This topic is about where the Irish government gets its money and what it spends that money on. In the exam you must tell direct and indirect taxes apart, sort revenue and spending into current and capital, and work out whether the budget is in surplus or deficit.
Sources of Government Revenue
Government revenue is the total income the state receives to fund public services and infrastructure. Most of this income is collected by the Revenue Commissioners through two main forms of tax:
- Direct taxes: Charged straight on the income or profits of individuals and businesses. Examples include Income Tax (PAYE), the Universal Social Charge (USC), Corporation Tax on company profits, and PRSI (Pay Related Social Insurance), which is paid by employees and employers to fund social welfare benefits and pensions.
- Indirect taxes: Taxes on spending that are added directly to the retail price of goods and services. The consumer pays it at the till, and the business collects and passes it on to Revenue. VAT (Value Added Tax) is a tax on the sale of goods and services, charged as a percentage of the price (standard rate 23%). Other examples include Excise Duty on fuel and alcohol, Customs Duty, and the Sugar Tax.
The state also receives non-tax revenue, such as dividends from semi-state companies like the ESB and money from privatisation (selling off a state-owned company).
Areas of Government Expenditure
Each year, the government allocates funds across departments to support society and provide essential public services.
Main spending areas include:
- Social welfare: Weekly income supports including Jobseeker's Allowance, Illness Benefit, the State Pension, and monthly Child Benefit.
- Public services and wages: Operating costs and salaries for public sector workers, such as gardaí, teachers, nurses, and civil servants.
- Infrastructure: Investment in transport networks, roads, water treatment, and public buildings.
- Debt servicing: Paying the interest on money the state has borrowed (the national debt).
Be able to name a department and two things it spends on:
- Justice: Garda wages, running prisons and courts.
- Health: hospital staff wages, medicines and equipment.
- Social Protection: State Pension, Jobseeker's Allowance.
Current versus Capital Finances
Government finances are divided into current (day-to-day, recurring) and capital (once-off, long-term physical assets).
| Classification | Revenue (Money In) | Expenditure (Money Out) |
|---|---|---|
| Current (Recurring, day-to-day) | Income tax, VAT, regular commercial dividends | Public sector wages, hospital medicines, social welfare payments, debt servicing |
| Capital (Once-off, long-term) | Proceeds from privatisation, capital grants from the EU | Constructing schools, building motorways, Luas light rail extensions |
Ask whether the state will pay for it again next year: if it recurs, it is current expenditure; if it creates a lasting asset, it is capital expenditure.
The National Budget
The Department of Finance prepares and presents the annual National Budget. The government prepares a budget to plan ahead: it sets out what it needs to spend and how it will raise that money through taxation.
Budget balance = total revenue − total expenditure
This leads to three possible outcomes:
- Surplus budget: Planned revenue is greater than planned expenditure.
- Balanced budget: Planned revenue equals planned expenditure.
- Deficit budget: Planned expenditure is greater than planned revenue.
When faced with a deficit, the government has three main remedies: increase revenue by raising taxes, decrease expenditure by cutting public spending, or borrow money.
Key terms
- Government Revenue
- All the money received by the government from taxation and non-tax sources to fund public spending.
- Government Expenditure
- All the money spent by the government on public services, state wages, social supports, and national projects.
- Direct Tax
- A tax levied directly on the income, earnings, or profits of individuals and businesses, such as PAYE or Corporation Tax.
- Indirect Tax
- A tax levied on spending that is included in the price of goods and services, such as VAT or Excise Duty.
- Current Expenditure
- Day-to-day, recurring government spending on public services, routine supplies, and state wages.
- Capital Expenditure
- Once-off government spending on long-term physical assets, public facilities, and durable infrastructure.
- Debt Servicing
- The money the government pays each year in interest on the national debt. It is current expenditure.
- National Budget
- The annual financial plan prepared by the Department of Finance outlining planned government revenue and expenditure.
Check yourself
Which government department is responsible for preparing and presenting the annual National Budget?
The Department of Finance.
Is the Sugar Tax a direct or an indirect tax? Give a reason.
Indirect, because it is a tax on spending that is included in the price the consumer pays, and the seller sends it to Revenue.
Name the Department of Justice and give two examples of its spending.
Department of Justice; examples include Garda wages and the running costs of prisons and courts.
Why is paying interest on the national debt classified as current expenditure?
Because it is a regular, recurring annual running cost rather than spending that creates a lasting physical asset.