chapter 23

2. 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

3. 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.

4. Current Revenue • 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

5. 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

6. Government’s Capital Budget • 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.

7. Government Finances • 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.

8. Current Budget Interpretation • 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.

9. Current Budget Interpretation cont. • 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.

10. 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.

11. 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.

12. 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.

13. Irish National Debt • 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.

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

15. 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

16. Principles of a Fair Tax System • Taxes should be equitable • Taxes should be certain • Taxes should be convenient • Taxes should be economical

17. 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

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

19. 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

20. 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

21. 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.

22. 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.

23. Adam Smith (1723–90) • Author: AnInquiry 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