AQA GCSE Economics: UK government revenue, spending and types of tax (8136)

This guide is written for the AQA GCSE Economics (8136) specification, for first teaching from September 2017. It covers section 3.2.1.2, Government income and expenditure, which sits in 3.2.1 Introduction to the national economy within the unit “How the economy works”. The specification is single tier, so everything here applies to every candidate. All figures in the worked examples are invented for illustration and are not real statistics.

Related pages: revision notes, practice questions, the shorter definitions page on interest rates and government finances, objectives of government, the AQA GCSE Economics hub, the printable checklist and the free diagnostics.

What the specification asks for

Spec point	What you must be able to do
Main sources of UK government revenue	Name the main taxes and other sources and say roughly which matter most
Main areas of UK government spending	Name the main spending areas and say which are largest
Direct and indirect taxation	Explain the difference and classify taxes
Progressive and regressive taxes	Explain how the share of income paid changes with income, and calculate it

Government revenue: where the money comes from

Revenue is the money the government receives. Most of it is tax. The main sources are:

• Income tax: paid by workers on their earnings, and by others on some other income.
• National Insurance contributions: paid by employees and employers on earnings. They are linked to the right to some state benefits.
• Value added tax (VAT): a percentage added to the price of many goods and services.
• Corporation tax: paid by companies on their profits.
• Excise duties: taxes on particular goods such as fuel, alcohol and tobacco.
• Local and property taxes: for example council tax, business rates and stamp duty on property purchases.
• Other sources: for example capital gains tax, inheritance tax, fees and charges, and borrowing.

Borrowing is not a tax. It covers a gap when spending is more than revenue. In the UK, income tax, National Insurance and VAT are among the largest sources of revenue, and corporation tax and excise duties are smaller.

Worked example: reading a revenue table (illustrative)

Country A’s government collects the following in a year (units are fictional and in billions).

Source	Amount	Share of total
Income tax	120	30.0%
National Insurance contributions	80	20.0%
VAT	90	22.5%
Corporation tax	40	10.0%
Excise duties	30	7.5%
Other	40	10.0%
Total	400	100%

Each share is amount divided by 400, times 100. For example VAT is 90 / 400 = 0.225, so 22.5%.

Direct taxes in the table (income tax, National Insurance, corporation tax) are 120 + 80 + 40 = 240, which is 240 / 400 = 60% of revenue. Indirect taxes (VAT and excise duties) are 90 + 30 = 120, which is 30%. The remaining 10% is other.

Government spending: where the money goes

Public spending pays for services and transfers. The main areas are:

• Social protection: pensions and benefits, including support for unemployed, disabled and low-income households.
• Health: running hospitals and other health services.
• Education: schools, colleges and universities.
• Defence.
• Public order and safety: police, courts and prisons.
• Transport: roads, railways and other infrastructure.
• Debt interest: interest paid on money the government has borrowed in the past.
• Other: for example housing, environmental protection and running costs.

In the UK, social protection, health and education are among the largest areas.

Worked example: spending and the deficit (illustrative)

Country A’s spending in the same year, in the same fictional units:

Area	Amount	Share of total
Social protection	135	32.1%
Health	105	25.0%
Education	55	13.1%
Defence	30	7.1%
Transport	20	4.8%
Debt interest	25	6.0%
Other	50	11.9%
Total	420	100%

Revenue was 400 and spending was 420, so the government has a budget deficit of 420 - 400 = 20. It must borrow 20, which adds to the national debt and means more debt interest in later years. If revenue had been 440, it would have a surplus of 20.

Spending is a choice. Every extra unit spent on one area has an opportunity cost, because it could have been spent elsewhere or used to cut taxes.

Direct and indirect taxes

The test is who the taxpayer is and whether they can pass the tax on.

	Direct tax	Indirect tax
Who pays it to the government	The person or firm whose income or profit is taxed	A seller, who collects it and passes it to the government
Who bears the burden	The person or firm that pays it	Usually the consumer, through a higher price
Based on	Income, profit or wealth	Spending on goods and services
Examples	Income tax, corporation tax, National Insurance	VAT, excise duties

Do not write that a direct tax is “paid directly to the government” as your whole answer, because a seller also pays VAT directly to the government. The point is that the person who finally bears an indirect tax is not the one who sends it in.

Worked example: finding the tax in a price

A good costs 50 before VAT, and VAT is 20%. Price paid = 50 x 1.20 = 60, so the tax is 10.

Reverse it: a good costs 72 including 20% VAT. Divide by 1.20: 72 / 1.20 = 60 before tax, so the tax is 72 - 60 = 12. A common error is taking 20% of 72 (14.40), which is wrong because the 20% was added to the 60, not to the 72.

If VAT rises from 20% to 25%, the same good that was 60 becomes 60 / 1.20 x 1.25 = 62.50.

Progressive and regressive taxes

These words describe how the percentage of income paid in tax changes as income rises. Judge them by percentages, not by pounds.

• Progressive: the percentage of income paid in tax rises as income rises.
• Regressive: the percentage of income paid in tax falls as income rises. Rich people may pay more pounds, but a smaller share of what they earn.
• Proportional: the same percentage at every income. This is a useful comparison but is not named in the specification.

Worked example: a progressive income tax

Country A’s income tax has an 11,000 tax-free allowance, 15% on income from 11,000 to 35,000, and 35% on income above 35,000. Each rate applies only to the slice of income in that band.

Income	Working	Tax	Tax as % of income	Income after tax
9,000	all below allowance	0	0%	9,000
26,000	(26,000 - 11,000) x 0.15 = 2,250	2,250	8.7%	23,750
70,000	24,000 x 0.15 + 35,000 x 0.35 = 3,600 + 12,250	15,850	22.6%	54,150
130,000	3,600 + 95,000 x 0.35 = 3,600 + 33,250	36,850	28.3%	93,150

The percentage climbs from 0% to 28.3% as income rises, so the tax is progressive. The taxpayer on 130,000 does not pay 35% of everything: the average rate (tax divided by income) stays below the top band rate.

Marginal versus average. Suppose a worker on 35,000 gets a 1,000 rise. The extra 1,000 is taxed at 35%, so extra tax is 350 and the worker keeps 650 more. Moving into a higher band never makes take-home pay fall, because only the extra slice is taxed at the higher rate.

Worked example: regressive effects of indirect taxes

Indirect taxes can be regressive even when the rate is the same for everyone, because lower-income households spend more of their income on taxed goods.

A sales tax of 20% on goods. Household J has income 15,000 and buys 10,000 of taxable goods before tax. Tax = 10,000 x 0.20 = 2,000, which is 2,000 / 15,000 = 13.3% of income. Household K has income 90,000 and buys 45,000 of taxable goods. Tax = 9,000, which is 10.0% of income. K pays more in total but a smaller share, so the tax is regressive in its effect.

A fixed duty of 0.50 per litre of fuel. Household L has income 18,000 and buys 1,200 litres: tax 600, which is 3.3% of income. Household M has income 72,000 and buys 1,800 litres: tax 900, which is 1.3% of income. A fixed amount per unit takes a bigger share from the lower income.

Here M spends a smaller share of income on fuel, which is why the duty is regressive. If a tax is on a luxury that only high earners buy, it can be progressive instead.

Using the ideas in evaluation

Direct taxes. Progressive income tax can reduce inequality and raises more revenue as incomes grow. Possible drawbacks: high rates may reduce the reward for extra work or encourage avoidance, and people see the tax on every payslip.

Indirect taxes. They are hard to avoid, collected cheaply from sellers, and taxes on goods like tobacco can discourage use and raise revenue together. Possible drawbacks: they can be regressive, and a rise in price can reduce sales, so revenue may rise by less than expected.

A balanced answer compares who loses and gains, gives a chain of reasoning (for example: higher fuel duty, higher prices, a bigger share of a low income lost, wider inequality) and reaches a judgement about which matters more for the government’s objectives, such as raising revenue or reducing inequality.

Common errors

• Writing “rich people pay more, so it is progressive”. Test the percentage of income.
• Charging the top rate on all earnings instead of only the slice above the threshold.
• Confusing direct/indirect with progressive/regressive. They are separate pairs: VAT is indirect and can be regressive.
• Calling borrowing a form of tax, or listing it as revenue from taxpayers today.
• Taking VAT off a tax-inclusive price by subtracting 20% instead of dividing by 1.20.
• Quoting real figures from memory. Say “among the largest” unless the question gives data.

Official syllabus

AQA GCSE Economics (8136), specification for first teaching from September 2017, published by AQA: section 3.2.1.2 Government income and expenditure.