Government Spending (Edexcel IGCSE Business)
Revision Note
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
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 |
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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
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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