Cambridge IGCSE Economics: Government budget, spending and taxation (0455) – Revision Notes

These notes condense sections 4.3.1 to 4.3.6 of the Cambridge IGCSE Economics 0455 syllabus for examination in 2026. Read the full study guide for explanations, then test yourself with the practice questions. Other links: the Cambridge IGCSE Economics hub, the printable checklist and the free diagnostics. All figures here are invented for practice.

Key definitions

Term	Meaning
Government budget (4.3.1)	A plan, usually for a year, of expected government revenue and planned spending
Tax	A compulsory payment to the government, not linked to a service received in return
Direct tax	Charged on income or wealth and paid straight to the government
Indirect tax	Charged on spending; collected by sellers and passed to the government
Progressive tax	Share of income paid rises as income rises
Regressive tax	Share of income paid falls as income rises
Proportional tax	Share of income paid stays the same
Disposable income	Income after direct tax (and after benefits are added)

Government spending (4.3.2)

Main areas: health, education, social security, defence, infrastructure, debt interest.

Area	Reason	Effect to quote
Health	People cannot all pay for care	Healthier, more productive workforce
Education	Skills benefit the learner and society	Higher productivity and incomes later
Social security	Supports low or no income	Less poverty, steadier spending
Defence	Protects the country	Security; resources diverted from other uses
Infrastructure	Private firms may under-provide	Lower business costs

Method for a share of spending:

1. Find the area’s spending.
2. Divide by the total spending.
3. Multiply by 100.

Example (Country B, invented): health 36, total 150. 36 / 150 × 100 = 24%.

Always add the opportunity cost: more for one area means less for another, or higher taxes or borrowing.

Reasons for taxation (4.3.3)

• Main source of revenue to pay for spending
• Redistribute income
• Discourage demerit goods
• Protect home producers with duties on imports
• Pay for external costs such as pollution
• Change how much households have to spend

Share of revenue from tax: Country B has tax revenue of 168 out of total revenue 175. 168 / 175 × 100 = 96%.

Classification (4.3.4)

	Direct	Indirect
Based on	Income or wealth	Spending
Examples	Income tax, company profits tax, property tax	Sales tax, customs duties, fuel tax
Who feels it	The person taxed	Consumers (through prices), also sellers

Do not assume that all direct taxes are progressive or that all indirect taxes are regressive.

Method for average tax rate:

1. Work out tax band by band (income in band × rate for band).
2. Add the bands together.
3. Divide total tax by total income and multiply by 100.

Worked reminder. Country B charges 0% on the first 6,000, 15% on income from 6,001 to 26,000, and 30% above 26,000. Tax on 40,000 = (20,000 × 15%) + (14,000 × 30%) = 3,000 + 4,200 = 7,200. Average rate = 7,200 / 40,000 = 18%. Tax on 16,000 = 10,000 × 15% = 1,500, an average rate of 9.4%. The rate rises with income: progressive.

Regressive check: a household with income 8,000 spends 6,000 on taxed goods, and another with income 50,000 spends 20,000. At a 10% sales tax they pay 600 (7.5%) and 2,000 (4.0%).

Qualities of a good tax (4.3.5)

Quality	One-line test
Equitable	Related to ability to pay
Certain	Clear what, when and how much
Convenient	Simple to pay
Economical	Low cost of collection / revenue
Efficient	Raises revenue without damaging incentives
Flexible	Can be changed when needs change

Cost of collection example: collecting 250 at a cost of 10 is 4%; collecting 90 at a cost of 9 is 10%. The first is more economical.

Impact of taxation (4.3.6)

Group	Likely effects
Consumers	Lower disposable income; higher prices; lower quantity bought
Producers	Higher costs; lower sales; lower profit or reduced investment
Government	More revenue; amount depends on how responsive demand is
Economy	Lower spending; possible higher prices; changed income gap; changed incentives; possible evasion

Per-unit tax sketch (words): the supply curve shifts upward (left) by the amount of the tax. Equilibrium moves up the demand curve to a higher price and lower quantity. Price rises by less than the tax, unless the whole tax is passed on.

Worked reminder. A tax of 4 per unit is on a good selling 2,000 units at 20, and the whole tax is passed on. Price becomes 24, a 20% rise. If quantity falls to 1,800, that is a 10% fall, and elasticity is −10 / 20 = −0.5. Revenue is 4 × 1,800 = 7,200. Producers keep 20 × 1,800 = 36,000, down from 40,000.

Method for the effect of a per-unit tax on revenue:

1. Add the tax to the old price (if the whole tax is passed on) and find the percentage rise.
2. Find the new quantity and the percentage change in quantity.
3. Divide the percentage change in quantity by the percentage change in price to get elasticity.
4. Multiply tax per unit by new quantity to get government revenue.
5. Multiply the old price by new quantity to get what producers keep.

Second reminder. A tax of 3 per unit is on a good priced at 10 that sells 800 units. The whole tax is passed on, so the price is 13, a rise of 30%.

	Inelastic case	Elastic case
New quantity	760	560
% change in quantity	−5%	−30%
Elasticity	−5 / 30 = −0.17	−30 / 30 = −1.0
Government revenue	3 × 760 = 2,280	3 × 560 = 1,680
Producers keep	10 × 760 = 7,600	10 × 560 = 5,600
Producers before the tax	8,000	8,000

In both cases producers are worse off, and the loss is bigger where demand is more responsive. A government that wants revenue prefers the less elastic good. A government that wants to cut consumption of a harmful good gets a bigger fall in quantity where demand is more elastic.

Evaluation checklist: size of the tax rate, elasticity of demand, who gets the money and how it is spent, short run versus long run, and whether people find ways to avoid the tax.

Must-know distinctions

• Progressive and regressive describe the share of income, not the amount.
• Direct and indirect describe what is taxed and how it is collected, not fairness.
• Government revenue counts tax after the quantity has changed.
• A tax on a good with inelastic demand raises more revenue than the same tax on one with elastic demand, but hits consumers harder.

Quick self-test

1. Define the government budget.
2. State three main areas of government spending.
3. Country C spends 24 of a 160 budget on defence. Calculate the percentage.
4. Give two reasons for a government to levy taxes.
5. Classify a sales tax as direct or indirect.
6. Income tax is 0% on the first 5,000 of income and 20% on income above that. Calculate the tax on an income of 10,000 and the average rate.
7. A household with an income of 20,000 spends 8,000 on taxed goods at 10% sales tax. Calculate the tax paid as a percentage of income.
8. State two qualities of a good tax.
9. A tax raises 300 and costs 15 to collect. Calculate the cost as a percentage of revenue.
10. Explain one effect of a higher sales tax on producers.

Answers

1. A plan of expected government revenue and planned spending, usually for one year.
2. Any three: health, education, social security, defence, infrastructure, debt interest.
3. 24 / 160 × 100 = 15%.
4. Any two: raise revenue, redistribute income, discourage demerit goods, protect domestic producers.
5. Indirect: it is charged on spending.
6. Tax = 5,000 × 20% = 1,000; average rate = 1,000 / 10,000 = 10%.
7. Tax = 10% × 8,000 = 800; 800 / 20,000 × 100 = 4%.
8. Any two from: equitable, certain, convenient, economical, efficient, flexible.
9. 15 / 300 × 100 = 5%.
10. Prices rise, so quantity demanded falls, so sales revenue and profit fall; the firm may cut output or jobs.

Where marks are usually lost

• Confusing direct and indirect by thinking of who writes the cheque. Check what is taxed: income or spending.
• Saying “the rich pay more, so it is progressive” without comparing percentages of income.
• Dividing by the wrong total when calculating a share.
• Using the old quantity to find government revenue after a tax.
• Listing effects without linking them: price rises, so quantity falls, so revenue falls.
• Giving a one-sided answer where the question asks for evaluation.
• Leaving out the opportunity cost of government spending.
• Naming a quality of a good tax with no explanation of what it means in the example.

Official syllabus

Source: Cambridge IGCSE Economics 0455 syllabus for examination in 2026, version 2, Cambridge University Press & Assessment, section 4.3 Fiscal policy (4.3.1 to 4.3.6).