Government Intervention and Economic Systems

Government Intervention

  • At the end of this topic, students should be able to:
    • Evaluate the economic role of the government in a mixed economy.
    • Evaluate how and why the government may use various interventions and incentives, such as taxation and legislation, to influence the price and quantity outcomes in particular markets.
    • Evaluate the role and effectiveness of regulation in the Irish economy.

Economic Systems

  • Free Enterprise
    • Sometimes called capitalism.
    • Based on the theory developed by Adam Smith, stating that an economy develops better when individuals can pursue their self-interest.
    • Under this system, producers produce goods which they perceive will be purchased in sufficient quantities to earn a profit, reacting to consumers’ needs and wants.
    • The consumer dictates what goods will be created.
  • Centrally Planned
    • Resources are publicly owned.
    • The government controls all areas of economic activity to eliminate the inequalities in the distribution of wealth.
    • Central planners determine the assortment of goods to be produced based on their predictions about consumer behavior, with any profits to be redistributed to all citizens.
    • Central planners allocate resources for the production of goods, fix the quantities of the goods to be produced, and set the price of the goods.
    • The benefits of production are allocated according to social needs of individual units such as families and towns.
  • Mixed Economy
    • Falls between the two extremes of free enterprise and centrally planned.
    • Most decisions are made by the private sectors (the market), but the government intervenes to ensure the supply of essential goods to everybody through the public sector.
    • The government is also involved in planning the organization of the economy and its future development.
    • Ireland is a mixed economy.

Role of the Government in the Economy

  • Achieve Full Employment
    • Full employment is a situation where everyone who wishes to be employed has a job at existing wages level.
    • This is usually considered to be at 4% unemployment.
  • Achieve Sustainable Economic Growth
    • Economic growth means an increase in output per person in the economy (expansion of the productive capacity of the economy).
  • Control Government Finances / Reduce Borrowing / Manage the National Debt
    • Government spending has a major influence on the economy.
    • When faced with a deficit, the government may have to cut spending which can have a contractionary effect on the economy.
    • Keynesian economics suggests that when faced with a contracting economy, the government should borrow money to invest in capital infrastructure projects to help stimulate aggregate demand. This is called a fiscal stimulus.
    • The fiscal stimulus acts as a kick start to the economy and has a multiplier effect.
    • Borrowing is never ideal and it places a burden on generations to come in terms of repaying the loan and the interest on the loan.
    • Ireland’s current National Debt (Oct 2019) is €215bn or 65% of our GDP – it was €35bn in 2007.
    • The annual cost of servicing this debt is around €5bn. If interest rates were to rise it would have a significant effect on this figure.
  • Boost Exports / Improve Competitiveness / Attracting Investment
    • By taking steps to improve competitiveness, the government hopes that Irish exports will continue to grow and so help facilitate the creation jobs.
    • The government also aims to control the cost of utilities and insurance costs for businesses.
    • Attracting investment (FDI) is the role of the IDA. Over 190,000 workers in Ireland are employed by companies who are clients of the IDA.
    • Spin-off jobs may also be created as a result of the establishment of these companies.
  • Broaden the Tax Base
    • To broaden tax base means the expansion of the amount of economic activity subject to tax, usually by eliminating exemptions, exclusions.
    • The government must introduce taxes that are difficult to avoid, hit those who can afford to pay, and minimize tax avoidance by large corporations.
    • The government has introduced the local property tax, septic tank tax inspection charge but there more options including:
      • A minimum effective corporate tax rate;
      • A financial transactions tax;
      • Increased environmentally friendly taxes; and
      • Increasing the minimum effective tax rates on high earners.
  • Promote Balanced Regional Development
    • The government must try to ensure that employment opportunities and development is distributed throughout the country.
    • The IDA plays a key role in achieving this aim with extra supports available for foreign businesses that set up in areas outside of the main urban centers.
    • The government has a role in ensuring that the appropriate infrastructure is in place in these less developed regions to make these areas attractive to FDI.
  • Improve Infrastructure
    • The further development of the road infrastructure, provision of public transport, development of the airports and seaports is vital for Ireland’s long term development.
  • Improve State Services: Health/Education Services / Achieve a Just Social Policy
    • Increasing emphasis is being placed on the improvement in health services, the provision of further places in primary schools, improvement in school buildings and the development of third level education.
    • By investing in state services you improve the ability of all citizens to be able to contribute to making Ireland a sustainable economy.
  • Achieve a More Equitable Distribution of Income and a Just Social Environment
    • The government must continue to ensure that social welfare recipient’s standard of living is maintained, that it provides adequately for future pensions and helps to redistribute income within the state, given the current constraints on government current spending.
    • Increasing the levels of pensions and improving social welfare payments are attempts by the government to help re-distribute wealth.
    • However, it is important that social welfare does not create disincentives to work.
  • Control Price Inflation
    • The government must try to reduce the pressure on rising prices within the economy.
    • Our government DOES NOT HAVE control over its monetary policy which is a major tool in combatting inflation
    • However the government can control prices by:
      • Stabilising the cost of living/business costs
      • Moderating wages demands
      • Taxing income
  • Achieve Environmental Objectives
    • The Irish government has committed to reducing the carbon footprint of the nation by signing up to the Kyoto protocol target and under the EU2020 targets.

How Does the Government Intervene in the Economy?

  • Collecting Taxes
    • Direct taxes refer to taxes on incomes and wealth. Examples include:
      • Income tax/Pay As You Earn (PAYE)
      • Deposit interest retention (DIRT) tax
      • Capital Gains Tax
      • Capital acquisitions tax
      • Corporation tax
    • Indirect taxes are taxes on goods and services. Indirect taxes are paid indirectly to the government by the final consumer. Examples include:
      • Value added Tax (VAT)
      • Excise duty
      • Customs Duty
      • Stamp duty
    • The total tax take in Ireland for 2023 was over €87bn
  • Paying Social Welfare/Redistributing Income
    • The Irish government uses some of the tax revenue to pay social welfare.
    • Types of social welfare payments include:
      • Child benefit - €140 per child/month
      • Job Seekers Benefit/Allowance - €232 per week
      • Disability - €232 per week
      • State Pension - €249
      • Housing Assistance Payment (HAP) – helps with the cost of private rental
      • Working family payment
    • The social welfare budget in Ireland is €25.6bn
    • A progressive tax is a tax that takes into account the ability to pay of a tax payer. A progressive tax system take a higher percentage of tax from a higher income earner.
      • For example, in Ireland high earners pay more in PAYE than low earners. When one earns over circa €35000 they begin to be taxed at the marginal rate (40%) as opposed to the standard rate of 20%.
  • Minimum Wage
    • The government has legislation which sets minimum wage rates in Ireland
    • In theory it allows a minimum standard of living for all citizens
  • Providing Grants and Subsidies
    • The government provides grants and subsidies for a range of businesses and industries
      • Local enterprise offices provide grants to start up business
      • IDA provides grant and subsidies to foreign firms setting up in Ireland
      • Enterprise Ireland provide grants to Irish businesses seeking to export
      • Irish Rail, Bus Eireann and Dublin Bus are subsidised by the government to provide cheaper public transport
      • The cost of private childcare is subsidised by the government
  • State Companies
    • The government often acts a business owner to provide essential services that would not otherwise be profitable. In the past state companies were often monopolies in their markets but this has since changed with de-regulation.
      • Bus Eireann operates a number of routes in rural parts of the country that are not profitable but are seen as socially beneficial to those communities.
  • Privatisation
    • This is the sale of a state owned company to private owners.
  • Nationalisation
    • The purchase of privately owned assets by the government/exchequer

The advantages of privatisation

  • Improved quality / choice of services
    • Privatised firm may improve the quality / efficiency / choice of the service provided
  • More competitive prices
    • Consumers may be offered more competitive prices on goods / services.
  • Continuity of supply
    • The newly privatised companies may have access to new sources of funds
  • Employment opportunities
    • If the new firm increases its market share then this may result in a growth in employment within the industry
  • More rewards/Incentives for innovation
    • Employees may reap more rewards for their innovations within the privatised industry e.g higher bonuses
  • Revenue from sale /reduce borrowing
    • The government could use the revenue from the sale of the firm to help reduce its level of borrowings
  • Shedding of loss making companies
    • By selling loss making companies the financial burden on the state / taxpayers is removed.

The disadvantages of privatisation

  • Loss of non-profit making services
    • Non-profit making services may be discontinued in an effort to reduce costs
  • Standards of service / increased prices
    • The quality of services provided by the new company may deteriorate in an effort to save costs.
  • Curtailment in Pay / Pensions increases /Changes to working conditions
    • The new owners may limit the pay / pension increases due to its employees or change its employees’ conditions of employment
  • Loss of jobs / reduced job security /increased social welfare bill
    • Jobs may be lost through rationalisation of services
  • Loss of a state resource / critical infrastructure
    • For example, if the state sold Coillte, we would lose ownership of our forests.
  • Costs of the Sale
    • All costs in preparation for the sale such as legal work must be paid for by the taxpayer.
  • Foreign ownership
    • Overseas buyers can become owners of a previously Irish company and so control of the asset can go outside the state.

Advantages of Nationalisation

  • Stability to economy / investor confidence
  • Employment / consumer protection
  • Continued provision of services to the community/ prevent foreign ownership
  • Running the civil service to help provide public services
    • State services are often provided with the administrative backing of Government Departments and Local Authorities
      • The Department of Health is responsible for the delivery of public health services through the HSE
      • The Department of Education is responsible for the delivery of education is all state funded pre-schools, primary schools, secondary school and third level institutions
      • Local Authorities have responsibility for Planning, Parks, Road Maintenance, Waste Management and Recycling, Tourism, Libraries, Water provision, Social housing provision
  • Represent the country at EU level
    • The EU is a powerful organization that has the power to create laws that supersede Irish Law. It is the Irish Governments responsibility to represent the interests of the Irish people at all levels of EU Government (EU Parliament, EU Commission, Council of EU Ministers, The European Council)
  • Acting during National Emergencies
    • The government has a responsibility to its citizens during any national emergency whether it be a weather or economic related event
  • Promoting Ireland as a business/tourist destination
    • Through the IDA and the Department of Foreign Affairs Ireland is promoted around the globe as a destination for global business
    • Tourism Ireland is a government funded body whose responsibility is to promote Ireland as a tourist destination abroad.
  • Control prices or factors affecting pricing
    • At times the Irish Government intervenes in market to control prices for the public good
      • For example Minimum Unit Pricing with regards to alcohol

How Does the Government Regulate the Economy?

  • Regulation is the mechanism by which consumer’s and the public interest can be safeguarded to ensure services are delivered in a safe, fair and sustainable manner.
  • The government appoints regulators who can impose price controls, sanction businesses, open up markets
  • Free market economists criticise the scale of regulation in the economy arguing that it creates an unnecessary burden of costs for businesses – with a huge amount of "red tape" damaging the competitiveness of businesses
  • The main reasons for policy intervention by the government are:
    • To correct Market Failures
    • Improve public welfare
    • Achieve a more equitable distribution of wealth
    • To improve the performance of the economy.
  • The government regulates markets through laws generally come from two sources:
    • Irish government departments
    • EU in the form of directives or regulations
  • The government has established a number of regulatory agencies to ensure the laws it draws up are being adhered to. These regulatory bodies set standards, monitor behavior and enforce law with sanctions where appropriate.
    • Financial Services
      • The Irish Central Bank regulates the entire financial industry in Ireland
    • Communications
      • The communications market is regulated by Comreg
    • Food Industry
      • Food Safety Authority
    • Workplace Health and Safety
      • Health and Safety Authority
    • Environmental Issues
      • Environmental Protection Agency
    • Consumers
      • Consumer and Competition Protection Commission
    • Worker’s Rights
      • Workplace Relations Commission
    • Planning and Building
      • Local Authorities and An Bord Pleanala
    • Public Sector
      • Ombudsman for Public Services
  • These regulatory bodies serve to:
    • Improve public welfare:
      • Consumers
      • Environment
      • Planning
    • Correct Market Failure
  • The consequences of regulation for businesses include
    • Increased business costs
    • Increased prices passed on to consumer
    • Increased cost in government administration
    • Health and safety regulations
    • Protects consumers from exploitation
    • Prevent anti-competitive behaviour / growth of monopolies
    • Increases competition in the industry
    • Environmental protection
    • Employment Laws