Exercises: Government revenue, expenditure and the budget balance

List three sources of Government revenue and three areas of Government expenditure in Ireland. Distinguish between current and capital expenditure.

A Government's current revenue in a year is €90 billion and its current expenditure is €85 billion.

1. a) Calculate the current budget balance and state whether it is a surplus or a deficit.

1. b) If capital expenditure is €12 billion and capital revenue is €2 billion, calculate the capital balance.

1. c) Calculate the overall budget balance.

Define the following terms: budget deficit, budget surplus, balanced budget, national debt. State the difference between a deficit and the national debt.

A Government's budget (€ million) is as follows. Income tax: 28,000; VAT: 17,000; corporation tax: 22,000; other current revenue: 14,000; social welfare spending: 25,000; health: 24,000; education: 12,000; other current expenditure: 18,000; debt interest: 4,000; capital spending: 11,000; capital receipts: 1,000.

1. a) Calculate total current revenue and total current expenditure (including debt interest).

1. b) Calculate the current balance and the capital balance.

1. c) Calculate the overall budget balance and say whether the Government needs to borrow.

In a given year, Ireland's national debt is €220 billion, GDP is €400 billion, and the budget deficit is €8 billion.

1. a) Calculate the debt-to-GDP ratio.

1. b) Assuming the deficit is financed by borrowing, calculate the new debt and, if GDP grows by 5% to €420 billion, the new debt-to-GDP ratio.

1. c) Explain why the ratio can fall even when the Government is running a deficit.

During a recession, tax revenue falls from €80 billion to €70 billion and welfare spending rises from €20 billion to €27 billion. Other spending stays at €60 billion.

1. a) Calculate the budget balance before and after.

1. b) Explain the role of automatic stabilisers in this change.

1. c) Distinguish between this "cyclical" deficit and a "structural" deficit.

The Government is running a budget deficit during a recession. Evaluate whether it should (i) cut spending, (ii) raise taxes or (iii) increase borrowing for investment in housing. Refer to the multiplier, the national debt, interest rates, and the experience of Ireland in 2008–2013 and the pandemic period.

Marginal propensity to consume is 0.75 and the Government increases capital spending by €2 billion, financed by borrowing.

1. a) Calculate the multiplier and the total rise in national income, assuming no taxes or imports.

1. b) If the marginal propensity to import is 0.15 and the marginal rate of tax is 0.10 (so the marginal propensity to withdraw is $1 - 0.75 + 0.10 + 0.15$), recalculate the multiplier and the total rise in income.

1. c) Explain why the multiplier is smaller in an open economy like Ireland, and discuss two limitations of using fiscal stimulus.

In a year of corporation tax windfalls, Ireland's Exchequer receives a large surplus, but a significant part of the revenue comes from a few multinational companies.

Discuss the case for and against (a) using the surplus to cut income tax, (b) investing it in a long-term savings fund, and (c) spending it on infrastructure such as housing and water. Refer to risks, intergenerational fairness and inflationary pressures.