Download Business, The Economy and the Government

Business, The Economy and the
Government
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CHAPTER 21 UNIT 6.
Ms Marshall 6th year business
Definitions
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 The economy refers to all the producers, distributors and
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consumers of goods and services in the country.
Economic growth refers to any increases in the financial
value of all the goods and services provided from a
country’s resources.
An economic boom, e.g. Celtic Tiger, occurs when the
level of economic activity is increasing very quickly.
An economic recession occurs when economic growth
ceases or goes into reverse – the economy starts
shrinking.
A depression is a severe and prolonged period of
economic decline.
Ms Marshall 6th year business
Government’s Role in Creating a Suitable Climate
for Business
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 Irish Government role in encouraging business:
 Through decreases in taxation business activity
is encouraged. A reduction in PAYE rates would
increase spending power and stimulate demand for
goods and services. A reduction in Corporation Tax may
improve company profits, and the ability to fund future
growth of the business. A reduction in VAT reduces cost
of goods and services, stimulates demand and makes the
Irish economy more competitive.
 Through increases in State expenditure
business activity is encouraged. The government
could increase capital expenditure on infrastructure,
schools, hospitals etc. This will create jobs and consumer
demand.
Ms Marshall 6th year business
Government’s Role in Creating a Suitable Climate
for Business
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 Through a network of state agencies that give business advice, training and
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guidance, mentoring services and grant aid to facilitate growth and
expansion.
Examples include:
Fáilte Ireland (developing and promoting tourism)
Enterprise Ireland (grant aid to indigenous industry, e.g. R&D and
marketing)
FÁS to be replaced by SOLAS (provides industrial training for workers)
IDA Ireland (provides grant aid to attract FDI)
County Enterprise Boards to encourage entrepreneurship.
Through government planning. Forward planning reduces
uncertainty for business. National wage agreements involving the social
partners allow businesses to predict their future wage costs, as well as
decreasing significantly the risk of industrial relations problems during the
length of the agreement.
Ms Marshall 6th year business
Government’s Role in Controlling Business
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 Government role in regulating business:
 The government regulates business in order to protect
the environment. It established the EPA
(Environmental Protection Agency) whose role it is to
protects the environment through its licensing,
enforcement and monitoring of business activities.
 The government regulates business in order to protect
the consumer. The Sale of Goods and Supply of
Services act 1980 gave rights to the consumer in relation
to goods or services bought or hired. The Consumer
Protection Act 2007 established the NCA which
investigates and prosecutes unfair trading practices.
Regulates
= laws
Ms Marshall 6th year business
Government’s Role in Controlling Business
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 The government regulates business in order to protect
the employees in the workplace with legislation on
unfair dismissal, equality and industrial relations. It
established the Health and Safety Authority which works
to create a national culture where all stakeholders
commit to a safe and healthy workplace.
 The government regulates business in order to protect
the general public against misuse of information
in manual or electronic format through the Data
Protection Act of 2003. Data protection is the means by
which the privacy rights of individuals are safeguarded in
relation to the processing of their personal data.
Ms Marshall 6th year business
How Government affects the Labour Force
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 As an Employer:
 The Irish government is the single largest employer, employing 250,000
public servant workers (Civil Service, State Bodies). The Haddington road
agreement has outlined how most of the public sector pay and conditions
will be affected over the next three years. The ASTI are the only ones who
have not yet signed up to it.
 Taxation policies/Fiscal Policies: low rates of income tax will result in
consumers having more disposable income therefore spending more money
on goods and services. This creates a demand for these goods and services
leading to increased production and job creation.
 VAT & Corporation tax: The government are adamant that corporation
tax will remain at 12.5%,this should lead to more foreign companies
locating/remaining in Ireland and offering employment. It also encourages
Irish entrepreneurs to set up in Ireland and create jobs. VAT is currently
very high at 23% which is a disincentive to businesses. However, it is lower
for those in the tourism sector as this is seen as an area for growth.
Ms Marshall 6th year business
Affecting the Labour Force
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 Infrastructure: Government investment in the country’s infrastructure (building
of new motorways, schools, hospitals etc.) leads to an increase in the number of
workers employed in the construction industry. It encourages other businesses to
operate here in Ireland and thereby increases employment. Major capital projects
have been shelved during the recession, e.g. Metro North.
 National agreements: brings stability to business planning as business costs such
as wages can be accurately forecasted/predicted. Towards 2016 collapsed.
Agreements such as Croke Park and Haddington Road bring some certainty.
 Increased spending on education/ training : Government investments in
education of the Irish labour force through training schemes, short term courses,
and upskilling programmes with Solas, will result in a more skilled, educated and
employable work force. Even during the recession, the Minister for Education has
ambitious plans to improve literacy and numeracy.
 Grants and incentives to foreign companies to locate in Ireland will result
in foreign industry providing employment to the Irish labour force. Employment
Subsidy Scheme designed to encourage companies to retain staff during the
downturn in the economy. Firms that received the subsidy were required to commit
to retaining a certain number of staff.
Ms Marshall 6th year business
Affecting the Labour force
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 Information Technology: Investment in I.T. especially in second and
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third level institutions has resulted in the Irish labour force having greater
skills which may be required in the high tech firms (‘smart economy’).
Utility charges: Electricity costs are the second highest in Europe/local
authority charges increased/new carbon tax adding to energy costs. These
all affect business costs and therefore may result in reduction of the labour
force.
Legislation/Regulation:
Industrial Relations legislation provides acceptable procedures for
resolving industrial disputes.
Minimum wage/labour costs: Minimum wage rates have gone up 55%
since introduced (€8.65). This may discourage firms from employing
additional workers. Other legislation which impacts on the labour force
includes Unfair Dismissals Act, Employment Equality Act etc.
Entrepreneurship:
The Irish Government encourages the development of enterprise though
supports provided by CEBs, Business Innovation Centres etc
Ms Marshall 6th year business
Economic Variables impacting on Business
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Government
Grants &
Support
Taxation
Exchange
Rates
Ms Marshall 6th year business
• IMPACTS ON:
• BUSINESS SALES
• BUSINESS COSTS
• BUSINESS CONFIDENCE
Business
Unemployment
Inflation
Interest Rates
Inflation
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 Inflation is the annual percentage increase in the level of prices in the economy. It is
measured using the Consumer Price Index.
 The Consumer Price Index is designed to measure the change in the average level of
prices(inclusive of all indirect taxes) paid for consumer goods and services
 Consumer Price Index (CPI): Over 50,000 prices are collected for a representative
basket consisting of 616 headings which cover over 1,000 different items in a fixed
panel of retail and service outlets throughout the country during the week
containing the second Tuesday of each month.
How does inflation impact on Business?
Sales: High inflation makes consumers shop around for the best deal. This can result in
lower sales if you are not competitive.
Costs: High inflation increases the costs of doing business in Ireland and leads to
employees looking for a cost-of-living wage increase. This increases the cost of
running a business in Ireland and can lead to bad industrial relations.
The cost of the business’s materials increases. This increases costs and lowers profits.
Ms Marshall 6th year business
Central Statistics Office
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 Prices on average, as measured by the CPI, were
0.1% higher in October compared with October 2012.
 The most notable changes in the year were increases
in Alcoholic Beverages
&Tobacco (+5.3%), Education (+4.6%)
and Restaurants & Hotels (+1.8%). There were
decreases in Clothing & Footwear (4.1%),Furnishings, Household Equipment & Routine
Household Maintenance(-4.0%), Communications (3.8%) and Transport (-2.2%).
Ms Marshall 6th year business
Interest Rates
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 Interest rates are the cost of borrowing money expressed as a percentage of the
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amount borrowed.
ECB rate 0.25%. Tracker mortgages cant go more than 1% above of the ECB rate.
Variable mortgages take into account the ECB rate and the Banks Profit Margin.
Ireland lost its right to set its own interest rates when we joined the Euro. Many see
this as a big disadvantage in times of economic downturn as it means we can not
adjust our rate to encourage borrowing. During the Celtic Tiger too-high interest
rates further inflated our housing crises and were a disincentive to savings which
overheated the economy as people were spending most of their income.
Sales: if the interest rate is high less customers update expensive items because
finance of the item is too expensive.
Costs: if the interest rate is high it is expensive to borrow for expansion as
businesses will not be able to make the repayments.
Confidence: High interest rates lead to business people investing in deposit accounts
instead of new ventures, this decreases business confidence.
Higher mortgage repayments leave consumers with less income to spend. This leads
to lower sales and profits. In the worst case scenario high mortgage repayments
could lead to repossession of property.
Ms Marshall 6th year business
Unemployment
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 The percentage of the labour force who do not have a job.
 The Live Register is not designed to measure unemployment. It includes part-time
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workers (those who work up to three days a week), seasonal and casual workers
entitled to Jobseeker’s Benefit or Allowance. It currently stands at 409,900.
Unemployment is measured by the Quarterly National Household Survey and the
latest estimated unemployment rate is 13.2%
Impact:
1. The government increases tax to pay for extra social welfare. Higher taxes taken
from business profits reduce the profits left for the business owners to invest.
2. Unemployed people have less disposable income. More unemployed people
means less money spent in shops, which lowers businesses’ profits.
3. Higher unemployment makes it easier for businesses to find employees to fill
vacancies. It can also lead to lower wages because some people will be willing to
work for low wages rather than stay on the dole.
Higher unemployment may lead to more crime in society. This increases a
business’s insurance costs and decreases its profits.
High unemployment leads to high emigration. This results in a brain drain, with
many highly educated young people leaving.
Ms Marshall 6th year business
Exchange Rates
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 Tells you how €1 is worth in terms of another currency.
 Impact
 When the euro increases in value, the prices of Irish
products sold in non euro countries increases. This
means that Irish exporters will sell fewer products in non
euro countries. Irish exporters’ sales and profits fall.
 When the euro increases in value, the price of foreign
goods sold in Ireland falls. This means Irish people buy
more foreign goods. This leads to lower sales and profits
for Irish businesses.
 When the euro increases in value, the price of foreign
goods in Ireland falls. This means the businesses pay less
for imports. This lowers the cost for Irish businesses.
Ms Marshall 6th year business
Taxation
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 Taxation is the compulsory payment that must be made to the
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government in return for the benefits of living or doing
business in Ireland.
When taxes are increasing, this is bad for business because:
Businesses have to give more of their profits away to the
government and so have less left for themselves or for
expansion.
If PAYE or PRSI or USC increase, employees have less
disposable income to spend in shops. Businesses’ sales and
profits fall as a result.
Higher VAT makes goods and services more expensive.
Consumers can’t afford the higher prices and so buy less.
Sales and profits fall.
Ms Marshall 6th year business
Taxation
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 Use of tax system to create a positive climate for business
 PAYE – Reduction in PAYE rates should increase spending power and
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stimulate demand for goods and services.
PAYE - An increase in PAYE rates could provide opportunities to reduce
rates/water charges and fund business supports e.g. grants or reduction in
PRSI (cost of employment)
Corporation Tax – A reduction in Corporation Tax may improve company
profits, and the ability to fund future growth of the business.
Stamp Duty – Changes may re-stimulate demand in the construction sector
Tax Credits – An increase in tax credits may stimulate demand for goods
and services
VAT/Excise Duties – Reduction in VAT, reduces cost of goods and services,
stimulates demand – makes Irish economy more competitive
Tax Incentive Schemes – Promote the establishment and expansion of
business.
Ms Marshall 6th year business
Grants & Subsidies
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 Grants are non repayable amounts of finance provided by
the government and the EU to a business to promote
enterprise and expansion.
 Grants are often used to get businesses to locate in a
certain area that needs employment. E.g. Gaeltacht
areas.
 Subsidies: a price support given by the government to a
business to allow it to sell its products at a price below
the market price. They are designed to increase the
production of goods and services deemed to be essential.
E.g. subsidising the public transport system.
Ms Marshall 6th year business
Impact of Business on the Economy
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 Positive Impact:
 Create jobs: this leads to lower unemployment. Intel
alone employ thousands of people in their Irish factories.
Lower unemployment means the government spends less
on welfare and receives more taxes from all those at
work. This gives the government a lot more money to
spend on improving the economy by increasing grants,
improving roads and lowering taxes.
 Businesses buy raw materials and services from other
businesses such as suppliers and service providers. This
leads to the creation of more businesses to supply them
and hence more wealth in the economy. For example,
Ribena buys a huge amount of fruit from Irish farmers.
Ms Marshall 6th year business
Impact of Business on the Economy
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 Positive Impact:
 Competition between businesses forces them to keep
prices low to compete. Low prices lead to low
inflation in the economy. E.g. Dunnes and Tesco
trying to compete with Lidl and Aldi.
 Businesses create wealth for the entrepreneur and
the employees. They spend their wealth buying from
other businesses. This leads to more businesses and
more wealth in the economy.
Ms Marshall 6th year business
Impact of Business on the Economy
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 Negative impact:
 Competition can lead to firms closing down. Many Irish factories
have closed because they cannot compete with low wage economies.
This causes an increase in unemployment, reducing tax intake and
increasing the amount of social welfare needed. E.g. Dell moved to
Poland.
 To increase profits, businesses may increase prices. This will lead to
an increase in inflation, which is harmful to the economy.
 Businesses may harm the environment, e.g. by dumping waste
instead of paying to have it safely disposed of. This will harm the
food and tourism sectors because Ireland has built a reputation for
its green image.
 Business success may lead to pressure on infrastructure, e.g. traffic
jams. This slows down the transporting of goods and increases the
cost of doing business.
Ms Marshall 6th year business
National Wage Agreements
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 Social partnership is the term used for the national pay agreements reached
in Ireland.
 The process was initiated in 1987, following a period of high inflation and weak
economic growth which led to increased emigration and unsustainable government
borrowing and national debt. Strike and wage moderation have been important
outcomes of the agreements and this has been seen as a significant contributor to
the Celtic Tiger. Prior to this agreement bargaining had been on a local level since
1981; in the previous decade national employer-union deals and 'National
Understandings' were the norm but came under increased pressure.
 The corporatist 'social partnership' agreements are agreed between the
Government, main employer groups Irish Business and Employers
Confederation (IBEC) and the Construction Industry Federation) and the trade
unions (members of the Irish Congress of Trades Unions); since 1997
voluntary/community organisations have taken part in the general policy
discussions but not in the key wage bargaining element. The core has been a tradeoff of modest wage increases in exchange for a lighter income tax burden. There are
also sectoral reforms negotiated and public service pay reviews 'benchmarking' with
private sector pay scales.
Ms Marshall 6th year business
Social Partnership
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 1987-1990 - Programme for National Recovery (PNR)
 1991-1994 - Programme for Economic and Social
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Progress (PESP)
1994-1996 - Programme for Competitiveness and
Work (PCW)
1997-2000 - Partnership 2000, for Inclusion,
Employment and Competitiveness (P2000)
2000-2003 - Programme for Prosperity and
Fairness (PPF)
2003-2005 - Sustaining Progress (SP)
2005 + - Towards 2016
Ms Marshall 6th year business
Towards 2016 - Collapse
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 The second stage of Towards 2016 effectively collapsed at the end of
2009 when the Government imposed income cuts of between 5%
and 8% for about 315,000 public servants in its Budget. At the end
of December 2009 the main employer body, IBEC, formally
withdrew from the terms of the agreement having failed to agree a
suspension of the pay terms with ICTU. In March 2010, under the
banner of "social dialogue", the ICTU public service unions and the
Government negotiated a three-year pay-freeze and the potential
claw-back of some of the imposed pay-cuts in return for verified
efficiencies and increased flexible working rosters and mobility of
up to 45 km between workplaces. Unlike earlier "social partnership"
procedures the main private sector employer bodies were not
involved and the negotiations were facilitated by the state Labour
Relations Commission (LRC).
 (The Croke Park Deal)
Ms Marshall 6th year business
Recent Exam Questions
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 2013 (2004)
 Outline the role of the Irish Government in encouraging and
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in regulating business in Ireland. 20 marks.
2012
Outline how the Irish Government’s policy of increased
taxation and decreased public expenditure is impacting on
business (20 marks).
2011
Discuss the effects on increasing unemployment on the Irish
economy. (20 marks).
2010
Discuss the different ways in which the Irish Government
affects the labour force in Ireland (20 marks).
Ms Marshall 6th year business
Recent Exam Questions
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 2009
 Discuss how the Irish Government could use the tax
system to create a positive climate for business in
Ireland. Use examples to illustrate your answer. (20
marks)
 2006
 Discuss the impact of inflation and interest rates on
business in Ireland (20 marks).
Ms Marshall 6th year business