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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 l... 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 may encourage consumers to travel to Northern Ireland for shopping, where the VAT rate might be lower. This could lead to a reduction in overall VAT revenue collected by the government, as purchases made outside the jurisdiction would not contribute to the local tax base.
Step 2
Irish employment levels:
Answer
If the rise in VAT results in decreased consumer demand—due to higher prices—it could lead to employers reducing their workforce in response to lower sales volumes. Consequently, this may result in job losses and a negative impact on overall employment levels in Ireland.
Step 3
Government Budget Deficit:
Answer
An increase in VAT usually aims to enhance government revenues. However, if consumer spending decreases as a result, the overall VAT revenue could fall, worsening the budget deficit. Additionally, increased unemployment may require higher social welfare spending, further putting pressure on the government budget.