government finances

Government Finances

By Shauna Hennessy

The National Debt

This is the total amount cumulative of government borrowing which is outstanding

There are two elements to the national debt

External or foreign debt

ie Money borrowed from abroad

Internal or domestic debt

ie Money borrowed from citizens and institutions in the country

Reasons for the National Debt

Productive investment Is spending on projects which

become selfndashfinancing These eventually create incomes which are then taxed to repay the borrowings Causes no problems for the country in the long run

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

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

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

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

The National Debt at the end of April 2012 was euro 1296 billion

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

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

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)

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

General Government DebtGDP 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

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

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

(c) Irelandrsquos 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 Irelandrsquos National Debt has been increasing in

recent times(iv) State and explain two economic disadvantages which may result from this

increase in Irelandrsquos 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 Irelandrsquos 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 projects3 Increased interest rates on the loans4 Borrowing to finance the statersquos bailout of the banks

1 x 6 marks

(iv) Two economic disadvantages of the increase in Irelandrsquos National debt

1 Opportunity costs involvedWith more funds being used to meet our annual interest repayments the

government has less funds available for other purposes

2 Increased burden on taxpayersThe 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 repaymentsAn 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 eg the health service education service

5 Reduced public confidenceCitizens may lose confidence in the economy and reduce their spending

This may further reduce economic growth

6 Diminished international credit-ratingThe fact that Ireland is seen to have an increasing national debt means

that our credit-rating is deteriorating

7 EU IMF conditions applied to IrelandThe EUIMF has attached conditions to our borrowing and so corrective

action must be taken in economic policy matters and agreed by the EU IMF

(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 purposescurrent budget deficit plus borrowing for capital purposes

(iii) Public Sector Borrowing RequirementExchequer borrowing requirement plus borrowing for semi-statestate sponsored bodies and local authorities

(iv) National DebtThis is the total amount accumulated total of outstanding borrowing by the government

(b) Irelands National Debt grew from euro36bn at end of 2006 to euro504bn 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 purposesSelf-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

(ii) Describe the economic consequences (positive and negative) of the increase in National Debt in recent yearsPositive Consequences

1048696 Improved Public servicesIf the increased debt is caused by anincrease in current borrowing thegovernment may continue to spend onpublic services resulting in a continuationof these services

1048696 Increased spending on infrastructureIf the increased debt is caused by anincrease in capital borrowing then there may be greater spending on the statersquosinfrastructure which may assist the futuregrowth of the economy

1048696 Future Economic GrowthIncreased National Debt may boostaggregate demand and may provideopportunities for further economic growth

1048696 EmploymentRising aggregate demand should lead toincreased demand for labour resulting inlower unemployment

1048696 Self-Liquidating debtIf the return on the borrowings is able tomeet the cost of repayments then theborrowing has been self-liquidating

Negative Consequences

1048696 Opportunity costs involvedWith more funds being used to meet ourannual interest repayments the

governmenthas less funds available for other purposes

1048696 Increased burden on taxpayersThe increase will mean that thegovernment will have to considerincreasing future taxes on future taxpayers

1048696 Increased annual interest repayments

An increasing national debt means that theannual cost of repaying our national debtis rising

1048696 Diminished international credit-rating

The fact that Ireland is seen to have anincreasing national debt may mean that ourcredit-rating worsens

1048696 Outside Euro stability pactrequirementsIreland has difficulty in meeting theconditions of the stability pact and hencecorrective action will need to be taken ineconomic policy matters

The National Debt

This is the total amount cumulative of government borrowing which is outstanding












































1 x 6 marks




















































































1 x 6 marks









































government finances

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