Business, The Economy and the Government

Ms Marshall 6th year business

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CHAPTER 21 UNIT 6 .

Business, The Economy and the Government


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Definitions

The economy refers to all the producers, distributors and 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.


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Government’s Role in Creating a Suitable Climate for Business

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.


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Government’s Role in Creating a Suitable Climate for Business

Through a network of state agencies that give business advice, training and 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.


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Government’s Role in Controlling Business

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


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Government’s Role in Controlling Business

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.


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How Government affects the Labour Force

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.


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Affecting the Labour Force

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.


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Affecting the Labour force

Information Technology: Investment in I.T. especially in second and 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


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Economic Variables impacting on Business

• IMPACTS ON:• BUSINESS SALES• BUSINESS COSTS• BUSINESS CONFIDENCE

Business

Unemployment

Inflation

Interest Rates

Taxation

Exchange Rates

Government Grants & Support


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Inflation

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.


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Central Statistics Office

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%).


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Interest Rates

Interest rates are the cost of borrowing money expressed as a percentage of the 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.


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Unemployment

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

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.


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Exchange Rates

Tells you how €1 is worth in terms of another currency. ImpactWhen 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.


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Taxation

Taxation is the compulsory payment that must be made to the 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.


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Taxation

Use of tax system to create a positive climate for business PAYE – Reduction in PAYE rates should increase spending power and

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.


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Grants & Subsidies

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.


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Impact of Business on the Economy

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.


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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.


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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.


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National Wage Agreements

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 trade-off 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.


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Social Partnership

1987-1990 - Programme for National Recovery (PNR)1991-1994 - Programme for Economic and Social

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


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Towards 2016 - Collapse

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)


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Recent Exam Questions

2013 (2004)Outline the role of the Irish Government in encouraging and

in regulating business in Ireland. 20 marks.2012Outline how the Irish Government’s policy of increased

taxation and decreased public expenditure is impacting on business (20 marks).

2011Discuss 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).


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Recent Exam Questions

2009Discuss 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)

2006Discuss the impact of inflation and interest

rates on business in Ireland (20 marks).

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Business, The Economy and the Government

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