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The UK government raises income from taxes such as Corporation Tax and Council Tax, and spends on public services and debt interest. 15 questions answered.
UK Government: Income and Expenditure is part of Introduction to the national economy in GCSE AQA Economics.
7 min
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GCSE AQA
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The UK government raises income from taxes such as Corporation Tax and Council Tax, and spends on public services and debt interest. 15 questions answered.
Use this lesson to stay inside Introduction to the national economy while connecting the detail back to the wider How the economy works topic.
Read the core explanations from UK Government: Income and Expenditure before testing yourself from memory.
Every year, the UK government collects hundreds of billions of pounds and then spends it. Those two decisions — how to raise money and where to spend it — touch every household, every business, and every public service in the country.
Think of it like a household budget, but at a national scale. A family earns income, pays bills, and decides what to prioritise. The government does the same, except the stakes affect 67 million people. Understanding this is central to Paper 2, because government spending is a direct component of Aggregate Demand.
Government revenue is the income the government receives, mostly through taxation. There are two broad categories of tax worth knowing: direct taxes, which are levied on income and profits, and indirect taxes, which are levied on spending.
Income Tax is the single largest source of government revenue in the UK. Workers pay a percentage of their earnings above a tax-free allowance — in 2024, the basic rate is 20% on earnings between £12,571 and £50,270. National Insurance Contributions (NICs) are a second major direct tax, paid by both employees and employers; they fund contributory benefits such as the state pension and some welfare payments, while the NHS is funded from general taxation, which includes NICs alongside other revenue.
Value Added Tax (VAT) is the UK's main indirect tax, charged at 20% on the pre-tax price of most goods and services. This means VAT adds one-sixth to the final price you pay — so when you buy a new phone or a restaurant meal, the tax element is one-sixth of the total price. VAT is the second-largest source of revenue after Income Tax.
The chart above shows that Income Tax, NICs, and VAT together account for the vast majority of what the government collects. This matters for exam questions: if you are asked to identify the main sources, these three are your anchor points.
Now that we know how the government raises money, the next question is: what does it spend it on? Government expenditure covers a wide range of areas, but a few categories dominate the budget.
Social protection — which includes the state pension, Universal Credit, housing benefit, and disability payments — is consistently the largest area of UK government spending. In 2023-24, it accounted for roughly a third of total expenditure. The ageing population means this figure is likely to grow over time.
Health spending, primarily on the NHS, is the second-largest category. Education — covering schools, colleges, and some university funding — is another major area. Together, social protection, health, and education typically account for well over half of total government spending.
With revenue and expenditure both in view, we can now look at what happens when they do not match — which is most of the time. When the government spends more than it collects, the gap is called a budget deficit. When it collects more than it spends, that is a budget surplus.
Worked example: Calculating the Budget Position
In a given year, the UK government collects £900 billion in revenue and spends £980 billion. Calculate the budget position and state whether it is a deficit or surplus.
Answer: Budget deficit of £80 billion. The government spent £80bn more than it received in revenue.
A persistent deficit means the government borrows year after year, which adds to the national debt — the total stock of outstanding government borrowing. Debt interest then becomes a spending commitment in its own right, as shown in the expenditure chart above.
Government spending (G) is one of the four components of Aggregate Demand: AD = C + I + G + (X - M). This means that when the government increases spending — say, by building new hospitals or raising welfare payments — AD shifts to the right, potentially increasing real GDP and employment.
The chain of analysis runs like this: higher government spending → increased AD → firms produce more → employment rises → household incomes rise → consumer spending increases further. This amplifying effect is linked to the concept of the multiplier, which you will encounter in more detail elsewhere in the course.
On the revenue side, higher taxes reduce disposable income for households and reduce profits for firms. This can dampen consumer spending and investment, shifting AD to the left. The government must therefore balance the need to raise revenue against the risk of slowing economic activity.
AQA questions on this topic tend to fall into a few predictable patterns. You might be asked to identify a source of revenue or an area of spending (1-2 marks), explain how a change in tax or spending affects the economy (4 marks), or evaluate a fiscal policy decision (6-9 marks). Each demands a different approach.
For identify or define questions, name the specific tax or spending category and give a brief description. For explain questions, build a chain: cause → effect → outcome. For evaluate questions, present both sides and reach a reasoned judgement that includes a condition — for example, whether the economy has spare capacity.
That chain — tax cut → higher disposable income → more consumer spending → higher AD → potential GDP growth — is exactly the kind of analysis that reaches Level 3 on a 6-mark question. Practise writing it out in full sentences using connective language.
Across this lesson, the core spec requirements connect tightly: government revenue (mainly Income Tax, NICs, and VAT) funds government expenditure (mainly social protection, health, and education), and the balance between the two determines the budget position, which in turn affects borrowing, national debt, and the macroeconomy through its impact on Aggregate Demand.
Published by Revise Right. Use the official specification reference to check the requirements for your course. Content updated: 2026-03-06.
Move to the related lessons or back to the topic page when you need the wider sequence before exam-style practice.
Corporation Tax is a direct tax paid by companies on their profits. It sits alongside Income Tax, National Insurance Contributions, VAT, excise duties and Council Tax as one of the sources of UK government revenue.
Council Tax is a local tax on residential properties, collected by local authorities. It is one of the sources of UK government revenue, though Income Tax, National Insurance Contributions and VAT together account for the vast majority of what the government collects.
The national debt is the total stock of outstanding government borrowing. A persistent budget deficit means the government borrows year after year, which adds to the national debt, and debt interest then becomes a spending commitment in its own right.
Excise duties are taxes on specific goods such as fuel, alcohol and tobacco. They are a source of UK government revenue alongside Income Tax, National Insurance Contributions, VAT, Corporation Tax and Council Tax.
A budget surplus is when the government collects more in revenue than it spends. A budget deficit is when the government spends more than it collects and must borrow to cover the shortfall, adding to the national debt.
Debt interest is the payments the government makes on the national debt, the total stock of outstanding government borrowing. It rises when borrowing increases, so a persistent budget deficit turns debt interest into a spending commitment in its own right.
The budget position is calculated as revenue minus expenditure. If the government collects £900 billion and spends £980 billion, the budget position is £900bn − £980bn = −£80bn, a budget deficit of £80 billion that the government must borrow, adding to the national debt.
The main sources of UK government revenue are Income Tax, National Insurance Contributions and VAT, which together account for the vast majority of what the government collects. Income Tax is the single largest source; other sources include Corporation Tax, excise duties on fuel, alcohol and tobacco, and Council Tax.
Social protection, which includes the state pension, Universal Credit, housing benefit and disability payments, is consistently the largest area of UK government spending, at roughly a third of total expenditure in 2023-24. Health, mainly the NHS, is the second-largest category, and education is another major area.
Government spending (G) is one of the four components of Aggregate Demand: AD = C + I + G + (X - M). When the government increases spending, AD shifts to the right, so firms produce more, employment rises, household incomes rise and consumer spending increases further, potentially increasing real GDP.
Government revenue is the income the government receives, mostly through taxation, while government expenditure is all spending by central and local government, including public services, welfare payments and debt interest. When expenditure exceeds revenue there is a budget deficit, and when revenue exceeds expenditure there is a budget surplus.
VAT is one-sixth of the final price of most goods and services, because it is charged at 20% on the pre-tax price. When a consumer buys a new phone or a restaurant meal, the tax element is one-sixth of the total price; VAT is the second-largest source of revenue after Income Tax.
Social protection is consistently the largest area of UK government spending, including the state pension, Universal Credit, housing benefit and disability payments. In 2023-24 it accounted for roughly a third of total expenditure, and the ageing population means it is likely to grow over time.
Income Tax is the single largest source of UK government revenue, with workers paying a percentage of their earnings over a tax-free allowance. VAT is the second-largest source, and together with National Insurance Contributions they account for the vast majority of what the government collects.
Higher taxes reduce disposable income for households and profits for firms, which can dampen consumer spending and investment and shift Aggregate Demand to the left. The government must therefore balance the need to raise revenue against the risk of slowing economic activity.