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Business Studies

Economy

Role of government

In the UK voters elect a national government at Westminster and local government in town halls. Voters expect the government to manage the economy well. Government economic objectives include:

  • Low unemployment, that is, as many workers in jobs as possible.
  • Lower prices. Continually rising prices is called inflation. Low inflation is an aim of government.
  • Economic growth. The aim is to produce more goods and services each year so that individuals have a higher standard of living.
The Chancellor of the Exchequer holding up the budget briefcase outside 11 Downing Street

The Chancellor announces the goverment's economic plans for the year in the annual Budget

The government can change the way businesses work and influence the economy either by passing laws, or by changing its own spending or taxes. For example:

  • Extra government spending or lower taxes can result in more demand in the economy and lead to higher output and employment.
  • Goverments can pass legislation protecting consumers and workers or restricting where businesses can build new premises.

The main types of tax include:

  • Income tax taken off an employee's salary. This results in less money to spend in the shops.
  • Value added tax (VAT) added to goods and services. A rise in VAT increases prices.
  • Corporation tax is a tax on company profits. A rise in this tax means companies keep less of their profits leading to less company investment and the possible loss of jobs.
  • National Insurance contributions are payments made by both the employee and the employer. They pay for the cost of a state pension and the National Health Service. An increase in this tax raises a company's costs and could result in inflation.
  • Local government collects rates from firms and can use the law to block planning permission for new premises.

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