Government Finances

1. Government Finances By Shauna Hennessy.

2. The National Debt • This is the total amount / cumulative of government borrowing which is outstanding

3. There are two elements to the national debt. Internal or domestic debt: ie. Money borrowed from citizens and institutions in the country. External or foreign debt: ie. Money borrowed from abroad

4. Reasons for the National Debt. • Productive investment: Is spending on projects which become self–financing. These eventually create incomes which are then taxed to repay the borrowings. Causes no problems for the country in the long run.

5. Social investment: Involves financing projects which can never be self-financing, but are required by society. Eg. Schools and hospitals. Could benefit the economy in the long run.

6. Current budget deficit: Is borrowing to finance current government expenditure. Eg. Civil servants wages. This is undesirable form of borrowing as it delays taxation to a further date.

7. Problems associated with the National Debt. • It is deferred taxation. • May result in rolled over debts ie. Replacing one debt with another. • Lenders may be able to influence government policy. Eg. The Troika dictate government fiscal policy. • Changes in the rate of exchange could increase the foreign debt itself and the cost of borrowing it.

8. Payment of interest on the domestic debt may result in an unequal distribution of wealth in the ecomony. • There may be a large opportunity cost to the borrowings.

9. The National Debt at the end of April 2012 was € 129.6 billion.

10. The National Treasury Management Agency (NTMA) • This act allows the government to delegate the borrowing and debt management functions of the Minister for Finance to the NTMA. The actions taken by the NTMA have the same status in law as those undertaken by the Minister for Finance

11. Functions of the NTMA. • The essential role is to manage the national debt on behalf of the government. • It manages the National Pension Reserve Fund, Social Insurance Fund and the Dormant Accounts Fund, as well as borrowing on behalf of the Housing Finance Agency.

12. The provision of financial advice, funding and providing guarantees for all major public investment projects is carried out by the National Development Finance Agency operating through the NTMA. • NTMA oversees and manages The National Asset Management Agency (NAMA)

13. Gross Domestic Product (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.

14. General Government Debt/GDP Ratio • This is the ratio of general government debt to gross domestic product (GDP). In other words: It reflects our debt as a percentage of what we produce or earn in a year.

15. Current Government Expenditure • Government current expenditure in a year is spending by the government on the provision of goods and services which will be totally consumed in that year. Eg. Salaries of civil servants, social welfare payments and interest payments on the national debt.

16. Government Capital Expenditure • Government capital expenditure is spending by the government on assets which will benefit the country for some time into the future. Eg. Spending on social housing, the building of new government offices and the provision of new schools.

17. (c) Ireland’s National Debt as a percentage of GDP is continuing to increase. (i) Explain the underlined term. (ii) What do the initials GDP stand for? (iii) State one reason why Ireland’s National Debt has been increasing in recent times. (iv) State and explain two economic disadvantages which may result from this increase in Ireland’s National Debt. (30 marks) (i) National Debt: the total amount / cumulative of government borrowing which is outstanding. 3 marks 2 marks 1 mark (ii) GDP: Gross Domestic Product 6 marks (2 + 2 + 2) (iii) 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. 1 x 6 marks 2011 O.L Q5

18. (iv) Two economic disadvantages of the increase in Ireland’s National debt. 1. Opportunity costs involved. With more funds being used to meet our annual interest repayments the government has less funds available for other purposes. 2. 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 3. Increased annual interest repayments. An increasing national debt means that the annual cost of repaying our national debt is rising. 4. 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 a deterioration in the provision of some services e.g. the health service; education service 5. Reduced public confidence. Citizens may lose confidence in the economy and reduce their spending. This may further reduce economic growth. 6. Diminished international credit-rating. The fact that Ireland is seen to have an increasing national debt means that our credit-rating is deteriorating. 7. 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.

19. (a) Define each of the following terms:(i) Current Budget Deficit;(ii) Exchequer Borrowing Requirement;(iii) Public Sector Borrowing Requirement;(iv) National Debt.(i) Current Budget DeficitCurrent government expenditure exceeds current government revenue/ Current (Day-to-day revenue and expenditure).(ii) Exchequer Borrowing RequirementThe amount borrowed by the government to fund a current budget deficit and any borrowing for capital purposes/current budget deficit plus borrowing for capital purposes.(iii) Public Sector Borrowing RequirementExchequer borrowing requirement plus borrowing for semi-state/state sponsored bodies and local authorities.(iv) National DebtThis is the total amount /accumulated total of outstanding borrowing by the government. 2009 H.L Q 6

20. (b) Irelands National Debt grew from €36bn at end of 2006 to €50.4bn at end of 2008. (i) Outline the major reasons for the increase in National Debt. 1. Increased Current Budget deficitsThe government have decided to operate a deficit budget in order to continue with the provisionof public services / not to further reduce aggregate demand. Any borrowing to finance thiscurrent expenditure will increase the size of the deficit. This money must be borrowed therebyincreasing the national debt. 2. Borrowing for capital purposes/Self-Liquidating DebtThe government continues to borrow to invest in infrastructure and other capital projects, whichwill eventually generate income and yield tax revenues to meet costs of repaying the moneyborrowed This also increases the national debt. 3. Social InvestmentThe government borrowed to invest in socially desirable projects which may not yield any taxrevenue such as hospitals, schools, public amenities.

21. Positive Consequences 􀁸 Improved Public services. If the increased debt is caused by an increase in current borrowing the government may continue to spend on public services resulting in a continuation of these services. 􀁸Increased spending on infrastructure. If the increased debt is caused by an increase in capital borrowing then there may be greater spending on the state’s infrastructure which may assist the future growth of the economy. 􀁸 Future Economic Growth. Increased National Debt may boost aggregate demand and may provide opportunities for further economic growth. 􀁸 Employment Rising aggregate demand should lead to increased demand for labour resulting in lower unemployment. 􀁸 Self-Liquidating debt. If the return on the borrowings is able to meet the cost of repayments then the borrowing has been self-liquidating. Negative Consequences 􀁸 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 on future taxpayers. 􀁸 Increased annual interest repayments. An increasing national debt means that the annual cost of repaying our national debt is rising. 􀁸 Diminished international credit-rating. The fact that Ireland is seen to have an increasing national debt may mean that our credit-rating worsens. 􀁸 Outside Euro stability pact requirements. Ireland has difficulty in meeting the conditions of the stability pact and hence corrective action will need to be taken in economic policy matters. (ii) Describe the economic consequences (positive and negative) of the increase in National Debt in recent years.