UK Government Finance

Sources of Government Income

• Direct taxes are a primary source of government revenue. These taxes include Income tax, paid directly from individuals' earnings, and Corporation tax, paid directly from companies' profits.
• Indirect taxes are also significant. These are taxes on expenditures like VAT (Value Added Tax), duty on cigarettes and alcohol, and fuel duty.
• The government can raise funds through the sale of assets, such as buildings or organisations.
• Borrowing is another source of funds for the government. The government can sell government bonds, also known as gilts, to investors domestically and internationally.

Government Expenditure

• Social Protection is a significant category of government expenditure. This includes pensions, welfare benefits, and other social security payments.
• The government spends a considerable amount on public services like healthcare (The NHS) and education.
• A portion of government expenditure also goes into defense, which involves military and intelligence spending.
• Interest payments on the national debt form a part of the government expenditure.
• Investments in infrastructural development such as in transportation systems, hospitals, and schools are also part of government expenditure.

Fiscal Policy

• Fiscal policy involves the manipulation of government spending and taxation to influence the economy.
• Increasing government spending and/or decreasing taxes (otherwise known as an expansionary fiscal policy) can be used to combat recession and unemployment.
• Decreasing government spending and/or increasing taxes (otherwise known as a contractionary fiscal policy) can be used to control inflation.
• This tool allows the government to influence aggregate demand and can contribute to economic stability.

Public Sector Net Debt

• Public sector net debt refers to the total amount of money the government owes to private sectors.
• The majority of this debt comes from the government borrowing to cover deficits in public spending.
• This is an important metric as it reveals the affordability of the government's current spending pattern, and high levels of debt can indicate a structural issue with the economy.

Budget Deficit & Surplus

• A budget deficit occurs when the government's expenditure is greater than its income. This is typically financed through borrowing.
• Conversely, a budget surplus occurs when the government's income exceeds its expenditures. This extra money can be saved for future use or used to pay off existing debt.
• Both deficits and surpluses can have significant impacts on the economy, influencing levels of public services, taxation, and national debt.