Government Policy Instruments GCSE Economics 3.4 Managing the Economy Government Policy Instruments

Learning Outcomes Students should be able to: Explain how governments and agencies regulate and control markets, for example through: Public provision Price controls Taxation Subsidies National Minimum Wage or Living Wage

National Minimum Wage or Living Wage The government has many policy instruments to influence key macroeconomic objectives These include: Public provision Price controls Taxation Subsidies National Minimum Wage or Living Wage

Public Provision This involves the government providing goods and services for individuals within the economy. This often happens in the case of merit and public goods. Activity: Why would the government provide merit and public goods for individuals?

Answers Merit goods, such as health care and education are often provided by the government as the true benefits of these services is underestimated by consumers and therefore under consumption occurs. By providing these goods, often at no charge, the government may therefore encourage consumption of these goods and reduce market failure. Public goods such as national defence are provided by the government as if left to the free market these goods would be underprovided, due to the problem of free riders. Therefore the government provides many of these goods to ensure provision at all.

Taxation Using taxation as a government policy instrument is a form of fiscal policy. There are many different taxes which the government can choose to use to influence the economy. These are direct taxes: taxes which impact an individuals income or a firm’s profit. Or indirect taxes: taxes levied on goods and services.

List of Taxes Some of the taxes the government may use to influence markets are: Income tax Corporation tax National Insurance VAT Excise duty Climate change levy

Income tax Income tax is a direct tax charged on a individual’s income. The personal allowance (amount allowed to be earned before tax is charged) currently stands at £11,000 in 2016-17 and is expected to rise to £11,200 in 2017. The tax rates are then charged at the following levels in 2016-2017: Type of tax Rate of Tax Thresholds Basic Rate 20% £11,000 - £43,000 Higher Rate 40% £43,0001 - £150,000 Upper Rate 45% £150,001 + Adapted from : https://www.gov.uk/government/publications/income-tax-personal-allowance-and-basic-rate-limit-for-2016-to-2017/income-tax-personal-allowance-and-basic-rate-limit-for-2016-to-2017

Activity If an individual earns £28,000 a year, calculate their level of income tax paid, remembering that they are entitled to their personal allowance first.

Impacts of tax changes Rises in income tax rates will cause consumers to have less disposable income. This could reduce levels of consumer spending in the economy and reduce Aggregate demand. This would be likely to have negative impacts on economic growth and employment.

Corporation Tax Corporation Tax is a tax on business profits and currently stands at a rate of 20% in the UK. Activity: Calculate the amount of corporation tax paid if a business earns £460,000. Adapted from https://www.gov.uk/corporation-tax-rates/rates

Impacts of changes to corporation tax Reductions in rates of corporation tax are likely to make the UK more attractive to firms who wish to set up here. This can encourage investment in the UK economy and boost the productive potential of the economy in the long run.

Other taxes VAT: Value added tax is charged on many goods within the UK. Some necessities do not charge VAT and some charge a reduced rate of VAT. VAT is charged for most goods and services at 20%. Excise Duties are taxes levied on goods and services to discourage consumption e.g. alcohol, cigarettes and gambling. https://www.gov.uk/vat-rates

Activity Which of the following taxes are direct taxes and which are indirect taxes? Income Tax VAT Corporation Tax Excise Duty

Subsidies Subsidies are payments from the government to firms which are designed to reduce their costs of production. They tend to help firms reduce costs which can either keep them in operation or even enable them to lower prices, which may encourage consumption or make firms more internationally competitive. They tend to enable firms to supply more, which can lower the market price.

Examples The UK Government pay subsidies in areas such as: Agriculture Renewable Energy Providers Car manufacturing Employee training Start up firms

National Minimum Wage and Living Wage A National Minimum Wage was introduced in the UK in April 1999. The rate of wage for adults aged 22 and over was £3.60 per hour. Adults aged 18-21 received £3 per hour and there was no minimum wage for workers aged 17 and under. National Minimum Wage rates are subject to change in October of each year and have been increasing over time. From fact file

Table 1: Changes in National Minimum Wage Rates in the UK 2012-2015. 21+ 18-21 <18 October 2015 £6.70 £5.30 £3.87 October 2014 £6.50 £5.13 £3.79 October 2013 £6.31 £5.03 £3.72 October 2012 £6.19 £4.98 £3.68 Source: Adapted from https://www.gov.uk/national-minimum-wage-rates

How does it work The National Minimum Wage is designed so that no employer can pay a wage lower than the rate specified by the government to any employee. This applies to full-time and part-time staff. The National Minimum Wage acts as a price floor, which the wage paid to employees cannot fall below.

Impacts of National Minimum Wage Increases equity in terms of pay Provides a higher incentive to work, which could increase the labour supply May increase consumer spending due to higher disposable incomes However: Could increase labour costs for firms Could lead to real wage unemployment Could reduce international price competitiveness

The Living Wage The National Living Wage was introduced in the UK on 1st April 2016. It is designed to provide a higher rate of pay for individuals aged 25 and over. The National Living Wage rate as of 1st April 2016 was £7.20 per hour. This is expected to increase to £9 per hour by the year 2020. The National Living Wage is designed to give individuals aged 25 and over enough money to afford essentials and also be able to save.

Impacts The Living Wage will have a similar impact to a rise in the National Minimum Wage. There are concerns that industries with a large proportion of their labour being paid National Minimum wage before April 2016 will see the biggest increase in costs. This includes industries such as accommodation and administration.