Fiscal Policy and Budget

To understand why the government intervenes in the market and why the budget is so important every year, we first must recap the Business Cycle.

Fiscal Policy

Is defined as any action taken by the government which influences the timing, magnitude and structure of current revenue and expenditure.  

• Expansionary fiscal policy is used to increase economic growth, employment, but can also increase inflation. This policy is used to stimulate growth during a recession. The government can do this by reducing tax or increasing government spending.

• Contractionary fiscal policy is used to reduce inflation, reduce budget deficit/national debt, redistribute income. This can be achieved by higher taxation or reduced government spending.

Irish government budget

Each year, the Irish government issues a budget on public spending, see here for a full break down of budget. There are three categories of Government/public spending: 

• Capital spending is on capital stock of the economy, such as building schools, hospitals, roads. 
• Current expenditure is ongoing, such as wages to public services employees. 
• The last category refers to transfer payments, such as unemployment benefits, disability payments and pensions. 

Government receive income (revenue) from different sources: 

• Direct taxes Taxes that are levied on income, wealth or profit, example: 
  • USC
  • PAYE
  • Corporation tax
  • Capital acquisitions tax (CAT)
  • Capital gains tax (CGT)
  • Deposit interest retention tax (DIRT)

• Indirect tax (tax on goods/services (consumption). They are paid indirectly to the government by final consumers. 
  • Value Added Tax (VAT)
  • Excise duty 
  • Carbon tax 
  • Sugar Sweetened drinks tax (SSDT)
  • Plastic bag levy 

Click on links above for definitions of type of tax and the pros and cons of each, as well as examples in Ireland.

What makes a good taxation System?

You need to know Adam Smith’s Canons of taxation, as well as other principals that make up a good taxation system. Read this post for more, as well as other definitions you need.

National Debt

When governments use expansionary fiscal policy; government spending may rise. A consequence of this may be an increase in national debt. You need to know the definition and consequences of national debt. See this post for more.

Privatisation

The selling of a state owned company / asset in whole or in part to the private sector. See this post for pros and cons of selling of state assets.