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Explain the following economic terms, using appropriate examples in each case: (i) Government Current Budget; (ii) Government Capital Budget; (iii) Revenue Buoyancy; (iv) Regressive Taxation - Leaving Cert Economics - Question 5 - 2007
Question 5
Explain the following economic terms, using appropriate examples in each case: (i) Government Current Budget; (ii) Government Capital Budget; (iii) Revenue Buoyancy... show full transcript
Worked Solution & Example Answer:Explain the following economic terms, using appropriate examples in each case: (i) Government Current Budget; (ii) Government Capital Budget; (iii) Revenue Buoyancy; (iv) Regressive Taxation - Leaving Cert Economics - Question 5 - 2007
Step 1
Explain the following economic terms, using appropriate examples in each case: (i) Government Current Budget
Answer
The Government Current Budget is a financial plan that outlines the government's expected revenues and expenditures for a specific period, typically one year. It includes revenue sources like income tax and VAT, and expenditures such as salaries for teachers and welfare payments. For example, if the government expects to collect €50 billion in taxes while planning to spend €48 billion on public services, it has a current budget surplus of €2 billion.
Step 2
(ii) Government Capital Budget
Answer
The Government Capital Budget refers to the allocation of government funds for long-term investments that typically do not recur annually. Unlike the current budget that focuses on day-to-day operations, capital budgets fund projects like infrastructure development. An example is constructing new roads or schools, funded through loans the government repays over several years.
Step 3
(iii) Revenue Buoyancy
Answer
Revenue Buoyancy measures how responsive government revenue is to changes in the economy. It refers to the increase in tax revenues that occurs without any increases in tax rates due to economic growth. For instance, if economic growth motivates more people to become employed, leading to higher income tax revenues, this reflects revenue buoyancy.
Step 4
(iv) Regressive Taxation
Answer
Regressive taxation is a tax structure where lower-income individuals pay a higher percentage of their income in taxes compared to higher-income individuals. This can be illustrated by sales taxes that take a larger portion of income from lower earners. For example, if both a wealthy person and a low-wage worker purchase a $1,000 product with a 10% sales tax, the tax burden is heavier for the lower-income person.
Step 5
State and explain how a government budget could be affected by each of the following developments: (i) a rise in interest rates in the economy
Answer
A rise in interest rates can lead to increased government current expenditure, as the government has to pay higher interest on public debt. This may limit funds available for other services, causing a strain on the budget.
Step 6
(ii) a fall in the rate of stamp duty on property purchased
Answer
A reduction in stamp duty could enhance property transactions, potentially increasing government current revenue through greater economic activity in the real estate sector. However, reduced tax revenue from lower stamp duty rates must also be considered.
Step 7
(iii) the introduction of subsidised child care for all families within the state
Answer
Introducing subsidised child care would likely increase government current expenditure due to the costs of supporting these programs. However, it might also lead to higher current revenues as it encourages more parents to join the workforce, resulting in increased income tax revenue.
Step 8
Outline the economic arguments you would identify for the Minister in favour of lowering Irish income taxation rates.
Answer
Lowering income tax rates can stimulate consumer spending, which is vital for economic growth. Individuals and families with more disposable income tend to spend more, leading to increased demand for goods and services. Additionally, lower taxes may incentivize workforce participation and attract foreign investment, improving overall economic conditions. It is essential to maintain living standards and encourage social cohesion through adequate public services funded by effective taxation.