Download File - The Business

Chapter 21 – Business and
the Government
Chapter Objectives
1. To identify and explain the reasons for Government
involvement in Business
2. To explain the Governments role in regulating Business in
Ireland
3. To understand how the Government affects the Labour
Force
4. To analyse the impact of The Economic variables on
Business
5. To evaluate semi-state companies and the process of
Privitisation
Reasons for Government
Involvement in Business
1.
2.
3.
4.
5.
Develop Natural Resources
Essential Services
Infrastructure
Business Development, Enterprise & Employment
Environment
The Government’s Role in creating a
Suitable Climate for Business
• 1)
Revenue and Expenditure Policies
• Current Spending/Sales and profits
•
•
•
•
The Government is the largest buyer of goods and services in the country.
eg.: Garda uniforms, school desks, civil servants salaries, pensions, etc
This increases sales and profits for businesses in the economy.
The money for current spending comes from taxes and borrowed money.
• Capital Spending
• The government spends money on capital projects such as new hospitals, schools,
roads, etc.
• This creates direct and indirect employment.
• These services are important for the development of society.
• An improved infrastructure makes it easier, quicker and cheaper for
businesspeople to transport goods around the country
• The money for capital spending is mostly borrowed.
• Grants
• The government provides a wide range of grants and
incentives to encourage business to set up (which
creates employment). These are non repayable sums
of money that a business gets if it meets certain
conditions. Grants make it cheaper to set up a
business.
• IDA Ireland attracts foreign firms to Ireland
• Enterprise Ireland provides assistance to
indigenous industries
• E.g.: for training, to buy machinery, etc
• 2)
Taxation Policies
• Corporation tax
• As of 2010, the rate of corporation tax is 12.5%. This means that businesses can
keep much of their profits. This encourages many businesses (especially foreign
businesses) to set up in Ireland. A large proportion of their profits can be used
for reinvestment and expansion.
• When businesses set up in Ireland, jobs are created (tax for the government,
more goods and services sold)
• PAYE
• By keeping income tax rates low (20% and 41% as of 2010), the government
increases workers’ disposable incomes (they take home more money).
• This benefits the business community as more money will be spent on goods
and services. This increases the sales and profits of businesses.
• Workers don’t demand higher wages, so there are few industrial relations
problems.
• VAT
• Low rates of VAT benefit businesses as customers have greater spending power.
3)
Government Economic Planning
•
Government economic planning reduces uncertainty for business.
•
Every 3 years social partners negotiate National Agreements. The social
partners are the government, trade unions, and Business interest
groups. (Eg Croke park deal)
•
Issues negotiated are wages, taxes and social welfare payments
•
These agreement help business in the following ways:
1.
Reasonable wages increases keep a business costs low. They can
continue to employ workers and charge a low price for their good.
This helps to control inflation, workers continue to be employed and
businesses can continue sell their goods and services at home and
abroad which increases sales and profits.
Industrial relations improve as wage increases are agreed in advance by
all parties.
2.
3.
4)
Government Departments and Agencies
1. IDA Ireland
•
•
This encourages foreign firms to set up in Ireland.
It offers grants and financial incentives to firms that set up here. This helps to create
jobs.
2. Enterprise Ireland.
•
•
•
Enterprise Ireland provides a number of supports for industries that are set up and run
by Irish people.
It gives grant to pay for machines, training, research, etc.
It gives advice, help with business plans, etc.
3. Labour Court and Labour Relations Commission
4. FAS
•
It trains workers in the skills they need for the area they wish to work in.
5. Failte Ireland
•
Failte Ireland provides advice to businesses involved in the tourism industry.
6. Udaras na Gaeltachta
•
•
Provides grants and advice to entrepreneurs setting up a business in Gaeltacht (Irish
speaking) areas of Ireland.
This helps create jobs
State Companies - Privatisation
• Semi owned companies are set up and run by the Government
for 3 main reasons:
• To provide essential services such as transport, energy etc
• To create Gov. revenue
• To create Jobs
• Privatisation - This is when the government sells a stateowned company to a private entrepreneur or business. There
are two ways that the government can privatise a state owned
business:
1. Share Issue Privatisation
• The company gets a quotation on the stock exchange, becomes a
public limited company (plc) and sells shares to the public.
• 2.Asset Sale Privatisation
• This means that the state-owned company can be sold to one
investor (this could be an individual person, a partnership or and
another business).
• The two most recent privatisations were Telecom Eireann (which
became Eircom Group plc) in 1999 and Aer Lingus (which became
Aer Lingus Group plc) in 2006.
Benefits of Privitisation
Drawbacks of Privitisatiion
Inefficiency of Gov.
management
Loss of Jobs
Lack of motivation of
employees – job for life
Loss of essential services
Poor quality services
Rise in prices
Capital Revenue for Gov.
Profits repatriated from
Ireland – Eircom owned by
Australian company
Can expand through private
investment
Government’s Role in Regulating
Business
1)
•
Consumers
The Consumer Information Act
•
•
•
The Sale of Goods and Services Act.
•
•
•
Business must give consumer’s truthful information about their goods and
prices.
The Director of Consumer affairs investigates complaints about false
information, promotes high standards in advertising and prosecutes
offenders.
Businesses must give refunds/repairs/replacements if the goods they sell
aren’t of merchantable quality (fit for their purpose or the same as sample
shown).
In addition to these, any firms involved in mergers or takeovers must get
approval from the competition authority before agreements are
reached.
Competition is better for consumer as it keeps prices down, as there are
more ideas and as goods are of better quality.
2) Employees
• Employee’s rights are protected through the labour
laws:
1. Industrial Relations Act 1990 (businesses can’t stop an
official strike),
2. Unfair Dismissals Act 1977 and 1993 (unfair dismissal not
allowed)
3. Employment Equality Act 1998 (businesses can’t
discriminate against workers).
•
In addition to these laws, the Health and Safety
Authority carries out inspections of workplaces to
ensure that there are safe and healthy working
conditions for employees.
3.Environment
• There are strict regulations in place for businesses in relation to
dumping, waste disposal, recycling, etc. These are enforced by the
Environmental Protection Agency (EPA).
• The EPA is the government watchdog that ensures firms are
complying with environmental laws. It can impose large fines on
offending firms.
4)
General Public
• Data Protection Act 1988 set up the Data Protection Agency.
• It outlines the rights of all people on whom electronic data is
held (data is got fairly, data is kept safe, data is used only for
the purpose given, etc).
• The Data Protection Commissioner enforces laws and
investigates complaints.
5)
Business
• The Companies Act 1963 – 1990. This regulates the formation and
operation of private and public companies
How the Government Affects the
Labour Force
1.Government as an Employer
• The government is the largest single employer by far. Some 350,000 people
work in government jobs in some capacity.
• Government employment falls into the following categories.
• Public sector workforce, such as civil servants, teachers, gardai and nurses. This
includes all those working in local authorities, county councils and corporations.
• Employment in state-sponsored bodies such as the ESB, An Post and Dublin Bus.
• There are also thousands of jobs created indirectly in areas such as catering,
cleaning and providing other services to the government.
• Contracting companies to build the LUAS, the Port Tunnel, the M50, etc helps
increase the number of jobs in the economy.
2 Government Spending
Increases government spending means that more salaries might be paid, more
school equipment will be purchased,
More workers will be needed to build roads, hospitals, etc. Government spending
can thus create and maintain employment.
3. Taxation
• Corporation Tax
• Low rates encourage further employment by companies
• PAYE/PRSI
• Low rates make it attractive to work and spend which creates
spin off jobs
4. Government Regulation
• These are the laws the government makes to protect the
interests of the worker.
• The Minimum Wage Act ensures that all workers earn a decent
basic wage.
• Other laws dealing with strikes, unfair dismissal and
discrimination also give workers rights and ensure they are not
treated badly by their bosses
5. National Agreements
• These are agreements between the government and the
social partners (unions, employer representatives,
farming associations, etc.) to keep wages increases small.
In return, the government will keep the rate of tax low.
• Small wage increases keep a businesses costs low and
their prices low. They are competitive and need workers
to make goods and services.
• These agreements help control inflation and help create
employment
6. Enterprise
• The government through the IDA, Enterprise Ireland, the
County Enterprise Boards, helps attracts investment to
Ireland.
• They give grants, advice and any help they can to
individuals and businesses setting up companies in
Ireland. This helps create employment in the country.
The economy has an impact on business through
items called Economic Variables.
• Economic variables are:
1.
2.
3.
4.
5.
Inflation
Interest rates
Unemployment
Taxation
Exchange rates
An increase or decrease in any of the above can have a
positive or negative impact on businesses
Impact of Economic variables on
Business
• 1. Inflation
• Inflation is an increase in the average price of goods and
services from one year to the next.
• It is measured by the Consumer Price Index (CPI).
• When the price rises, the value of money falls.
• Inflation has an impact on the following areas in business
1. Sales & Profits
2. Trade
3. Employment
4. Wages
5. Raw Materials
1. Sales & Profits
• If inflation is low, then prices for goods and services to
the Irish consumer are stable. This means that firms will
produce and sell more, which increases profits.
• High inflation rates will reduce consumer spending. They
can no longer afford to buy as many goods and services.
They switch from buying luxury goods to essential goods.
This will reduce firms’ sales and profits.
2 Trade:
• If inflation is low, Irish firms will be more competitive
when trading abroad, If inflation is high, then Irish firms
will be less competitive abroad. Exports become dearer.
The number of goods we sell abroad falls.
• People begin to find imports cheaper and we buy more
goods from companies in foreign countries and fewer
goods from firms in Ireland.
3. Raw Materials
• Low inflation rates mean Irish manufacturers will buy their raw
materials in Ireland rather than look abroad. Their costs are
low and profits stay high.
• High inflation will increase the cost of raw materials in Ireland.
This increases company’s expenses and lowers their profits.
Irish firms may be forced to buy raw materials from abroad
4. Wages
• High inflation may result in unions looking for wage increases.
Workers need more money to maintain standard of Living.
This may cause industrial action. Low inflation rates help to
maintain a stable industrial relations climate.
5. Employment
• Firms might not be selling as many goods at a higher price.
Firms cut back on production and therefore won’t need as
many workers.
2 – Interest Rates
• Interest Rates represent the cost of borrowing money or the
return on money saved.
• The European Central Bank (ECB) now sets interests rates for
countries that use the euro (in the Eurozone). Current record
low of 0.25%
• If interest rates rise, so does the amount that you have to pay
back to bank.
Sales & Profits - Low interest rates result in consumer borrowing
and spending, which leads to an increased demand for goods
and services. This in turn increases sales and profits of business.
High interest rates have the opposite effect and are bad for
business.
Business Costs - If the interest rates rise, the repayments on a
loan also increase. This increases a firms costs and their profits
fall.
• Employment - If interest rates rise resulting in higher costs
and reduced sales and profits, firms might have to let off
workers. If interest rates are low, people’s demand for goods
and services is high, businesses may expand and the business
costs will fall. Firms may then hire more workers.
• Expansion - When interest rates are low, firms borrow more
money to expand their business (the cost of repaying the
money is low). This results in them becoming more
competitive in domestic and international markets. High
interest rates have the opposite effect.
• Savings High interest rates have negative affect of businesses
because investors and consumers may put their money into
savings accounts in banks. This means they get a greater
return from saving; their money grows by a large amount.
Investors don’t then buy shares in companies.
3 - Unemployment
• Unemployment refers to the number of people who are
available and looking for work but who cannot get a job.
Sales and Profits - High unemployment means less money being
spent in the economy. People aren’t earning money so they
can’t afford to buy goods and services. This reduces sales and
profits.
Social Welfare - High unemployment means more social welfare
payments have to be paid out. This may mean that the
Government has to increase taxes to pay for these. The
government will have less money to spend on other aspects of
the economy such as health, education, the infrastructure, etc.
• Taxation - High unemployment also means less PAYE is
collected as fewer people are working. Also less VAT will be
collected as the unemployed have less money to spend. This
reduces the government’s income. It then has less money to
spend on other services in the country.
• Social Cost - High unemployment is linked to more crime in
society. This increases businesses costs and reduces their
profits. The government has to spend more money on law
enforcement which reduces spending in other areas and may
also mean an increase in the level of tax to be able to pay for
this.
4 – Taxation
Taxes have to be paid to the government. This is the main source
of income for the state.
The main business taxes are income tax, corporation tax, VAT,
motor tax and capital taxes. Lower Rates of Tax are Better for
Business
1. PAYE/PRSI/USC – These are income taxes paid by workers. If
these rates are kept low, then workers have more money to
spend, which results in firms selling more. They make more
profits. If rates are low, workers are happier to work and
industrial relations problems are less likely to occur.
If taxes are high, workers have less money to spend in shops.
Businesses sales and profits fall. There will be industrial relations
problems as workers will want higher wages.
2. Corporation Tax/Self Assessment Tax
This is the tax that companies/businesses pay on their profits. As
of 2012 corporation tax is 12.5%. Sole Trader up to 52%
Lower corporation tax results in firms having more retained
profits, which they can then plough back into the business to
finance expansion and help them become more competitive
with foreign firms.
Higher rates of corporation tax reduce a company’s profits. This
means that firms have less money to spend to expand, for
dividends for shareholders, etc.
3 VAT (9% tourism, 13.5% services 23% products)
Low VAT rates mean lower prices of products in shops. This
leads to increased sales and profits for companies and keeps
them competitive. People can also enjoy a higher standard of
living as they can afford more goods and services. Increased Vat
has the opposite effect.
5 Exchange Rates
The exchange rate for the euro tells you how much €1 is worth
in terms of another currency. It tells you how much of a foreign
currency you will get for €1. Exchange rates affect firms that
trade internationally (they are not relevant when trading with
other Eurozone countries). However, Ireland does a lot of trade
with the US and the UK, and as a result, exchange rates are very
important to us.
A strong euro/rising exchange rate/ euro increases in value
This can cause the price of Irish goods to increase in foreign
countries. When the price of Irish goods goes up, Irish firms sell
fewer goods abroad. Sales and profits fall. Example
An Irish business sells whiskey for €100 a bottle.
If the exchange rate is €1 = $1.50, the bottle of whiskey sells for
$150 in the U.S. If the exchange rate rises €1 = $2, then the
whiskey will sell for $200 a bottle. Consumers will stop buying
the Irish Whiskey
Foreign currency can be purchased more cheaply to pay for
imports. The cost of imported goods falls. Irish people buy
foreign goods. This leads to increased competition for Irish
firms. Their sales and profits fall.
• example
• Exchange rate is €1 = £1.50. An importer buys £150 worth of
goods from England for €100.
• If the exchange rate rises to €1 = £2. Then the importer’s €100
can buy them £200’s worth of goods.
Impact of Business on the Development of the Economy
Positive Effects
Negative Effects
Employment – reduces social welfare
Environmental Impacts
Spin off Business
Competition from multinationals
Entrepreneurial Culture
Social costs – long working hours
Infrastructure - development
Corporate dominance – Banking sector
Increase Tax revenue
Reduces anti social behaviour