Transcript THE ROLE OF THE GOVERNMENT IN THE ECONOMY

Role of the Government in
the Economy
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Instruments of Government Economic Policy
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Fiscal policy
Monetary policy
Direct intervention
Price and incomes policy
Economic planning
Exchange rate policy
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Summary of Government Economic Aims
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Full employment
Control inflation
Equilibrium on the balance of payments
Control government finances
Just social policy
Provision of infrastructure
Achievement of economic growth
Regional development
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Some Conflicts Between Government Economic Aims
1. Full employment versus control of inflation
To achieve full employment the government increases
expenditure and lowers interest rates. These two actions
would actually fuel inflation. Similarly, to control inflation the
government would increase interest rates, decrease
expenditure and increase direct taxes. These actions would
be counter-productive to the creation of employment.
2. Control of government finances versus full employment
As an aid to employment the government usually undertakes
measures that necessitate increased expenditure without
increasing taxes. These actions have a detrimental affect on
government finances.
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Some Conflicts Between Government Economic Aims
3. Full employment versus balance of payments equilibrium
The creation of employment results in the increasing of the
general level of income in the economy. As Ireland has a high
MPM, this will automatically cause an increase in imports, which
could result in a disimprovement in our balance of trade.
4. Provision of infrastructure versus control of government
finances
Expenditure on the infrastructure is normally financed – apart
from EU funds – by government borrowings. This expenditure
does not always bring a direct or immediate return to the
government, thus increasing the burden of the national debt,
requiring extra servicing of the debt and thereby increasing
current expenditure.
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Some Conflicts Between Government Economic Aims
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Economic growth versus just social policy
To achieve a just social policy the government may impose high
taxes on the high-income earners and transfer this income to
those on social welfare. These high-income earners are usually
the wealth creators in the economy. These high taxes could
force these people out of the economy and so seriously stunt
the effort to achieve economic growth. Some people would also
argue that the welfare payments might act as a disincentive to
get people back onto the workforce.
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Privatisation
Privatisation is the sale of government owned
companies to the private sector.
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Advantages of Privatisation
1. The sale of these companies can raise money for the government, which
can be used to reduce the national debt.
2. Many of these semi-state companies are loss-making enterprises supported
from taxation. Their sale would reduce the need for taxation or the money
could be spent providing other services.
3. Some semi-state companies’ activities are restricted by the Act which set
them up. This restricts their expansion and thus their profitability. By
selling the semi-state company a new set of Memorandum of Association
and Articles of Association can be drawn up allowing the business to
expand.
4. Privatisation gives Irish people the opportunity to invest in major Irish
companies. The government can discriminate in favour of investors seeking
small numbers of shares and against large institutional investors.
5. Employees are often given shares in the company being privatised. This
affords them a chance to earn capital gains on the stock exchange, if the
company is successful.
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Disadvantages of Privatisation
1. The government will succeed only in selling profitable or potentially
profitable semi-state bodies, which will leave it supporting the lossmaking bodies.
2. The new companies could fall into foreign control and decisions
could be made that are not in the national interest.
3. The new company could discontinue the provision of services that
the semi-state body deemed socially desirable, but which are
unprofitable.
4. The privatised company may reduce staffing levels, thus creating
more unemployment and causing an extra burden on government
resource (in the form of more unemployment benefits).
5. If the new privatised firm is still a monopoly, it could restrict
production to increase prices to the consumers.
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The National Development Plan 2007–2013
The National Development Plan (NDP) has identified five
prioritised areas of investment during the life of the plan.
1. Economic infrastructure
Aims to invest in:
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Transport – €32,914m to be invested
Energy – €8,526m
Environmental Services – €5,772m
Communications and Broadband Programme – €435m
Government Buildings Infrastructure – €1,413m
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The National Development Plan 2007–2013
2. Enterprise, science and innovation (about €20
billion)
Aims to:
– attract high-quality foreign direct investment
– develop our own indigenous (native) companies
– establish Irish companies capable of becoming world
leaders in given industries
– modernise the agriculture sector, develop the
tourism industry and support the rural economy.
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The National Development Plan 2007–2013
3. Human capital (total €25,796m)
Aims to:
– Ensure access for everybody in our society to the
highest standards of education.
– Meet the labour skills requirement of the future.
– Develop the third level education sector.
– Particular attention to be given to post-graduate
studies.
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The National Development Plan 2007–2013
4. Social infrastructure (Total €33,612m)
Aims to:
– Have a fair and equitable redistribution of the wealth
created by our economic success.
– Invest €21 billion in housing to include the provision
of 100,000 new social and affordable units.
– Invest €5 billion in health infrastructure.
– Invest €2.3 billion to modernised prison
infrastructure, provide a new criminal courts
complex and improve Garda infrastructure.
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The National Development Plan 2007–2013
5. Social inclusion (Total €49,636m)
Aims to:
– Invest €12 billion on a Children’s Programmes dealing with
childcare services, child protection and recreational facilities.
– Invest over €4 billion on Working Age Education Support
programmes.
– Invest €9.7 billion to help older people live independently at
home and to provide quality residential care facilities for those
who can no longer do so.
– Invest €19 billion on programmes and services for people with
disabilities.
– Provide extra funding for the RAPID (Revitalising Areas by
Planning, Investment and Development) programme.
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Transport 21
Transport 21 is a government capital investment programme of €34 billion over
the period 2006 to 2015.
Its stated aim is to provide finance to:
 Complete the development of the inter-urban motorway network by 2010.
 Bring about improvements in the rest of the national road network,
particularly in the regions identified in the National Spatial Strategy.
 Complete the safety programme on the national rail network.
 Bring about a radical improvement in the level and quality of rail services.
 Transform the public transport system in the Greater Dublin Area;
 Develop the public transport system in the provincial cities;
 Improve regional and rural public transport services;
 Fund essential capital works at the six existing regional airports;
 Improve accessibility to public transport for people with mobility, sensory
and cognitive impairments.
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Understanding Economics, © Richard Delaney, 2008, Edco
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