The Economy

Question 1

What government department is primarily responsible for the UK economy and fiscal policy?

Answer 1

• The Treasury.
• The most senior minister in the Treasury is the Chancellor of the Exchequer, currently Rachel Reeves.

Question 2

What are the main responsibilities of the Chancellor of the Exchequer?

Answer 2

• Controlling fiscal policy, which involves tax and spending.
• Controlling the national debt.
• Managing unemployment and inflation.
• Setting a target rate of inflation for the Bank of England.
• Heading the Treasury, which controls government investment and borrowing.

Question 3

How does the government get its money (revenue)?

Answer 3

• Mainly through taxes (around £1.49 billion in 2024-25).
• These include direct taxes (on income) and indirect taxes (on consumption).
• Other sources include National Insurance Contributions, land sales, and charges to patients (for the NHS).
• Local authorities, which also contribute to public services, get revenue from council tax, business rates, specific and general grants from central government, council house rent, fees, and reserves.

Question 4

Direct taxes

Answer 4

• Taxes on income, such as income tax, national insurance, corporation tax (on company profits), and capital gains tax (on asset value increases).
• They are considered progressive because they are based on the ability to pay.

Question 5

Indirect taxes

Answer 5

• Based on consumption, such as sales tax (VAT), alcohol, fuel, and tobacco duty, and green taxes.
• They are considered regressive because they are not based on the ability to pay, meaning the poor pay the same rate as the rich

Question 6

Explain the terms Debt, Deficit, and Surplus.

Answer 6

• If a government spends more than it takes in revenue, the difference is the annual deficit. This needs to be borrowed.
• If the government takes in more revenue than it spends, the difference is the annual surplus.
• The debt is the accumulation of all the annual deficits over time.
• Think of the deficit as an overdraft or credit card bill, and the debt as a mortgage.

Question 7

What are the approximate current levels of the UK’s annual deficit and total debt (as of 2024-25)?

Answer 7

• The annual deficit is around £127 billion, which is about 4.5% of GDP.
• The total debt is around £3.4 trillion, which is about 98% or 98.4% of GDP. Lenders use comparative GDPs to set interest rates.

Question 8

How does the government plan and announce its tax and spending policies?

Answer 8

• Each year, the Chancellor makes a Budget Speech to the House of Commons, reporting on the economy’s performance, giving an outlook, and setting out plans for taxes and spending.
• This is accompanied by a Finance Act to implement the plans.
• There is also an Autumn Statement.
• Every three years, the Chancellor publishes a Comprehensive Spending Review for longer-term plans.

Question 9

What are some key areas where the government spends money?

Answer 9

• Overall UK government spending is increasing.
• Major areas include public services like the NHS, education, and social services (adult social care, children’s services).
• Social protection (pensions and benefits) is the largest item, expected to total £316 billion in 2025-26. State pensions alone are the biggest cost at £145.6 billion in 2025-26.
• Local government spending includes capital spending on big projects (schools, housing) and revenue spending for day-to-day running costs, salaries, and service delivery.

Question 10

What independent bodies are involved in economic management and forecasting?

Answer 10

• The Office for Budget Responsibility (OBR) was set up in 2010 and is responsible for economic forecasts. It is politically neutral and independent.
• The Bank of England was made independent by Gordon Brown and is responsible for monetary policy, specifically setting interest rates. The Monetary Policy Committee (MPC), a group of economists, sets the base interest rate.

Question 11

What is the Office for Budget Responsibility (OBR) ?

Answer 11

• It is responsible for economic forecasts.
• It is politically neutral and independent.

Question 12

What is the Bank of England?

Answer 12

• Made independent by Gorden Brown.
• Responsible for monetary policy, specifically setting interest rates.

Question 13

Who are the Monetary Policy Committee and what do they do?

Answer 13

• A group of economists.
• Set the base interest rate.

Question 14

Gross Domestic Product (GDP):

Answer 14

• The market value of all the goods and services produced by a country.
• It’s a core goal for all governments to increase this (growth).

Question 15

Recession:

Answer 15

Two successive quarters when the economy (GDP) shrinks

Question 16

Growth:

Answer 16

When GDP rises, increasing employment and prosperity.

Question 17

Inflation:

Answer 17

An increase in prices and a fall in the purchasing value of money.

Question 18

Consumer Price Index (CPI)/Retail Price Index (RPI):

Answer 18

Measures of inflation using a basket of goods.

Question 19

Balance of Trade:

Answer 19

The difference in value between total imports and total exports.

Question 20

What are the different political approaches to achieving economic growth?

Answer 20

• Interventionist (Labour)
• Hands off (Conservative)

Question 21

Interventionist approach

Answer 21

• Suggests raising taxes, especially on the wealthy.
• Borrowing to invest in public services and infrastructure (like roads, railways, energy, housing) to create growth through a healthier, more skilled workforce.
• The state is seen as active and involved.

Question 22

Hands off approach

Answer 22

• Suggests cutting taxes to encourage private sector activity and wealth creation, believing the private sector spends money better than governments.
• The state is small and delegates delivery to the private sector.

Question 23

What is Council Tax?

Answer 23

• A property tax with a personal element.

Question 24

What is the role of Business Rates in local government finance?

Answer 24

• Money collected from business premises based on a ‘rateable value’ (what the rent would be), not on business profits.
• Councils can keep 50% of the rates they collect; the rest goes to central government.

Question 25

How do councils fund Capital Spending (big building projects)?

Answer 25

- Through Capital grants from central government or Mayoral Combined Authorities (like SYMCA). - Through Capital receipts (money from selling council assets). - By borrowing money within government limits. - Through Private Finance Initiatives (PFI) and Public-Private Partnerships (PPP), where private companies provide investment repaid over years.

Question 26

How Council Tax calculated?

Answer 26

- Households are taxed based on a notional value from 1991, placed into one of eight bands (A-H).

Question 27

How are Council Taxes collected?

Answer 27

- Council taxes are collected by the billing authority. - These are typically district councils in two-tier areas and unitary authorities elsewhere, such as Sheffield.

Answer 28

- Provides an average of 25% of local authority income, but lower in areas with poorer housing.

Question 29

Who can claim some of the Council Tax?

Answer 29

- Precepting authorities (PCCs, Fire & Rescue Services, County Councils, Parish Councils) claim some of the collected money.

Question 30

Who is discounted/exempt from council tax?

Answer 30

- There are discounts for single occupants and exemptions for full-time students.

Question 31

What is the maximum rate Councils can raise the council tax to?

Answer 31

- Councils can raise council tax rates by up to 4.99% a year (3% general, 1.99% adult social care precept) without a referendum, though councils facing bankruptcy may be allowed higher increases.

Question 32

Critisism of the Housing Bands

Answer 32

- It is criticised as "out of date, regressive and distortionary" because bands haven't been revalued since 1991