Transcript National Debt.

Kayla Niblock
 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.
of Large National Debt.
What is Deadweight debt?
.
of Large National Debt.
 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
Increased national income
Improved government services
 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 11th , 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.
Income tax
Government taxation
• 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.
Name of
Direct Tax Indirect
(i)Name the type of tax. Tax
tax
Tax
Tax levied
on goods or
services
VAT /
Excise
Duty
Yes
Tax on
company
profits
Corporatio Yes
n Profits
Tax
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.
Tax
Name of
tax
Direct Tax
Tax levied
on goods or
services
VAT /
Excise
Duty
Tax on
company
profits
Corporatio Yes
n Profits
Tax
Tax on an
employee’s
wages
Income
Tax / PAYE
Indirect
Tax
Yes
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.
€10,000m − €9,500m = €500m
Surplus
Current Budget-2006
Government Current Income
€10,000m
Government Current Spending
€9,500m
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*