Control of the economy

The UK economy changes year after year. The UK government seeks to achieve many policies including economic growth, improving the standard of living of people within the country, controlling inflation and reducing unemployment. Its policies will determine the nature and type of decisions that it makes.

The government controls the economy in a number of different ways.

The government controls the economy in a number of different ways. One way is through legal statute or legislation using an Act of Parliament that creates new laws. Another way is through the provision of subsidies that make goods or services available for people. A third way is through taxation.

Taxes collected by HMRC for the government fall under two headings:

Direct taxation

Direct taxation is levied upon incomes or the resources of individuals and organisations.

• Income tax is paid upon a person's income or, for Partnership businesses, upon the partners' incomes.

• Corporation tax is levied upon the profits of UK companies.

HMRC also collects National Insurance contributions. Although these are not really a tax they are often portrayed as one. National Insurance is the major source of funds used by the government to provide state benefits such as pensions and jobseekers' allowances.

Indirect taxation

Indirect taxation is not as noticeable as direct taxation. Indirect taxes are added to the price of the goods and services that consumers purchase. Value Added Tax (VAT) at a rate of 17.5% is added to the price of most goods that a consumer purchases. For example, the price of a DVD includes 17.5% VAT. There are, however, certain goods that are zero-rated. For example, VAT does not apply to food, baby clothes or prescription products.

Governments have continually reviewed the main issues behind taxation. This especially involves deciding who pays the taxes. This process aims to develop a fair system that applies not just for individuals but also for companies.