Government Spending (Edexcel IGCSE Business)

Revision Note

Lisa Eades

Written by: Lisa Eades

Reviewed by: Steve Vorster

The Impact of Government Spending and Taxation on Business

  • The government of each country sets the corporation and income tax rates every year

    • If tax rates fall, then customers will have more money available to spend on goods or services

    • If tax rates rise,  then customers will have less money available to spend on goods or services

    • If tax rates fall, then businesses will have more money available to invest, increase their product range, or hire new workers

    • If tax rates rise, then businesses will have less money available to invest, increase their product range, or hire new workers

  • The government also decides how much money will be spent in the economy during the financial year

    • Many businesses benefit from government supply contracts

      • Pharmaceutical manufacturers sell drugs and medical equipment to public hospitals and other health providers

      • Construction companies are contracted to build infrastructure such as roads, schools and public buildings

      • Publicly-owned plant and equipment, such as trains and ambulances, are produced by manufacturers in the private sector
         

  • If government spending falls, then businesses will have less demand for their goods or services, and their profit may fall

  • If government spending rises, then businesses will have more demand for their goods or services, and their profit may rise

Raising Tax Revenue

  • Tax revenue is raised to fund public spending

  • Rates of taxation are set by national or regional governments

  • These decisions are sometimes considered to be politically-motivated

    • E.g. The reduction of income tax prior to an election could persuade voters with more disposable income to back the existing government

  • Tax revenue can be raised from a variety of sources

Diagram: Common Sources of Tax Revenue

1--common-sources-of-tax-revenue-

Tax revenue can be raised from a range of sources, including company profits, workers' income, sales, imports and excise duties

Sources of Tax Revenue

Tax on company profits

  • Sometimes known as corporation tax

  • A proportion of profit is paid by private limited companies and public limited companies

  • The rate of corporation tax varies from country to country

Income tax

  • Paid by workers based on their earnings

    • Employers usually deduct this tax before distributing earnings to workers

    • In most countries, workers earn a minimal amount before income tax is deducted

      • E.g. The first $12,000 of income may not be taxed at all, but any income beyond that has progressively higher levels of taxation attached

Sales tax

  • Applied to purchases of certain goods, e.g. VAT or GST

    • Higher rates are often applied to luxury goods and services

    • Different rates can be applied to encourage or discourage spending behaviour

      • E.g. The rate of GST in Singapore is 9%

Import tax

  • Applied to products purchased overseas

    • Free trade agreements often involve the removal of these taxes to minimise trade barriers

Excise tax

  • Applied to some manufactured products such as alcohol, tobacco and fuel

    • In the UK, excise tax of approximately £0.53 is charged on each litre of unleaded petrol

Tax Revenue Statistics in 2023

UK

USA

Bermuda

 

  • Almost three-quarters of tax revenue was generated from income tax and value-added (sales) tax 

 

  • A greater percentage of tax revenue was raised through corporation tax

 

  • A significant proportion of tax revenue was generated from customs duties 

Examiner Tips and Tricks

In the exam you could be asked to analyse the ways the introduction of a new tax might affect a given business. Consider what type of tax it is - if it is levied on the business profits or employee wages it will increase costs. However, if it is levied on the selling price of goods it could reduce sales revenue as customers may reduce consumption due to rising prices.

Government Spending

  • Governments spend the tax revenue they have collected to provide a range of public services, such as

    • Education: including schools, colleges and universities

    • Healthcare: including hospitals, public health programmes, doctors and dentists

    • Emergency services: including police, paramedics, the fire service and coastguard

    • Judicial systems: including courts and prisons

    • Defence: including the armed forces and border controls

  • Tax revenue also funds social security, such as state pensions and  unemployment benefits
     

  • Some governments use tax revenue to provide grants that encourage certain behaviours

    • Homeowners may receive funding to improve insulation or install environmentally friendly heating systems

Diagram: 2023 Government Spending in Australia

1--government-spending-australian-government-spending-

In 2023, the Australian government's largest spending priorities were health and education

Source: Australian Treasury 

Government spending and business

  • The Australian government's spending on health, housing and education helps to ensure that its citizens are capable of being productive contributors to the economy. entrepreneurs or productive employees

  • Spending on the judiciary and emergency services ensures the country's stability so that it remains safe and secure for businesses to operate effectively and consumers have confidence to spend money in the economy

  • Spending on transportation allows for businesses to move goods around, into and out of the country

    • It also provides workers with flexibility to commute and access jobs across the country

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Lisa Eades

Author: Lisa Eades

Expertise: Business Content Creator

Lisa has taught A Level, GCSE, BTEC and IBDP Business for over 20 years and is a senior Examiner for Edexcel. Lisa has been a successful Head of Department in Kent and has offered private Business tuition to students across the UK. Lisa loves to create imaginative and accessible resources which engage learners and build their passion for the subject.

Steve Vorster

Author: Steve Vorster

Expertise: Economics & Business Subject Lead

Steve has taught A Level, GCSE, IGCSE Business and Economics - as well as IBDP Economics and Business Management. He is an IBDP Examiner and IGCSE textbook author. His students regularly achieve 90-100% in their final exams. Steve has been the Assistant Head of Sixth Form for a school in Devon, and Head of Economics at the world's largest International school in Singapore. He loves to create resources which speed up student learning and are easily accessible by all.