Where does the government get its money, and what does it spend it on?
The main sources of government income, the main types of government spending, the difference between a budget deficit and surplus, and the meaning of the national debt.
A focused answer for AQA GCSE Economics on the sources of government income, types of government spending, the budget deficit and surplus, and the national debt.
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What this dot point is asking
AQA wants you to identify the main sources of government income (taxes), the main types of government spending, the difference between a budget deficit and a budget surplus, and the meaning of the national debt. This sets up fiscal policy, where the government changes spending and taxes to manage the economy.
Sources of government income
Most government income is tax. The biggest sources in the UK are income tax, national insurance and VAT. The government also earns smaller amounts from things like fees and charges, but tax revenue dominates.
Types of government spending
Transfer payments are not counted as spending on output, because no good or service is produced; the money is simply transferred to support people's incomes.
Budget deficit and surplus
Deficits are common, especially in a recession, when tax revenue falls (people earn and spend less) and spending rises (more benefits are paid). Surpluses are rarer and usually appear in a strong economy.
The national debt
A large national debt is not automatically a crisis, but it has costs: rising interest payments use up money that could go to schools or hospitals, and very high debt can worry lenders and push up the interest the government must pay.
Worked example
Try this
Q1. Give one example of a direct tax and one example of an indirect tax. [2 marks]
- Cue. Direct: income tax (or corporation tax). Indirect: VAT (or fuel duty).
Q2. Explain why a government might run a budget deficit during a recession. [3 marks]
- Cue. Tax revenue falls as incomes and spending drop, while benefit spending rises as more people are out of work, so spending exceeds income and the government must borrow.
Exam-style practice questions
Practice questions written in the style of AQA exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.
AQA 20194 marksExplain the difference between a budget deficit and a budget surplus.Show worked answer →
A 4 mark explain question, so define each clearly and contrast them.
A budget deficit occurs when, over a year, government spending is greater than its income from taxes, so it must borrow to cover the gap.
A budget surplus occurs when government income is greater than its spending, so it has money left over, which can be used to repay debt.
Markers reward the correct definition of each (spending versus income) and a clear statement that a deficit means borrowing while a surplus means a chance to repay debt.
AQA 20226 marksExplain the difference between direct and indirect taxes, using an example of each.Show worked answer →
A 6 mark question that wants the distinction explained with developed examples.
A direct tax is paid directly to the government out of income or profits by the person or firm who owes it. An example is income tax, which is taken from a worker's earnings, or corporation tax on company profits.
An indirect tax is a tax on spending, collected by the seller and passed on to the government. An example is VAT added to the price of goods, or fuel duty on petrol.
A strong answer states clearly that direct taxes are on income and profits while indirect taxes are on spending, develops one example of each, and may note that indirect taxes are paid only when you choose to buy the good. Markers reward the correct distinction plus examples.
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Sources & how we know this
- AQA GCSE Economics (8136) specification — AQA (2017)