Government and the Economy Revision Notes for Junior Cert Business Studies

Government and the Economy

Why does the government get involved in the economy?

The government plays a vital role in Ireland's economy for several important reasons. Understanding these reasons helps us see why government involvement is necessary for a healthy, fair economic system.

Regulation

Without proper rules and oversight, businesses might engage in unfair or harmful practises. The government creates a fair and orderly economic environment by establishing laws and regulations.

Important

Regulation means the government sets rules and standards that businesses must follow to ensure fair competition and protect consumers and workers.

Key examples of regulation in Ireland include:

Worker protection: Laws like the Employment Equality Acts ensure fair treatment of employees
Consumer protection: The Competition and Consumer Protection Act safeguards buyers from unfair business practises
Financial oversight: The Central Bank of Ireland monitors financial institutions to protect people using banking services
Business standards: The Department of Enterprise, Trade and Innovation oversees business operations and employment practises

Example

Practical Example: Mobile Phone Competition

When you buy a mobile phone contract with Eir or Three, competition laws ensure these companies cannot secretly agree to charge the same high prices. This regulation protects consumers from unfair pricing practises.

Job creation and tax collection

The government is actually Ireland's largest employer, providing jobs across many sectors including healthcare, education, and public services. This employment serves two purposes:

Direct job creation: Government jobs in hospitals, schools, and civil service provide employment opportunities
Tax revenue generation: When government employees earn wages, they pay income tax, which returns money to the government

This creates a beneficial cycle where government investment in employment generates revenue through taxation.

Protection of natural resources

Ireland's environment and natural resources need careful management to ensure they remain available for future generations.

The Department of Communications, Climate Action and Environment oversees this responsibility by:

Monitoring how companies extract oil and gas from Irish waters
Ensuring environmental standards are met in industrial activities
Protecting Ireland's coastlines, forests, and wildlife habitats

Note

When companies explore for natural gas off the Irish coast, government regulations ensure this is done safely without damaging marine ecosystems.

Support of enterprise

The government actively encourages new businesses to start and existing businesses to grow because successful enterprises create jobs and generate tax revenue.

Government support includes:

Enterprise Ireland: Provides funding and advice to Irish businesses looking to export their products internationally
Local Enterprise Office (LEO): Offers support and training to small businesses in local communities
Tax incentives: Special tax rates to encourage business investment and growth

Government revenue

Just like households need income to pay for expenses, the government needs money to fund public services. Government income has a special name in economics.

Important

Revenue refers to all the money the government receives from various sources to fund public services and infrastructure.

Revenue from taxation

The government's primary source of revenue comes from collecting taxes from individuals and businesses throughout the country.

Important

Taxation is the system where the government collects money from people and businesses to pay for public services like hospitals, schools, and roads.

The Office of the Revenue Commissioners handles tax collection in Ireland. Here are the main types of taxes:

Personal taxes:

Income tax: Paid by workers on their earnings
Deposit Interest Retention Tax (DIRT): Collected on interest earned from bank savings accounts

Business taxes:

Corporation tax: Paid by companies on their profits
Value Added Tax (VAT): Added to the price of goods and services

Import/consumption taxes:

Customs duty: Charged on goods brought into Ireland from outside the EU
Excise duty: Applied to specific products like cigarettes, alcohol, and fuel
Motor tax: Annual fee paid by vehicle owners

Property taxes:

Local Property Tax (LPT): Based on the value of residential properties

Example

Worked Example: VAT Calculation

When you buy a video game for €60, approximately €10 of that price goes to the government as VAT. This represents the standard VAT rate applied to most goods and services.

Other sources of revenue

While taxation provides the majority of government revenue, other important sources include:

Privatisation: When the government sells state-owned companies to private investors.

Dividends: The government owns shares in some companies and receives a portion of their profits. This is like being a shareholder in successful Irish businesses.

EU funds: Money received from the European Union to support various projects and development programmes in Ireland.

Example

Privatisation Example: Bord Gáis Energy

In 2014, the government received approximately €950 million from selling Bord Gáis Energy to private investors. This one-time revenue helped boost government funds for that year.

Government expenditure

The government spends revenue on numerous services and programmes that benefit Irish citizens and society.

Main areas of government spending

Social welfare: This includes unemployment benefits (Jobseeker's Benefit and Allowance), health-related payments (Illness Benefit), family support (Child Benefit), retirement income (State Pension), and maternity support.

Health services: Funding for public hospitals, medical equipment, doctor and nurse salaries, and healthcare programmes.

Education: Supporting primary schools, secondary schools, universities, teacher salaries, and educational resources.

Transport infrastructure: Building and maintaining roads, public transport systems, and transport safety measures.

Tourism promotion: Marketing Ireland as a tourist destination and supporting the tourism industry.

Agriculture support: Assisting farmers and supporting rural development programmes.

Public sector wages: Paying salaries to government employees including teachers, nurses, gardaí, and civil servants.

Debt servicing: Money set aside to pay interest and repay loans the government has borrowed in previous years.

Important

Debt servicing is the amount of money the government allocates each year to pay interest and repay money it has borrowed previously.

Types of government revenue and expenditure

Government financial activities can be categorised into two distinct types based on their frequency and duration.

Important

Capital refers to one-off or long-term financial activities, while Current refers to regular, everyday financial activities.

Examples of capital and current items

Current revenue:

Taxation (collected regularly throughout the year)
Dividends (regular payments from government-owned companies)

Capital revenue:

EU funds (received for specific projects)
Privatisation (one-time sale of state companies)

Current expenditure:

Paying nurses' wages (regular monthly salaries)
Child Benefit payments (regular monthly payments to families)

Capital expenditure:

Building new schools (one-time construction projects)
LUAS extension (major infrastructure project)

Note

Remember: Capital = one-off or long-term, Current = regular and ongoing. This distinction helps categorise all government financial activities.

The national budget

Similar to how families plan their household budgets, the government creates an annual financial plan.

Important

The national budget is a document that shows the government's planned revenue and expenditure for the upcoming year.

The budget process

Each government minister submits a request for funding to run their department for the year. The Minister for Finance then:

Calculates expected revenue from taxes and other sources
Reviews all departmental funding requests
Decides how much money to allocate to each department
Creates the final budget document

Note

The amount allocated may not always match what departments requested, as the Minister for Finance must balance all needs against available resources.

Types of national budget

Depending on the relationship between planned income and expenditure, there are three possible budget outcomes:

1. Surplus budget When planned total revenue exceeds planned total expenditure, the government has money left over. This means:

Extra funds available for public investment
No need to increase taxes
Ability to build financial reserves for emergencies
More money for new programmes or services

2. Balanced budget When planned revenue exactly equals planned expenditure, creating a perfectly balanced financial plan with no surplus or shortfall.

3. Deficit budget When planned expenditure exceeds planned revenue, creating a shortfall. This situation means:

Insufficient revenue to cover all planned spending
Potential need to cut some public services
Possible tax increases to raise more revenue
Government may need to borrow money

Solutions to a budget deficit

When facing a budget deficit, the government has three main options:

Example

Solutions to Budget Deficit

Option 1: Increase revenue

Raise existing tax rates or introduce new taxes
Sell government-owned companies or assets (privatisation)

Option 2: Decrease expenditure

Reduce spending on services like healthcare, education, or social welfare
Cut public sector jobs or freeze wage increases

Option 3: Borrow money

Take loans to cover the shortfall between income and expenditure
This creates future obligations as borrowed money must be repaid with interest

Real example: During economic difficulties, the government might choose to increase VAT from 21% to 23% to generate additional revenue, or it might reduce spending on new hospital equipment to balance the budget.

Summary

Key Points to Remember:

The government participates in the economy through regulation, job creation, environmental protection, and business support
Government revenue comes primarily from taxation, with additional income from privatisation, dividends, and EU funds
Major government expenditure areas include social welfare, health, education, and debt servicing
Capital items are one-off or long-term, while current items are regular and ongoing
Budget outcomes can be surplus (income > expenditure), balanced (income = expenditure), or deficit (expenditure > income)

Government and the Economy (Junior Cert Business Studies): Revision Notes