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Government revenue and spending

In the UK, the government spends about $500 billion a year. Where does such a huge amount of money come from? Perhaps more importantly, what does the government spend it on? The money governments have to spend is called revenue. Revenue comes from several sources, including charging for services and borrowing. However, a government's main source of revenue is taxation. There are different kinds of taxes. For example, anyone with a regular income has to pay income tax on their earnings. This is a percentage of their income which goes to the government. Many countries operate a system called progressive income tax. Under this system, people with a higher income pay a higher percentage to the government. Another kind of tax is value added tax. This is paid when we buy goods or services which are not essential or are regarded as luxuries.

Taxation, however, is not only a way for a government to earn revenue. Through taxation, governments also achieve a number of other things. Income tax, for example, should help to make the income gap between the rich and the poor smaller. Tax on harmful products like tobacco and alcohol should discourage people from consuming them. Finally, taxation is a way for the government to control overall supply and demand in the market. For instance, a very high tax on a product will mean few people can buy it and therefore its market will be very small.

So where does the money go? Revenue is generally spent on a combination of public services and something called transfer payments. Transfer payments are benefits that are given to families and individuals in society who need financial support. In Britain, transfer payments make up almost a third of all public spending. These payments include safety net benefits such as unemployment benefit and social security benefits for families who do not have enough income to get by.

Most of the rest of the revenue goes on public goods. These can be divided into two areas: pure public goods and mixed public goods. Pure public goods are things like street lighting or national defence. These are important for everyone in a society, but they cannot be supplied by private business. To understand why not, let's look at the example of street lighting. Lighting needs to be offered to everyone who uses the streets. If a private business provided street lighting, they would need to charge for it. But how could they make everyone pay? Non-payers would benefit from the lighting, too. It would be impossible to stop them. This is why a government, and not private businesses, offers street lighting; everyone pays for it through their taxes.

Mixed public goods are things which people ought to have because they are beneficial, such as health care and education. Why do many governments fund these things? The reason is that having a healthy, educated population is good for the economy and (or society as a whole. People, especially those on low incomes, may not be able to spend money on these services. Governments fund the services so that everyone can afford them, and this encourages people to use them.



Date: 2015-12-24; view: 947


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