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Taxation and government spending

The Government contributes to demand in the economy by spending money on the goods and services it provides to society as a whole. Government spending accounts for more than a third of the economy.

The government raises most of the money it needs through taxation:

  • Income Tax - a percentage of money deducted from wages
  • Council Tax - for some of the services provided by local councils.
  • Value Added Tax (VAT) - paid on many of the goods and services we buy.

Businesses have to pay tax on their profits -they also rely on public services such as the education system and road network.

The UK taxpayer typically pays about a fifth of their wages to the government, but they pay two-fifths if they fall into the higher rate tax bracket.