Chapter 21 – Business and the Government. Chapter Objectives 1.To identify and explain the reasons for Government involvement in Business 2.To explain.

Chapter 21 – Business and the Government

Chapter Objectives1. To identify and explain the reasons for Government

involvement in Business2. To explain the Governments role in regulating Business in

Ireland3. To understand how the Government affects the Labour

Force4. To analyse the impact of The Economic variables on

Business5. To evaluate semi-state companies and the process of

Privitisation

Reasons for Government Involvement in Business1. Develop Natural Resources2. Essential Services3. Infrastructure4. Business Development, Enterprise & Employment5. Environment

The Government’s Role in creating a Suitable Climate for Business• 1) Revenue and Expenditure Policies• Current Spending/Sales and profits• The Government is the largest buyer of goods and services in the country. • eg.: Garda uniforms, school desks, civil servants salaries, pensions, etc• This increases sales and profits for businesses in the economy.• The money for current spending comes from taxes and borrowed money.

• Capital Spending• The government spends money on capital projects such as new hospitals, schools,

roads, etc. • This creates direct and indirect employment. • These services are important for the development of society.• An improved infrastructure makes it easier, quicker and cheaper for

businesspeople to transport goods around the country• The money for capital spending is mostly borrowed.

• Grants• The government provides a wide range of grants and

incentives to encourage business to set up (which creates employment). These are non repayable sums of money that a business gets if it meets certain conditions. Grants make it cheaper to set up a business.

• IDA Ireland attracts foreign firms to Ireland• Enterprise Ireland provides assistance to

indigenous industries• E.g.: for training, to buy machinery, etc

• 2) Taxation Policies

• Corporation tax• As of 2010, the rate of corporation tax is 12.5%. This means that businesses can

keep much of their profits. This encourages many businesses (especially foreign businesses) to set up in Ireland. A large proportion of their profits can be used for reinvestment and expansion.

• When businesses set up in Ireland, jobs are created (tax for the government, more goods and services sold)

• PAYE• By keeping income tax rates low (20% and 41% as of 2010), the government

increases workers’ disposable incomes (they take home more money). • This benefits the business community as more money will be spent on goods

and services. This increases the sales and profits of businesses.• Workers don’t demand higher wages, so there are few industrial relations

problems.

• VAT • Low rates of VAT benefit businesses as customers have greater spending

power.

3) Government Economic Planning• Government economic planning reduces uncertainty for business.

• Every 3 years social partners negotiate National Agreements. The social partners are the government, trade unions, and Business interest groups. (Eg Croke park deal)

• Issues negotiated are wages, taxes and social welfare payments

• These agreement help business in the following ways:

1. Reasonable wages increases keep a business costs low. They can continue to employ workers and charge a low price for their good.

2. This helps to control inflation, workers continue to be employed and businesses can continue sell their goods and services at home and abroad which increases sales and profits.

3. Industrial relations improve as wage increases are agreed in advance by all parties.

4) Government Departments and Agencies1. IDA Ireland

• This encourages foreign firms to set up in Ireland. • It offers grants and financial incentives to firms that set up here. This helps to create

jobs.2. Enterprise Ireland.

• Enterprise Ireland provides a number of supports for industries that are set up and run by Irish people.

• It gives grant to pay for machines, training, research, etc.• It gives advice, help with business plans, etc.

3. Labour Court and Labour Relations Commission4. FAS

• It trains workers in the skills they need for the area they wish to work in.5. Failte Ireland

• Failte Ireland provides advice to businesses involved in the tourism industry. 6. Udaras na Gaeltachta

• Provides grants and advice to entrepreneurs setting up a business in Gaeltacht (Irish speaking) areas of Ireland.

• This helps create jobs

State Companies - Privatisation• Semi owned companies are set up and run by the Government

for 3 main reasons:• To provide essential services such as transport, energy etc• To create Gov. revenue• To create Jobs

• Privatisation - This is when the government sells a state-owned company to a private entrepreneur or business. There are two ways that the government can privatise a state owned business:1. Share Issue Privatisation• The company gets a quotation on the stock exchange, becomes a

public limited company (plc) and sells shares to the public.

• 2.Asset Sale Privatisation• This means that the state-owned company can be sold to one

investor (this could be an individual person, a partnership or and another business).

• The two most recent privatisations were Telecom Eireann (which became Eircom Group plc) in 1999 and Aer Lingus (which became Aer Lingus Group plc) in 2006.

Benefits of Privitisation Drawbacks of Privitisatiion

Inefficiency of Gov. management

Loss of Jobs

Lack of motivation of employees – job for life

Loss of essential services

Poor quality services Rise in prices

Capital Revenue for Gov. Profits repatriated from Ireland – Eircom owned by Australian company

Can expand through private investment

Government’s Role in Regulating Business1) Consumers• The Consumer Information Act

• Business must give consumer’s truthful information about their goods and prices.

• The Director of Consumer affairs investigates complaints about false information, promotes high standards in advertising and prosecutes offenders.

• The Sale of Goods and Services Act.• Businesses must give refunds/repairs/replacements if the goods they sell

aren’t of merchantable quality (fit for their purpose or the same as sample shown).

• In addition to these, any firms involved in mergers or takeovers must get approval from the competition authority before agreements are reached.

• Competition is better for consumer as it keeps prices down, as there are more ideas and as goods are of better quality.

2) Employees• Employee’s rights are protected through the labour

laws: 1. Industrial Relations Act 1990 (businesses can’t stop an

official strike), 2. Unfair Dismissals Act 1977 and 1993 (unfair dismissal not

allowed) 3. Employment Equality Act 1998 (businesses can’t

discriminate against workers).

• In addition to these laws, the Health and Safety Authority carries out inspections of workplaces to ensure that there are safe and healthy working conditions for employees.

3.Environment• There are strict regulations in place for businesses in relation to

dumping, waste disposal, recycling, etc. These are enforced by the Environmental Protection Agency (EPA).

• The EPA is the government watchdog that ensures firms are complying with environmental laws. It can impose large fines on offending firms.

4) General Public• Data Protection Act 1988 set up the Data Protection Agency. • It outlines the rights of all people on whom electronic data is

held (data is got fairly, data is kept safe, data is used only for the purpose given, etc). • The Data Protection Commissioner enforces laws and

investigates complaints.5) Business • The Companies Act 1963 – 1990. This regulates the formation and

operation of private and public companies

How the Government Affects the Labour Force

1.Government as an Employer

• The government is the largest single employer by far. Some 350,000 people work in government jobs in some capacity.

• Government employment falls into the following categories.• Public sector workforce, such as civil servants, teachers, gardai and nurses. This

includes all those working in local authorities, county councils and corporations.• Employment in state-sponsored bodies such as the ESB, An Post and Dublin Bus.• There are also thousands of jobs created indirectly in areas such as catering,

cleaning and providing other services to the government. • Contracting companies to build the LUAS, the Port Tunnel, the M50, etc helps

increase the number of jobs in the economy.

2 Government SpendingIncreases government spending means that more salaries might be paid, more

school equipment will be purchased, More workers will be needed to build roads, hospitals, etc. Government spending

can thus create and maintain employment.

3. Taxation• Corporation Tax• Low rates encourage further employment by companies

• PAYE/PRSI• Low rates make it attractive to work and spend which creates

spin off jobs

4. Government Regulation• These are the laws the government makes to protect the

interests of the worker.• The Minimum Wage Act ensures that all workers earn a decent

basic wage. • Other laws dealing with strikes, unfair dismissal and

discrimination also give workers rights and ensure they are not treated badly by their bosses

5. National Agreements• These are agreements between the government and the

social partners (unions, employer representatives, farming associations, etc.) to keep wages increases small. In return, the government will keep the rate of tax low.• Small wage increases keep a businesses costs low and

their prices low. They are competitive and need workers to make goods and services.• These agreements help control inflation and help create

employment

6. Enterprise• The government through the IDA, Enterprise Ireland, the

County Enterprise Boards, helps attracts investment to Ireland. • They give grants, advice and any help they can to

individuals and businesses setting up companies in Ireland. This helps create employment in the country.

The economy has an impact on business through items called Economic Variables.

• Economic variables are:1. Inflation2. Interest rates3. Unemployment4. Taxation5. Exchange rates

An increase or decrease in any of the above can have a positive or negative impact on businesses

Impact of Economic variables on Business• 1. Inflation• Inflation is an increase in the average price of goods and

services from one year to the next.• It is measured by the Consumer Price Index (CPI).• When the price rises, the value of money falls.• Inflation has an impact on the following areas in business1.Sales & Profits2.Trade3.Employment 4.Wages5.Raw Materials

1. Sales & Profits

• If inflation is low, then prices for goods and services to the Irish consumer are stable. This means that firms will produce and sell more, which increases profits. • High inflation rates will reduce consumer spending. They

can no longer afford to buy as many goods and services. They switch from buying luxury goods to essential goods. This will reduce firms’ sales and profits.

2 Trade:• If inflation is low, Irish firms will be more competitive

when trading abroad, If inflation is high, then Irish firms will be less competitive abroad. Exports become dearer. The number of goods we sell abroad falls. • People begin to find imports cheaper and we buy more

goods from companies in foreign countries and fewer goods from firms in Ireland.

3. Raw Materials •Low inflation rates mean Irish manufacturers will buy their raw materials in Ireland rather than look abroad. Their costs are low and profits stay high.•High inflation will increase the cost of raw materials in Ireland. This increases company’s expenses and lowers their profits. Irish firms may be forced to buy raw materials from abroad4. Wages•High inflation may result in unions looking for wage increases. Workers need more money to maintain standard of Living. This may cause industrial action. Low inflation rates help to maintain a stable industrial relations climate.5. Employment •Firms might not be selling as many goods at a higher price. Firms cut back on production and therefore won’t need as many workers.

2 – Interest Rates• Interest Rates represent the cost of borrowing money or the

return on money saved.• The European Central Bank (ECB) now sets interests rates for

countries that use the euro (in the Eurozone). Current record low of 0.25%

• If interest rates rise, so does the amount that you have to pay back to bank.

Sales & Profits - Low interest rates result in consumer borrowing and spending, which leads to an increased demand for goods and services. This in turn increases sales and profits of business. High interest rates have the opposite effect and are bad for business.

Business Costs - If the interest rates rise, the repayments on a loan also increase. This increases a firms costs and their profits fall.

• Employment - If interest rates rise resulting in higher costs and reduced sales and profits, firms might have to let off workers. If interest rates are low, people’s demand for goods and services is high, businesses may expand and the business costs will fall. Firms may then hire more workers.

• Expansion - When interest rates are low, firms borrow more money to expand their business (the cost of repaying the money is low). This results in them becoming more competitive in domestic and international markets. High interest rates have the opposite effect.

• Savings High interest rates have negative affect of businesses because investors and consumers may put their money into savings accounts in banks. This means they get a greater return from saving; their money grows by a large amount. Investors don’t then buy shares in companies.

3 - Unemployment• Unemployment refers to the number of people who are

available and looking for work but who cannot get a job.

Sales and Profits - High unemployment means less money being spent in the economy. People aren’t earning money so they can’t afford to buy goods and services. This reduces sales and profits.

Social Welfare - High unemployment means more social welfare payments have to be paid out. This may mean that the Government has to increase taxes to pay for these. The government will have less money to spend on other aspects of the economy such as health, education, the infrastructure, etc.

• Taxation - High unemployment also means less PAYE is collected as fewer people are working. Also less VAT will be collected as the unemployed have less money to spend. This reduces the government’s income. It then has less money to spend on other services in the country.

• Social Cost - High unemployment is linked to more crime in society. This increases businesses costs and reduces their profits. The government has to spend more money on law enforcement which reduces spending in other areas and may also mean an increase in the level of tax to be able to pay for this.

4 – Taxation Taxes have to be paid to the government. This is the main source of income for the state.The main business taxes are income tax, corporation tax, VAT, motor tax and capital taxes. Lower Rates of Tax are Better for Business

1. PAYE/PRSI/USC – These are income taxes paid by workers. If these rates are kept low, then workers have more money to spend, which results in firms selling more. They make more profits. If rates are low, workers are happier to work and industrial relations problems are less likely to occur.If taxes are high, workers have less money to spend in shops. Businesses sales and profits fall. There will be industrial relations problems as workers will want higher wages.

2. Corporation Tax/Self Assessment TaxThis is the tax that companies/businesses pay on their profits. As of 2012 corporation tax is 12.5%. Sole Trader up to 52%Lower corporation tax results in firms having more retained profits, which they can then plough back into the business to finance expansion and help them become more competitive with foreign firms. Higher rates of corporation tax reduce a company’s profits. This means that firms have less money to spend to expand, for dividends for shareholders, etc.3 VAT (9% tourism, 13.5% services 23% products)Low VAT rates mean lower prices of products in shops. This leads to increased sales and profits for companies and keeps them competitive. People can also enjoy a higher standard of living as they can afford more goods and services. Increased Vat has the opposite effect.

5 Exchange RatesThe exchange rate for the euro tells you how much €1 is worth in terms of another currency. It tells you how much of a foreign currency you will get for €1. Exchange rates affect firms that trade internationally (they are not relevant when trading with other Eurozone countries). However, Ireland does a lot of trade with the US and the UK, and as a result, exchange rates are very important to us.A strong euro/rising exchange rate/ euro increases in valueThis can cause the price of Irish goods to increase in foreign countries. When the price of Irish goods goes up, Irish firms sell fewer goods abroad. Sales and profits fall. ExampleAn Irish business sells whiskey for €100 a bottle.If the exchange rate is €1 = $1.50, the bottle of whiskey sells for $150 in the U.S. If the exchange rate rises €1 = $2, then the whiskey will sell for $200 a bottle. Consumers will stop buying the Irish Whiskey

Foreign currency can be purchased more cheaply to pay for imports. The cost of imported goods falls. Irish people buy foreign goods. This leads to increased competition for Irish firms. Their sales and profits fall.•example•Exchange rate is €1 = £1.50. An importer buys £150 worth of goods from England for €100. •If the exchange rate rises to €1 = £2. Then the importer’s €100 can buy them £200’s worth of goods.

Impact of Business on the Development of the Economy

Positive Effects Negative Effects

Employment – reduces social welfare Environmental Impacts

Spin off Business Competition from multinationals

Entrepreneurial Culture Social costs – long working hours

Infrastructure - development Corporate dominance – Banking sector

Increase Tax revenue

Reduces anti social behaviour