Introduction to the national economy
What's covered
Key facts
Government income and expenditure
Direct taxes are paid directly to the government by the individual or business and cannot be passed on; examples are income tax, corporation tax, National Insurance, capital gains tax and inheritance tax.
Interest rates, saving, borrowing, spending and investment
When Bank Rate rises, lenders usually raise the rates they charge borrowers and offer savers more; a cut has the opposite effect.
Government income and expenditure
Of departments' day-to-day spending in 2025-26, the biggest items were health (£204 billion), education (£95 billion) and defence (£39 billion).
Interest rates, saving, borrowing, spending and investment
With a fixed interest rate the interest cost stays the same over the credit period whatever happens to the base rate.
Government income and expenditure
In 2026/27 UK income tax (outside Scotland) is 0% up to £12,570, then 20%, 40% and 45% on higher bands, which makes it progressive.
Interest rates, saving, borrowing, spending and investment
Higher interest rates make saving more attractive and borrowing more expensive, which discourages consumer and business spending.
Government income and expenditure
In 2025-26 the OBR estimated income tax would raise £329 billion, 26.7% of all receipts, the largest single source.
Interest rates, saving, borrowing, spending and investment
Interest earned in one year = amount saved x annual interest rate.
Government income and expenditure
Indirect taxes are taxes on spending, imposed on producers; examples are VAT and duties on fuel, alcohol and tobacco.
Interest rates, saving, borrowing, spending and investment
Interest is the cost of borrowing money or the reward for saving.
Practice questions with answers
A taste of the 22 questions in this topic, answers marked. Sign up to practise the full set with spaced repetition.
According to the OBR, which source was expected to raise the most revenue in 2025-26?
- •Corporation tax
- •Fuel duty
- ✓Income tax
- •Value added tax
Why might a bank charge a higher interest rate on one loan than another?
- •Bank Rate has just been cut
- •The borrower also saves with the bank
- •The borrower has always repaid on time
- ✓The borrower seems more likely to default
Per the OBR, which was the largest area of UK public spending in 2025-26?
- •Debt interest
- •Defence spending
- •Health care
- ✓Welfare payments
A rise in interest rates is most likely to cause households to:
- •Borrow more to spend now
- •Save less and borrow more
- ✓Save more and borrow less
- •Spend more using credit cards
Which of these is a direct tax?
- •Alcohol duty
- •Fuel duty
- ✓National Insurance
- •Value added tax
How does a fall in interest rates usually affect business investment?
- •It falls because borrowing is cheaper
- •It falls because profits are taxed more
- ✓It rises because borrowing is cheaper
- •It rises because saving pays more
Three minutes a day. Knowledge that sticks.
Practise all 22 Introduction to the national economy questions with spaced repetition, so what you revise today is still there in the exam. Free to use, no card needed.