Government Finances
By Shauna Hennessy.
The National Debt

This is the total amount /
cumulative of government
borrowing which is
outstanding
There are two elements to the
national debt.


Internal or
domestic
debt:
ie. Money
borrowed from
citizens and
institutions in
the country.


External or
foreign debt:
ie. Money
borrowed from
abroad
Reasons for the National Debt.

Productive investment:
Is spending on projects which become
self–financing. These eventually create
incomes which are then taxed to repay
the borrowings. Causes no problems for
the country in the long run.

Social investment:
Involves financing projects which can
never be self-financing, but are required
by society. Eg. Schools and hospitals.
Could benefit the economy in the long
run.

Current budget deficit:
Is borrowing to finance current
government expenditure. Eg. Civil
servants wages. This is undesirable
form of borrowing as it delays taxation
to a further date.
Problems associated with the
National Debt.




It is deferred taxation.
May result in rolled over debts ie. Replacing
one debt with another.
Lenders may be able to influence government
policy. Eg. The Troika dictate government
fiscal policy.
Changes in the rate of exchange could
increase the foreign debt itself and the cost
of borrowing it.


Payment of interest on the domestic
debt may result in an unequal
distribution of wealth in the ecomony.
There may be a large opportunity cost
to the borrowings.

The National Debt at
the end of April 2012
was € 129.6 billion.
The National Treasury
Management Agency (NTMA)

This act allows the government to
delegate the borrowing and debt
management functions of the Minister
for Finance to the NTMA. The actions
taken by the NTMA have the same
status in law as those undertaken by
the Minister for Finance
Functions of the NTMA.


The essential role is to manage the
national debt on behalf of the
government.
It manages the National Pension
Reserve Fund, Social Insurance Fund
and the Dormant Accounts Fund, as
well as borrowing on behalf of the
Housing Finance Agency.


The provision of financial advice,
funding and providing guarantees for all
major public investment projects is
carried out by the National
Development Finance Agency operating
through the NTMA.
NTMA oversees and manages The
National Asset Management Agency
(NAMA)
Gross Domestic Product (GDP)

The output produced by the factors of
production in the domestic economy
irrespective of whether the factors are
owned by Irish nationals or foreigners.
Measures the total income arising from
productive activity within the state.
General Government
Debt/GDP Ratio

This is the ratio of general government
debt to gross domestic product (GDP).
In other words: It reflects our debt as a
percentage of what we produce or earn
in a year.
Current Government
Expenditure

Government current expenditure in a
year is spending by the government on
the provision of goods and services
which will be totally consumed in that
year. Eg. Salaries of civil servants, social
welfare payments and interest
payments on the national debt.
Government Capital
Expenditure

Government capital expenditure is
spending by the government on assets
which will benefit the country for some
time into the future. Eg. Spending on
social housing, the building of new
government offices and the provision of
new schools.
(c) Ireland’s National Debt as a percentage of GDP is continuing to increase.
(i) Explain the underlined term.
(ii) What do the initials GDP stand for?
(iii) State one reason why Ireland’s National Debt has been increasing in recent times.
(iv) State and explain two economic disadvantages which may result from this
increase in Ireland’s National Debt. (30 marks)
(i) National Debt: the total amount / cumulative of government borrowing
which is outstanding.
3 marks 2 marks 1 mark
(ii) GDP: Gross Domestic Product 6 marks (2 + 2 + 2)
(iii) One reason why Ireland’s National Debt has been increasing in recent times:
1. Increased borrowing by the state for current budget deficit purposes.
(reduced tax revenues / increased current spending)
2. Increased borrowing by the state for infrastructural projects.
3. Increased interest rates on the loans.
4. Borrowing to finance the state’s bailout of the banks.
1 x 6 marks
(iv) Two economic disadvantages of the increase in Ireland’s National debt.
1. Opportunity costs involved.
With more funds being used to meet our annual interest repayments the government
has less funds available for other purposes.
2. Increased burden on taxpayers.
The increase will mean that the government will have to consider increasing future
taxes; introduce new household charges etc resulting in a lower standard of living
for citizens
3. Increased annual interest repayments.
An increasing national debt means that the annual cost of repaying our national debt
is rising.
4. Risk to provision of public services / cuts in government spending
Due to an increase in the national debt the government has cut spending on public
services, resulting in a deterioration in the provision of some services e.g. the
health service; education service
5. Reduced public confidence.
Citizens may lose confidence in the economy and reduce their spending. This may
further reduce economic growth.
6. Diminished international credit-rating.
The fact that Ireland is seen to have an increasing national debt means that our
credit-rating is deteriorating.
7. EU / IMF: conditions applied to Ireland.
The EU/IMF has attached conditions to our borrowing and so corrective action must
be taken in economic policy matters and agreed by the EU / IMF.
(a) Define each of the following terms:
(i) Current Budget Deficit;
(ii) Exchequer Borrowing Requirement;
(iii) Public Sector Borrowing Requirement;
(iv) National Debt.
(i) Current Budget Deficit
Current government expenditure exceeds current government revenue/
Current (Day-to-day revenue and expenditure).
(ii) Exchequer Borrowing Requirement
The amount borrowed by the government to fund a current budget deficit
and any borrowing for capital purposes/current budget deficit plus
borrowing for capital purposes.
(iii) Public Sector Borrowing Requirement
Exchequer borrowing requirement plus borrowing for semi-state/state
sponsored bodies and local authorities.
(iv) National Debt
This is the total amount /accumulated total of outstanding borrowing by
the government.
(b) Irelands National Debt grew from €36bn at end of 2006 to €50.4bn at
end of 2008.
(i) Outline the major reasons for the increase in National Debt.
1. Increased Current Budget deficits
The government have decided to operate a deficit budget in order to continue with
the provision
of public services / not to further reduce aggregate demand. Any borrowing to
finance this
current expenditure will increase the size of the deficit. This money must be
borrowed thereby
increasing the national debt.
2. Borrowing for capital purposes/Self-Liquidating Debt
The government continues to borrow to invest in infrastructure and other capital
projects, which
will eventually generate income and yield tax revenues to meet costs of repaying
the money
borrowed This also increases the national debt.
3. Social Investment
The government borrowed to invest in socially desirable projects which may not
yield any tax
revenue such as hospitals, schools, public amenities.
(ii) Describe the economic consequences (positive and negative)
of the increase in National Debt in recent years.
Positive Consequences
Negative Consequences
􀁸 Improved Public services.
If the increased debt is caused by an
increase in current borrowing the
government may continue to spend on
public services resulting in a continuation
of these services.
􀁸 Opportunity costs involved.
With more funds being used to meet our
annual interest repayments the government
has less funds available for other purposes.
􀁸 Increased spending on infrastructure.
If the increased debt is caused by an
increase in capital borrowing then there
may be greater spending on the state’s
infrastructure which may assist the future
growth of the economy.
􀁸 Future Economic Growth.
Increased National Debt may boost
aggregate demand and may provide
opportunities for further economic growth.
􀁸 Employment
Rising aggregate demand should lead to
increased demand for labour resulting in
lower unemployment.
􀁸 Self-Liquidating debt.
If the return on the borrowings is able to
meet the cost of repayments then the
borrowing has been self-liquidating.
􀁸 Increased burden on taxpayers.
The increase will mean that the
government will have to consider
increasing future taxes on future taxpayers.
􀁸 Increased annual interest repayments.
An increasing national debt means that the
annual cost of repaying our national debt
is rising.
􀁸 Diminished international credit-rating.
The fact that Ireland is seen to have an
increasing national debt may mean that our
credit-rating worsens.
􀁸 Outside Euro stability pact
requirements.
Ireland has difficulty in meeting the
conditions of the stability pact and hence
corrective action will need to be taken in
economic policy matters.