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‘The Exchequer deficit in December 2012 was €14.89bn’ - Leaving Cert Economics - Question 4 - 2013
Question 4
‘The Exchequer deficit in December 2012 was €14.89bn’. (Department of Finance, January 2013) (a) (i) Discuss four possible economic consequences of the Government... show full transcript
Worked Solution & Example Answer:‘The Exchequer deficit in December 2012 was €14.89bn’ - Leaving Cert Economics - Question 4 - 2013
Step 1
Discuss four possible economic consequences of the Government Current Budget Deficit for the Irish economy.
Answer
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Increased National Debt: A persistent budget deficit can lead to an accumulation of national debt, as the government must borrow to fund its expenditures. This can increase the interest burden on taxpayers in the future.
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Inflationary Pressures: Funding the deficit through borrowing or printing money could lead to inflation. This devalues the currency and affects purchasing power, particularly impacting lower-income households.
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Reduced Public Services: Continuous deficits may result in cuts to public services as the government seeks to balance its books. This can lead to declining quality of essential services such as healthcare and education, further impacting economic growth.
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Impact on Investment: A high budget deficit may deter foreign investment, as it signals economic instability. Investors may fear that the government will increase taxes in the future to address the debt, leading to a less attractive investment environment.
Step 2
Explain how a government budget could be used to reduce income inequalities in an economy.
Answer
A government budget can address income inequalities through progressive taxation and targeted welfare programs.
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Progressive Taxation: The government can design tax systems where higher income brackets pay a larger percentage of their income in taxes. This helps redistribute wealth and fund essential services for lower-income individuals.
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Welfare Programs: The budget can allocate funds to social welfare programs, such as unemployment benefits, housing assistance, and healthcare, which directly support lower-income households. These programs enhance the living standards of disadvantaged groups and help bridge the income gap.
Step 3
State and explain two reasons why the government increased taxes on cigarettes and alcohol in its most recent budget.
Answer
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Public Health Improvement: Increasing taxes on cigarettes and alcohol is a strategy to discourage consumption of harmful products, ultimately aiming to reduce health-related issues linked to these substances. This can contribute to overall public health improvement and lower healthcare costs in the long run.
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Revenue Generation: Higher taxes on these goods can create additional revenue for the government, which can be reinvested in public services and health programs, providing a dual benefit of improving public health while also financially supporting government initiatives.
Step 4
Outline three economic impacts for the Irish economy of an increase in Motor Tax.
Answer
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Increased Revenue for Infrastructure: Raising Motor Tax can generate additional revenue, which can be used to improve road infrastructure, public transportation, and other essential services that benefit the economy.
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Consumer Behavior Change: Higher Motor Tax may incentivize individuals to use public transportation or alternative modes of transport, which could lead to reduced traffic congestion and lower emissions, ultimately benefiting the environment.
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Impact on Disposable Income: An increase in Motor Tax results in higher costs for vehicle owners, potentially reducing their disposable income. This may affect overall consumer spending in the economy, impacting businesses dependent on consumer expenditure.
Step 5
‘The Public Capital Programme must make a further contribution to budgetary consolidation’. As an Advisor to the Minister for Public Expenditure and Reform, discuss two economic arguments in favour of a reduction in capital expenditure in the Budget.
Answer
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Focus on Fiscal Responsibility: Reducing capital expenditure can aid in achieving fiscal consolidation by lowering the overall budget deficit. Prioritizing necessary expenditures ensures that long-term financial stability is maintained, which is crucial for economic growth.
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Reallocation of Resources: Cutting capital expenditure allows the government to reallocate resources towards more immediate social needs and essential services that directly impact citizens, such as healthcare and education, optimizing overall welfare while maintaining budgetary discipline.