GOVERNMENT INCOME
Sources of Government Income
The government needs money to pay for public expenditure . Revenue can be raised through taxation, national insurance contributions, borrowing, charging for services or by selling off state-owned assets.
Taxation
Aims of Taxation
To raise money to pay for government spending.
To discourage people from buying harmful goods such as cigarettes.
To influence the level of total demand in the economy.
To redistribute income from the rich to the poor.
Principles of Taxation
A tax should be certain so that everyone knows the amount, method and time of tax payment.
A tax should be convenient so that tax collection is at a time and in a form suitable to the payer.
A tax should be economical with the cost of collection representing only a small part of the revenue raised.
A tax should be equitable (fair) so that wealthy people pay more than poor people.
A tax should not act as a disincentive and stop people from working.
A tax should be flexible so that the government can use tax changes to help control the level of demand in the economy.
Main Types of Taxation
Income tax. Everyone is given a tax-free personal allowance (amount) above which additional earnings are taxed at an increasing rate.
Value added tax (VAT) is a tax on spending. 17.5 per cent is added onto the selling price of most non-essential goods and services.
Duties are taxes on the sale of luxury goods. A fixed amount is added to the selling price.
Council Tax is a local tax on property. All properties are valued and the amount of council tax paid depends on the value band which the property falls into.
Corporation tax is a tax on company profits.
Petroleum revenue tax is a tax on oil taken from the North Sea.
Inheritance tax is a tax on the transfer of money and property.
Method of Collection
Direct taxes are paid straight to the Inland Revenue.They are therefore taxes on income.
Indirect taxes are first collected by the seller and then passes on to Customs and Excise. These taxes are therefore taxes on expenditure.
Tax Burden
Some taxes are fairer than others. A tax can be:
Progressive, where the percentage of income taken in tax rises as income rises. Income tax in an example of progressive taxation.
Regressive, where the percentage of income taken in tax falls as income rises. Rates are an example of regressive taxation.
Proportional, where the percentage of income taken in tax stays the same as income rises. VAT is an example of proportional taxation.
Budgets
Calculation of the Budget
The Chancellor of the Exchequer is the minister of finance in charge of the Treasury. The Chancellor announces how much the government is going to spend over the next twelve months, sometime in November.
The government states how it is going to raise the money to pay for its expenditure at the same time in the Budget.
Table 13.1 Advantages and disadvantages of various taxes.
Tax |
Collection |
Burden |
Advantages |
Disadvantages |
Income |
Direct |
Progressive |
* Fair |
* Disincentive to work |
VAT |
Indirect |
Proportional |
* Economical |
* Inflationary |
Duties |
Indirect |
Regressive |
* Economical |
* Inflationary |
Council Tax |
Direct |
Progressive |
* Economical |
* Disincentive to invest |
Corporation |
Direct |
Progressive |
* Economical |
* Disincentive to invest |
Types of Budget
A reflationary or deficit budget where government spending is greater than government income. Reflationary budgets increase total demand within the economy.
A deflationary or surplus budget where government income exceeds expenditure and total demand is falling within the economy.
A neutral budget where government income and spending are the same and total demand in the economy remains constant.
Government Borrowing
Public Sector Borrowing Requirement
If the government spends more than its received income it will have to borrow the difference. The amount the government needs to borrow in a given time period is called the public sector borrowing requirement (PSBR). The PSBR is met by:
Selling National Savings certificates and Premium Bonds.
Selling Treasury bills which are IOUs which will be bought back in ninety-one days; time.
Selling securities, which are IOUs paying interest yearly which will be bought back sometime in the future. Securities are sometimes called gilts, stocks or bonds.
National Debt
The total amount owed by the government to UK citizens and foreigners at a particular moment in time is called the national debt. The money raised may have been spent on capital goods which increase our ability to produce goods. Interest has to be paid on the debt. A large national debt is a problem if:
Interest has to be paid to overseas citizens, so that the balance of payments suffers.
Taxes have to be increased to meet interest payments