OCR A Level Economics: Fiscal policy 1: the budget and taxation (H460) – Practice Questions

These are original questions written for Marlbridge, for revision and practice on this content. They are not reproduced past-paper questions, and they do not replicate the exam’s exact structure, question count or mark tariffs – examination boards hold copyright in their own papers. Use these alongside the official past papers from your board or school.

These questions follow the OCR A Level Economics (H460) specification, Version 3.0 (June 2026), for first assessment in 2021, on the first part of the topic Fiscal policy (Macroeconomics content). The specification labels no content as AS or Extension. All countries and figures are made up, and money is in currency units (cu).

Use the study guide and revision notes first, and plan with the OCR Economics hub, checklist and diagnostics.

Questions

1. Distinguish between current and capital government expenditure, giving one example of each. [4]

2. Country C taxes income at 0% up to 9,000 cu, 25% from 9,000 to 36,000 cu, and 45% above 36,000 cu.

(a) Calculate the tax paid on an income of 54,000 cu. [2] (b) Calculate the average tax rate at 54,000 cu. [1] (c) Calculate the marginal tax rate when income rises from 54,000 cu to 60,000 cu. [2] (d) Use average rates at 36,000 cu and 54,000 cu to show that the system is progressive. [1]

3. (a) Distinguish between a direct tax and an indirect tax. [2] (b) Classify excise duty on alcohol and inheritance tax, giving a reason for each. [2]

4. Three taxes in Country D take the following amounts (cu) from three taxpayers.

Income	Tax A	Tax B	Tax C
10,000	500	400	1,000
40,000	3,200	400	4,000
80,000	8,800	400	8,000

Calculate the average rate of each tax at each income, and classify each tax. [6]

5. Explain two features of a good tax. [4]

6. In Country E the taxable income base, in bn cu, is 900 - 9t, where t is the tax rate in per cent. Tax revenue = t × (900 - 9t) / 100.

(a) Calculate revenue at tax rates of 30% and 70%. [2] (b) State the revenue-maximising rate and the revenue raised. [2] (c) Explain why revenue falls as the rate rises above the revenue-maximising rate. [2]

7. The top rate of income tax in Country L is 60%. The government plans to cut it to 45%. Evaluate whether this will raise tax revenue. [8]

8. Country G has bands of 0% up to 8,000 cu, 15% from 8,000 to 30,000 cu, and 40% above 30,000 cu. It proposes a flat tax of 20% on all income above an 8,000 cu allowance.

(a) Calculate the tax paid under each system by people with incomes of 16,000 cu, 40,000 cu and 120,000 cu. [3] (b) State the average tax rate paid at 120,000 cu under each system. [1] (c) Evaluate the case for the flat tax. [6]

9. Country H’s government receives 260 bn cu: income tax 90, National Insurance contributions 50, VAT 70 and other taxes 50. Current spending is 250 bn cu and capital spending is 30 bn cu. GDP is 1,600 bn cu.

(a) Calculate the overall budget balance and say which of surplus, deficit or balance it is. [2] (b) Calculate the current budget balance. [1] (c) Express the overall balance as a percentage of GDP. [1] (d) Explain what the difference between the two balances shows. [2]

10. In Country J the budget deficit is 5% of GDP and the output gap is -4%. Assume each 1% of output gap changes the budget balance by 0.5% of GDP.

(a) Calculate the cyclical and the structural deficit. [2] (b) State the deficit if the economy returns to trend and nothing else changes. [1] (c) Explain why a government might judge its fiscal stance by the structural balance. [3]

11. In Country K a low-income household (15,000 cu) pays 1,200 cu in direct tax and 1,500 cu in indirect tax. A high-income household (90,000 cu) pays 22,500 cu in direct tax and 6,300 cu in indirect tax.

(a) Work out the total tax paid by each household as a share of its income, and say whether the whole system is progressive. [3] (b) Evaluate whether the government should raise more revenue from indirect rather than direct taxes. [9]

Answers

1. Current expenditure pays for running services and for transfers [1], for example public sector wages or benefits [1]. Capital expenditure buys assets that last and add to future capacity [1], for example a new hospital building or a road [1]. [4] Examiner insight: The definition and the example each need to be there for both types.

2. (a) 27,000 × 25% = 6,750 [1]; 18,000 × 45% = 8,100, total 14,850 cu [1]. [2] (b) 14,850 / 54,000 = 27.5% [1]. [1] (c) Extra tax = 6,000 × 45% = 2,700 [1]; 2,700 / 6,000 = 45% [1]. [2] (d) The average rate grows from 18.75% (6,750 / 36,000) to 27.5%, so Country C’s tax is progressive [1]. [1] Examiner insight: Show the slice taxed in each band, so that your working is easy to follow and easy to check.

3. (a) A direct tax is charged on earnings, profit or wealth and is usually borne by the payer [1]. An indirect tax is levied on spending and can be passed on to the consumer in the price [1]. [2] (b) Excise duty on alcohol is indirect because it is charged on spending on a good [1]. Inheritance tax is direct because it falls on wealth passed on and is paid by the estate [1]. [2] Examiner insight: Label each tax and say why.

4. Tax A: 5%, 8%, 11% [1], so progressive [1]. Tax B: 4%, 1%, 0.5% [1], so regressive [1]. Tax C: 10% at every income [1], so proportional [1]. [6] Examiner insight: Classify from the average rates, not from the cu amounts. Tax B is a fixed charge, so the cu paid is constant while the share falls.

5. Equity: those more able to pay contribute more (vertical) and similar people pay similar amounts (horizontal) [1]; a progressive income tax does this better than a flat charge [1]. Economy: collection and compliance costs are low relative to revenue [1]; a simple tax with few reliefs is cheaper to run [1]. (Certainty, convenience, efficiency or yield also work if explained.) [4] Examiner insight: Naming a feature earns little by itself. Explain it and tie it to a tax.

6. (a) At 30%: 30 × 630 / 100 = 189 bn cu [1]. At 70%: 70 × 270 / 100 = 189 bn cu [1]. [2] (b) The peak is at t = 900 / (2 × 9) = 50% [1], with revenue 50 × 450 / 100 = 225 bn cu [1]. [2] (c) Above 50% the base shrinks faster than the rate rises [1], because higher rates reduce work effort and encourage avoidance or emigration [1]. [2] Examiner insight: Part (c) needs the base named and a reason it falls.

7. Revenue equals rate times base [1]. According to the Laffer Curve, if 60% is above the revenue-maximising rate, a cut raises revenue [1], because work incentives improve and avoidance falls, so the base grows by more than the rate falls [1]. If 60% is below the peak, the base grows too little and revenue falls [1]. The peak is unknown and differs by tax and country [1]. Behaviour adjusts slowly, so revenue could drop in the short run [1]. The cut favours high earners, reducing equity [1]. A supported judgement: revenue rises only if 60% is above the peak [1]. [8] Examiner insight: Evaluation gains credit when it says what the outcome depends on and why.

8. (a) Banded: 16,000 → 8,000 × 15% = 1,200; 40,000 → 3,300 + 4,000 = 7,300; 120,000 → 3,300 + 36,000 = 39,300 [2]. Flat: 1,600, 6,400, 22,400 [1]. [3] (b) Banded 39,300 / 120,000 = 32.75%; flat 22,400 / 120,000 = 18.7% [1]. [1] (c) The flat tax is simpler and cheaper to administer [1]. It cuts the top marginal rate from 40% to 20%, which may improve work incentives and reduce avoidance [1]. Revenue from the 120,000 cu earner falls by 16,900 cu, so total revenue may fall unless the base grows [1]. The 16,000 cu earner pays 400 cu more while the top earner pays far less, so equity falls [1]. The allowance means average rates still rise with income [1]. A reasoned judgement that weighs incentives and simplicity against equity and revenue [1]. [6] Examiner insight: Use the figures from part (a) to back each claim.

9. (a) Total spending = 250 + 30 = 280; 260 - 280 = -20 bn cu, a deficit [1] for the figure and [1] for the label. [2] (b) 260 - 250 = +10 bn cu [1]. [1] (c) -20 / 1,600 × 100 = -1.25% of GDP [1]. [1] (d) Current receipts cover current spending with 10 bn cu to spare [1], so the overall deficit arises because capital spending of 30 bn cu exceeds that surplus [1]. [2] Examiner insight: Part (a) asks for the overall balance, not the current one. Give the sign or the word.

10. (a) Cyclical = 4 × 0.5 = 2.0% of GDP [1]; structural = 5 - 2 = 3.0% of GDP [1]. [2] (b) The deficit falls to 3.0% of GDP [1]. [1] (c) The cyclical part rises and falls with the economic cycle without any new decision [1]. The structural balance shows the effect of the government’s own choices on spending and taxes [1]. A rising actual deficit in a downturn may not be expansionary policy, and a government that read it as such might cut spending in a recession [1]. [3] Examiner insight: Separate changes caused by the cycle from changes caused by decisions.

11. (a) Low: (1,200 + 1,500) / 15,000 = 18% [1]. High: (22,500 + 6,300) / 90,000 = 32% [1]. The combined system is progressive [1]. [3] (b) Indirect taxes are cheap to collect and hard to avoid [1]. The low-income household already pays 10% of income in indirect tax against 7% for the high-income household [1], so raising them would be regressive and reduce equity [1]. Direct taxes are 25% of the high earner’s income, so rises may weaken incentives or raise avoidance [1]. Indirect tax rises lift prices and may add to cost-push inflation [1]. Revenue depends on the elasticity of demand for the taxed goods [1]. Taxing harmful goods can correct market failure [1]. Direct taxes are more visible, so indirect rises may be easier to introduce [1]. A judgement, for example that a mix of both is better than relying on one, since each criterion points in a different direction [1]. [9] Examiner insight: Use the data in your evaluation, then reach a decision and give the reason.

Where marks are usually lost

• Charging the top rate on all income rather than just the part above its threshold.
• Judging progressivity from the cu paid, or giving the average rate when the marginal rate is asked for.
• Naming features of a good tax without explaining them.
• Treating the Laffer Curve as proof rather than a model with an unknown peak.
• Evaluation that states “it depends” without saying on what.
• Using debt interest or wages as examples of capital spending.
• Treating any deficit as expansionary policy, or forgetting that the current budget excludes capital spending.

Next steps

• Review the revision notes and the study guide.
• Use the hub and checklist.
• Try all free 10-minute diagnostics.
• Book a free trial class: /trial/.

Official syllabus

OCR, A Level in Economics (H460), Version 3.0 (June 2026), first assessment 2021, Component 2 content: The application of policy instruments, topic Fiscal policy, the first part. Published by OCR (Oxford Cambridge and RSA).