- Define and explain What Governments Do in your own words
- Use key terms such as tax accurately
- Apply what you have learned to new examples and questions
- Avoid the common mistakes learners make with this topic
Governments shape the economy every day: they build roads, run schools, collect taxes and support people in need. This chapter explains what governments do, where their money comes from, and how they decide what to spend it on.
This lesson focuses on What Governments Do: learn the main economic jobs of a government.
Learn the main economic jobs of a government.
Key ideas
Why governments intervene
Some things markets provide badly: street lights benefit everyone whether they pay or not, so private firms would not supply enough. Governments also protect the vulnerable, keep competition fair and manage the whole economy through fiscal policy.
Spending choices and trade-offs
Government budgets are limited, so spending more on hospitals means less for something else — the same opportunity-cost idea households face. Borrowing can fund investment today but means interest payments tomorrow.
Key term — tax: A compulsory payment to the government, such as income tax on earnings or VAT on shopping. Taxes fund public services.
A government spends £500 billion and raises £450 billion in tax. What is the deficit?
£50 billion (£500bn − £450bn).
Answer: £50 billion (£500bn − £450bn).
- Assuming governments can spend without limits Borrowing must be repaid with interest, so today's spending can mean tomorrow's tax rises or spending cuts.
- Thinking taxes disappear Tax revenue is spent on public services — it is transferred to schools, hospitals and roads, not destroyed.
Practice
Any two of: schools, hospitals, roads, police, fire service, street lighting.
Value Added Tax — a tax added to the price of most goods and services when you buy them.
Because everyone benefits whether they pay or not, so the firm could not charge enough users to cover its costs.
Progressive — higher earners pay a bigger share of their income in tax.
Quick check
Which of these best defines "tax"?
Give one argument for and one against raising taxes to fund hospitals.
- What Governments Do: learn the main economic jobs of a government.
- Why governments intervene: Some things markets provide badly: street lights benefit everyone whether they pay or not, so private firms would not supply enough.
- fiscal policy: The government's use of taxation and spending to influence the economy — for example, cutting taxes to boost spending.
- Watch out for: assuming governments can spend without limits