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Outline the possible economic effect which the increase in the VAT rate from 21% to 23% may have for each of the following: Cross-border shopping: Irish employment levels: Government Budget Deficit: - Leaving Cert Economics - Question 9 - 2012
Question 9
Outline the possible economic effect which the increase in the VAT rate from 21% to 23% may have for each of the following: Cross-border shopping: Irish employment... show full transcript
Worked Solution & Example Answer:Outline the possible economic effect which the increase in the VAT rate from 21% to 23% may have for each of the following: Cross-border shopping: Irish employment levels: Government Budget Deficit: - Leaving Cert Economics - Question 9 - 2012
Step 1
Cross-border shopping:
Answer
The increase in the VAT rate from 21% to 23% may encourage consumers to engage in cross-border shopping, particularly to Northern Ireland. This could lead to a reduction in purchases made within the country, ultimately resulting in a decrease in VAT revenue collected by the government. Consequently, higher prices domestically may drive shoppers to seek lower prices elsewhere.
Step 2
Irish employment levels:
Answer
If the increase in VAT leads to a decline in consumer demand, businesses may experience reduced sales. This, in turn, can result in layoffs or reduced hiring, thereby negatively impacting Irish employment levels. A fall in demand may compel companies to decrease their workforce, which would contribute to rising unemployment rates.
Step 3
Government Budget Deficit:
Answer
The rise in VAT will likely lead to an initial increase in revenue. However, if consumer spending decreases significantly due to the higher rates, the overall VAT collected may drop, exacerbating the government budget deficit. Additionally, higher unemployment due to decreased consumer demand can lead to increased welfare spending, further widening the deficit as the government struggles to balance its budget.