chapter 12 - fiscal policy and the budget framework

Question 1

what is fiscal policy ?

Answer 1

fiscal policy refers to any action taken by the government to impact the timing, magnitude and structure of the governments current revenue and expenditure

Question 2

what is fiscal policy for the Irish government ?

Answer 2

for the Irish government policy involves decisions related to how it collects and spends money in order to achieve specific economic goals. this could include strategies to stimulate economic growth, control inflation, reduce unemployment or to manage public finances

Question 3

Budget 2024 - taxation

Answer 3

-standard PAYE cut off rate increased from 40000 to 42000 which increases take home pay

• USC drops from 4.5% to 4% which also increases take home pay

Question 4

Budget 2024 - min wage

Answer 4

€11.30 to €12.70 per hour an increase of €1.40

an increase of 12.39%

increases cost of business and reduces business competitiveness

inflationary - cost push inflation

Question 5

Budget 2024 - purpose

Answer 5

an expansionary budget

-to help the cost of living crisis
-help the most vulnerable eg lower earners, children/parents, renters/house buyers, interest rate hikes - variable/tracker mortgage holders, business have high costs, high energy costs and high inflation 5.2%

by saying the actions is inflationary ( leads to higher demand ), so higher prices - demand pull inflation

Question 6

Budget 2024 - expansionary policy

Answer 6

any action taken by the government that leads to an increase in aggregate demand/ stimulate economic growth i.e cut taxes ( increase demand), increase expenditure ( increased social welfare )

it conflicts with the ECB’s current contractionary monetary policy

Question 7

Budget 2024 - housing

Answer 7

-extended first time buyer scheme ( helps new entrants/ younger persons to buy a home)

• reduced rental income tax on landlords - should increase the supply of rental property’s
• mortgage interest relief to mortgage holders whose interest has increased due to ECB hikes

Question 8

Budget 2024 - children

Answer 8

-increased SNA’s in classrooms
- 1 in 8 in danger of poverty
-free school books for kids
- reduced third level fees

Question 9

Budget 2024 - social welfare

Answer 9

to help deal with cost of living crisis
- €12 increase in weekly payments - pensions, jobseekers
- X2 welfare payment for xmas and child benefit (one-off)

Question 10

Budget - what is current revenue

Answer 10

day to fay revenue collected by the government
tax revenue - customs , excise, PAYE, VAT, Corp tax

non tax revenue - lotto surplus, profits from state owned companies eg dublin bus

Question 11

Budget - what is capital revenue

Answer 11

one-off revenue received by the government

eg borrowing on the bond market ( issuing Irish bonds to raise finance)
grants from the EU
sale of state owned assets eg aerlingus ,10% sale of Dublin bus

Question 12

Budget - what is current expenditure ?

Answer 12

money spent on items that get used up during the year on day-to-day items
- public sector works eg teachers, nurses
-interest on out National Debt

transfer payments - a payment by the government where no factors of production is offered in returns eg social welfare payments, pensions and national debt

Question 13

Budget - capital expenditure

Answer 13

money spent on items not used up within the year. long term or one-off spending, which increases the productive capacity of the country
-social housing
-new schools/housing
-new roads

it is justifiable to borrow to fund capital expenditure if long term returns outweigh the cost

Question 14

what are the advantages of a current budget surplus (5)

Answer 14

1. decreased inflationary pressures- a surplus will mean more is leaked (taxation) than injected(expenditure) in the economy, which should dampen demand, and lead to lower price levels, so a surplus can help to control/ lower higher price levels

2.financial management- having a budget surplus shows that the government is effectively managing its finances, which can instil confidence in the economy and increase investment

3.EU guideline compliance - a budget surplus indicates that the country is meeting the EU guidelines without difficulty, avoiding negative attention on Irish government economic policy

4. scope for taxation reforms - the existence of a surplus suggests room for tax system improvements, such as widening tax bands, or removing USC as a tax
5. increased government revenue use - with more revenue available, the government can invest in current projects like increasing number of employees in state services and long term projects like infrastructure development eg children’s hospital

Question 15

what are the disadvantages of a current budget surplus ? (4)

Answer 15

1.conflicting expectations - citizens may demand improvements in state services when they see a budget surplus, but their expectations may conflict with one another

2. public sector worker wage demands - public sector workers may see the surplus as an opportunity for wage negotiations or an increase in the workforce, potentially leading to budgetary challenges
3. tax reduction demands - taxpayers who feel they are paying too much tax may demand reductions or increased equity in the tax system as there is excess tax
4. opportunity costs - achieving a budget surplus may involve reducing expenditure on essential services like health and education which could lead to deterioration in these areas

Question 16

what is the exchequer ?

Answer 16

this is the main treasury account held by the Irish government at the central bank of Ireland. all governments receipts and expenditures are recorded in the central fund on a cash basis. the difference between receipts and expenditures is called the exchequer balance

Question 17

what is Fiscal Drag ?

Answer 17

the tendency of revenue from taxation to rise as a share of GDP in a growing economy without any need for government action. It occurs due to inflation or income growth pushing taxpayers into higher tax brackets. it acts as an automatic stabiliser

Question 18

what is revenue buoyancy ?

Answer 18

it is when the tax collected is greater than what has been planned for. this has a deflationary effect on the economy

Question 19

what is national debt ?

Answer 19

it is the value of total outstanding debt/ borrowing owed by the state

Question 20

what is the relationship between a government budget deficit and the national debt

Answer 20

a government budget deficit exists when total government expenditure exceeds total government revenue

a budget deficit is financed by increasing government borrowing

national debt is the total amount (cumulative) of government borrowing which is outstanding (due/owed)

a budget deficit will result in an increased national debt in absolute terms and a higher cost of servicing the national debt

Question 21

what are the 3 functions of (NTMA) the national treasury management agency

Answer 21

the NTMA manages national debt
1. they borrow on behalf of the government by issuing government bonds eg IOU notes

2. they manage our National Debt -try to lower overall interest rates we pay back the loan at by fixing low interest rates/ hedging against shocks to the market

3.manage our pension reserve fund on behalf of the government - in order to have adequate money to pay for future pensions

Question 22

how to make out National debt more sustainable ? (3)

Answer 22

1. debt write off - if the government can convince the ECB/ EU commission to write off some of our national debt that we took on during the Great recession, this would reduce the amount we have to repay making it more manageable
2. negotiate lower interest rates - if the NTMA were able to convince investors that Ireland is a safe place to invest in bods, they may be able to auction off bonds at lower interest rates, thus reducing the amount that has to be repaid every year
3. ensure debt is “self- liquidating” - the government should only take on debt if they are certain that it will improve the economy’s ability to repay said debt. eg it should be used to improve infrastructure, build schools or hire more doctors

Question 23

what are the disadvantages of having a high national debt ? (5)

Answer 23

1. future costs of repayments - the national debt must be repaid at some point. this puts pressure on future generations as they already have to repay hundreds of billions of euro which they saw little benefit
2. the opportunity cost of interest - the NTMA must repay the annual interest yield on the bonds it issues. this leas to the government spending more of its revenue on interest repayments and may lead to a reduction in the quality of state services due to lower funding
3. borrowing for current spending - the government may be borrowing money to help repay debt which it has already incurred. this leads to no reinvestment in the economy (eg improving infrastructure) and a reduced likelihood that the government will be able to pay off this debt without increasing taxation rates.
4. a high level of debt makes the country vulnerable to economic shocks - when a country has a large national debt, investors see it as a riskier investment. this can make it very difficult for governments to raise funds during economic downturns and they may have to accept higher bond yields as a result

5.reduced credit rating - higher debt may reduce our credit rating on the bond market. this will have an impact on the ability of the Irish government to get private external funding in the bond market

Question 24

what are the functions of taxation in an economy ? (5)

Answer 24

1. fund public services and infrastructure development - taxes collected from individuals, business and other entities contribute to the governments income, which they can then use as expenditure to improve public services/ infrastructure and provide essential services such as education, healthcare, transportation, defence and law enforcement
2. redistribution of wealth and income - taxation can be used as a tool to promote income and wealth redistribution. progressive tax systems, where higher income individuals pay a higher percentage of their income in taxes, can help reduce income inequality and create a more equitable society
3. stabilise economic cycles - during times of economic expansion, governments may increase tax to curb inflationary pressure, while during economic downturns, they may reduce taxes to stimulate spending and investment. used as part of their fiscal policy to achieve their current objectives.
4. discouraging negative externalities - certain taxes, such as excide taxes on tobacco and carbon taxes on greenhouse gas emissions, are designed to discourage activities that have negative impacts on public health or the environment( reduce the consumption of demerit goods)
5. create employment/investment - they can also positively influence positive behaviour eg governments may offer tax incentives to encourage investment in specific industries or technologies deemed beneficial for the economy or the environment

Question 25

what is a progressive tax ?

Answer 25

it takes a higher proportion away from higher income earners than rom low-income earners. a tax is progressive when the proportion of income paid in taxes rise as income rises. Income tax (PAYE) is an example of progressive tax as workers wages increases they will pay a higher tax rate

eg USC

Question 26

what is a regressive tax ?

Answer 26

a tax that fails to account for a persons ability to pay it. it takes a higher proportion away from low income earners that high income earners. a regressive tax mean that the proportion of income tax paid falls as incomes increase. VAT is an example of a regressive tax as high and low income earners pay the same amount of tax on the goods that they buy.

Question 27

what is a direct tax? and examples

Answer 27

these are taxes on all forms of income or wealth. they are paid directly by the taxpayer to the government

eg PAYE, USC - income taxes, direct, progressive

LPT - direct and regressive
CGT - direct, tax on profit of sale of asset
DIRT - direct
Corporation tax

Question 28

what is an indirect tax and examples ?

Answer 28

an indirect tax is a tax on the consumption of goods and services - to encourage a behaviour

eg VAT
Excise duties
SSDT
Customs Duties
Stamp Duty
these are all regressive taxes

Question 29

what are Adams Smith’s Four Canons of taxation ?

Answer 29

1. Equity - taxes should take a higher proportion of income in tax as income rises. the better able should bear a greater burden of taxation, whether or no they benefit. the idea of this canon is that taxes should be progressive and so income tax in Ireland is equitable as those as those on higher incomes should pay a greater proportion in taxation
2. economy - the costs of collecting taxes should be as low as possible. the income collected should be greater than the cost of collection. the raising of revenue for government is the main aim of taxation. the local property tax is economic at it can be collected online
3. certainty- the amount paid should be certain and clear/ a taxpayer should know when they are paying tax and how much tax they are paying. similarly the government should know how much they are collecting and when they will receive it. various taxes such as VAT receipts must be forwarded to the revenue commission at certain specified times.
4. convenience - the tax should be collected in a way and at a time which is convenient for the taxpayer. it is more convenient to have tax deducted at source eg PAYE rather to receive a bill for the total amount due in a single payment after the income has been spent. VAT is collected at the time of purchase and so is convenient for the taxpayer

Question 30

what are the other principles a modern tax system should consider as well as Adam Smith’s Canons (4)

Answer 30

1. limited disincentive to work/save - introduction of a higher PAYE band (>100000 could reduce labour supply, high Dirt less savings). this would limit economic growth.
2. limited disincentive on investment - Low CPT of 12.5% attracts investors, which creates employment and boosts GDP

3.act as an automatic stabiliser - tax revenue should grow as economy grows and vice versa

4. limit tax evasion - the system should be regulated to discourages/eliminate it

Question 31

what are the advantages of using indirect taxes over direct taxes eg increasing VAT rather than income tax

Answer 31

1. the costs of collection are borne by retailers (economic), so they are more convenient for the government to collect and easier for the consumer to pay ( easy administration)
2. as the tax is built into the selling price they are impossible to evade. they are much more difficult to avoid versus income (direct ) taxes
3. No disincentive to work with a VAT increase, as they don’t impact the take home income - an increase in direct taxes taxpayers may feel a disincentive to work
4. used by government to change consumption behaviour/patterns eg SSDT was introduced to lower consumption of unhealthy sugary drinks

Question 32

what are the disadvantages of using indirect taxes over direct taxes eg increasing VAT rather than income tax

Answer 32

1. inflationary - increased VAT rates will lead to higher prices causing cost push inflation
2. regressive - they do not tax a persons ability to pay into account
3. disincentive to spend - rising prices in the economy when consumer confidence is low/savings high may cause people to defer spending
4. some consumers may use cheaper black economy - less revenue for the state
5. revenue uncertain- it is harder to predict than direct taxes

Question 33

what are the advantages of using direct taxes over direct taxes eg increasing income rates than increasing VAT

Answer 33

1. helps to reduce income inequality as direct taxes like income tax can be designed to be progressive, meaning higher income individuals pay a larger percentage of their incomes in taxes
2. it is related to the person’s ability to pay, so doesn’t take too much from lower income earners
3. the cost of collection is low as the employer must deduct PAYE at source and collect it on behalf of the government
4. the government is relatively certain of how much tax is due, making it easier to budget and plan for the future. they are also very certain for a person as they are more sure of tax impacts of more work, etc
5. fiscal drag - this occurs as tax intake increase automatically when incomes increase, lowering the chance of a boom/ dampening potential higher growth

Question 34

what are the disadvantages of using direct taxes over direct taxes eg increasing income rates than increasing VAT

Answer 34

1. may discourage a person to work - high rates of eg PAYE can discourage a person to work or to enter the workforce or to increase their hours, as proportionately more tax will be taken from those with higher income
2. may encourage wage demands - increased direct direct taxes eg higher PAYE rates, may encourage higher wage demands from staff, increasing the likelihood of strikes and industrial action
3. encourages tax evasion - direct taxes are easier to evade and higher rates also increase the incentive for someone to evade them (illegal) or avoid them (legal) eg more jurisdiction to lower tax effect
4. reduced savings as higher direct taxes will lower net take home pay, leaving less income to save