A LevelBusinessAQARevision NotesBusiness & the External EnvironmentEconomic EnvironmentEconomic Environment in Practice: Economic Growth & Taxation

Economic Environment in Practice: Economic Growth & Taxation (AQA A Level Business): Revision Note

Syllabus Edition

First teaching 2026

First exams 2028

Exam code: 7132

Lisa Eades

Written by: Lisa Eades

Reviewed by: Bridgette Barrett

Updated on

Economic growth

  • Economic growth means an increase in the value of goods and services produced by an economy over a period of time

    • It is usually measured as the percentage change in gross domestic product (GDP)

  • Real GDP growth adjusts for inflation, showing the true increase in output rather than just rising prices, and is the measure governments usually focus on

The economic cycle

  • The business cycle describes the upturns and downturns in the level of a country’s economic activity over time

    • A recession occurs when an economy experiences two consecutive quarters (6 months) or more of negative economic growth

    • A boom is defined as a period of time where an economy experiences increasing/high rates of economic growth

The business cycle over time

Graph depicting economic cycle stages: expansion, boom, downturn, low growth, recession, slump, recovery. Axes are time and GDP percentage change.
The business cycle includes periods of expansion, boom, recession and recovery

Stage of the business cycle

Characteristics

Impact on businesses

Recession

  • Increasing/high unemployment

  • Low confidence for firms/households

  • Low inflation or deflation

  • Increase in government expenditure

  • Customers have less  disposable income  and are likely to reduce spending or postpone significant spending decisions, leading to lower revenue

  • Businesses may find it relatively easy to recruit workers from a larger pool of candidates

  • Businesses may delay spending decisions and focus on reducing risk and survival

  • Production levels are likely to be reduced 

  • Businesses often stockpile products

  • Increased spending on welfare benefits and spending on infrastructure projects to inject demand into the economy may benefit some businesses

Boom

  • Decreasing unemployment and increasing job vacancies

  • High confidence and more risky decisions taken

  • Increasing rate of inflation

  • An improvement in the government budget as tax revenues rise and government expenditure falls

  • Customers’ disposable income increases, leading to higher sales revenue

  • Recruitment and staff retention may become more challenging and businesses may need to pay higher wages

  • Businesses look to expand and maximise profit

  • Production levels are likely to increase 

  • Product or market development strategies are more likely

  • Interest rates are likely to rise and the higher cost of borrowing will increase the risk of capital investment

  • Lower government spending may impact on business growth plans

  • Public sector pay controls may cause industrial unrest and affect business operations

  • Economic growth matters to business because it's closely linked to consumer confidence, spending power, business investment, government tax revenue and unemployment

    • These rise and fall together with the wider economy

Line graph of UK GDP index 2007–2026, showing dip in 2008 banking crisis, sharp crash in 2020 Covid-19 pandemic, then slower rise amid cost of living crisis
Source: Office for National Statistics, June 2026

  • UK GDP grew by 0.6% in Q1 2026 and 0.7% in Q2 2026, following annual growth of 1.3% in 2025 and 1.0% in 2024

    • This represents a modest, gradual recovery rather than a strong boom

      • Growth has been led by the services sector

    • It follows on from the sharp squeeze on household spending during the 2022 cost of living crisis

  • Consumer confidence has, however, remained fragile even as the overall economy has kept expanding

Benefits of economic growth for business

  • Rising national income increases consumer spending power

    • Demand for most goods and services tends to increase

  • Businesses often see rising sales and revenue without needing to cut prices or compete as aggressively

  • Growing confidence can make it easier to raise finance for expansion

    • Investors and lenders see less risk

  • A growing economy usually increases tax revenue for the government

    • This sometimes allows it to invest more in infrastructure or services that benefit business

Challenges of economic growth for business

  • Growth isn't always felt evenly

    • Some sectors or regions can continue to struggle even while the overall economy grows

  • Strong or fast growth can push inflation up

    • Demand for resources, labour and materials rises faster than supply

  • Businesses that expand based on a period of growth can be left overextended if growth slows again

    • Increased costs, such as those related to extra staff or inventory, don't disappear as quickly as revenue can fall

  • Modest growth, like the UK is currently experiencing, can still leave real consumer spending power squeezed

    • This means growth in GDP doesn't automatically lead to stronger sales for every business

Example

A retailer might see its overall market grow slightly, but if consumer confidence stays weak, customers may still trade down to cheaper products rather than genuinely increase how much they spend

Impact of economic growth on functional areas

Functional area

Impact

Example

Marketing

  • Rising consumer confidence and disposable income increase demand for goods and services

  • Businesses may increase marketing budgets or expand into new markets to take advantage of growth opportunities

  • JD Sports increased marketing investment for its expansion in North America

  • It is now the retailer's largest region with 38% of global sales

Finance

  • Rising profits and improving investor and lender confidence make it easier to raise finance for expansion

  • Businesses may increase capital investment as revenue and profit margins improve

  • Currys raised planned spending to around £95 million in 2026

  • Rising consumer confidence and stronger profits gave it the chance to invest in updating stores and digital tools

Human resources

  • Recruitment and employee retention become more challenging as competition for workers increases

  • Businesses may need to raise wages to attract and retain staff in a tighter labour market

  • UK construction SMEs complained of serious recruitment difficulties for trades such as carpenters, bricklayers, electricians, scaffolders and roofers in 2026

  • Many had to increase pay to compete for scarce skilled workers as demand for construction work grew

Operations

  • Rising demand may require increased production capacity or expansion into new sites

  • Businesses may invest in additional capacity, stock or the supply chain to meet growing demand

  • Aldi invested £370 million to open 40 new UK stores in 2026 to expand capacity and take advantage of rising consumer demand

Case Study

Greggs and economic growth

Two Greggs bakery pastries on white paper bags, including a glazed square bake and two golden flaky sausage rolls on a plain white background

Greggs, the UK bakery and food-to-go chain, reported total sales up 7.2% to £1.10 billion in the first half of 2026, with operating profit rising almost 23% to £86.5 million. This improvement was achieved even as the UK economy grew only modestly and consumer confidence remained subdued.

The business grew its share of customer visits to 8.7%, despite an overall decline in the food-to-go market as a whole, largely by emphasising its reputation for good-value food during a period when many customers were still cautious with spending.

However, Greggs also warned that rising costs from its expansion, including new shops and staff, meant profits in the second half of the year would fall year-on-year unless consumer confidence genuinely improved.

Taxation and government spending

  • Governments impose direct and indirect taxes on businesses and households

    • Direct taxes are levied on income

      • Examples include income tax and corporation tax

    • Indirect taxes are levied on spending

      • Examples include sales tax (VAT), stamp duty and excise duty

  • Taxation is the main way the government funds spending on public services and its other key priorities, including

    • Education

      • Including schools, colleges and universities

    • Healthcare

      • Including hospitals, social care, public health programmes, doctors and dentists

    • Emergency services

      • Including police, paramedics, the fire service and coastguard

    • Judicial systems

      • Including courts and prisons

    • Defence

      • Including the armed forces and border controls

    • Social security

      • Including state pensions and  unemployment benefits

    • Business support

      • Including providing grants that encourage certain behaviours or subsidies that reduce the costs of businesses that provide certain goods or services

  • Governments use taxation and spending together as fiscal policy

    • Expansionary policy

      • Increasing spending or cutting taxes to boost a slowing economy

    • Contractionary policy

      • Raising taxes or cutting spending to reduce inflation or high government debt

  • Taxation is also collected by local and regional councils

    • Business rates and council tax revenues are used to fund local services such as roads, street lighting, refuse collection and social services

The impact of an increase in taxation

Impact

Explanation

Revenue

  • Revenue may fall for many businesses

    • Increased income tax will reduce the  disposable income of customers and demand for non-essential products may fall

    • Increased VAT makes products more expensive and customers may switch to alternative products

Costs

  • Operating costs will rise as a result of increased taxes such as VAT and National Insurance contributions

    • Higher costs may be offset by charging higher prices

    • Higher prices may lead to lower sales and profit may fall

  • Import costs are increased when customs duties  are raised

Business decisions

  • Business spending and investment may be affected by increases in corporation tax, as less profit will be retained to cover future expenses and make plans for business expansion

  • Operational decisions may be affected by increases in business rates and taxes related to employing workers

    • Businesses may choose to delay business improvement or relocation, or employ fewer workers as a result of increased costs

  • In some cases businesses may take steps to try to avoid paying specific taxes or pay lower rates of taxation

    • Move the business to a low-tax location

    • Change production methods to reduce the use of highly-taxed components

Case Study

Employer National Insurance contributions

In April 2025, the UK government implemented significant changes to employer National Insurance contributions (NICs) which are a direct tax

  • Rate Increase: The employer NIC rate rose from 13.8% to 15%

  • Threshold reduction: The earnings threshold at which employers start paying NICs decreased from £9,100 to £5,000 per year

These adjustments aimed to improve public finances but have raised concerns among businesses regarding increased operational costs

Bar chart showing annual NICs increase for earnings from £10,000 to £100,000. Increases range from £2 to £1,127, highlighted in dark blue.
Increase in NIC contributions (Source: Contractor Umbrella)

Increased operational costs

  • Higher payroll expenses

    • Employers now pay more NICs per employee, increasing overall payroll costs.

      • For an employee earning £30,000 annually, the NIC payable by the employer increased by approximately £270 per year due to the rate rise

Pressure on employment decisions

  • Hiring freezes

    • To manage rising costs, some businesses have paused recruitment

  • Job reductions

    • Particularly in sectors like retail and hospitality, companies are considering reducing part-time roles to cut expenses

Investment and growth constraints

  • Delayed expansion plans

    • With tighter budgets, businesses may postpone investments in growth or infrastructure

  • Reduced training budgets

    • Companies might limit spending on employee development programmes

Sector-specific challenges

  • Small and medium enterprises (SMEs)

    • SMEs, with limited financial buffers, are particularly affected, potentially leading to closures or downsizing

  • Labour-intensive industries

    • Sectors that rely heavily on human labour face steeper cost increases, impacting their competitiveness

Business response

  • To mitigate the impact, businesses are exploring various strategies

    • Salary sacrifice schemes

      • Encouraging employees to exchange part of their salary for non-cash benefits, reducing NIC liabilities

    • Operational efficiency

      • Streamlining processes to lower costs without reducing staff

    • Pricing

      • Passing some of the increased costs to consumers through price rises, where market conditions allow

Impact of taxation on functional areas

Functional area

Impact

Example

Marketing

  • Higher indirect taxes (such as VAT) or employment taxes may force businesses to raise prices, risking loss of price-sensitive customers

  • Marketing budgets may be cut to help protect profit margins after a tax rise

  • Domino's Pizza UK raised prices by 4% in 2025, largely to offset higher employment costs after the rise in employer National Insurance contributions

  • Sales fell by 2.5 per cent as some customers cut back

Finance

  • Higher direct taxes, such as corporation tax and employer National Insurance, reduce the profit a business retains for investment

  • Tesco said the higher rate of employer National Insurance cost the business £235 million in 2025

Human resources

  • Rising employment taxes, such as employer National Insurance and the National Living Wage, increase the cost of employing staff

  • This can lead to hiring freezes, reduced hours or job losses

  • Coughlans Bakery closed all 32 of its shops after National Insurance and minimum wage rises added around £20,000 a week to its costs

Operations

  • Higher business rates raise the cost of running shops and other premises

  • This may force businesses to close underperforming stores or renegotiate rents

  • Poundland has been closing shops and renegotiating rents to cut costs, as rising business rates and other pressures squeeze its profits

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Author
Reviewer
Lisa Eades

Author: Lisa Eades

Expertise: Curriculum Expert

Lisa has taught A Level, GCSE, BTEC and IBDP Business for over 20 years and is a senior Examiner for Edexcel. Lisa has been a successful Head of Department in Kent and has offered private Business tuition to students across the UK. Lisa loves to create imaginative and accessible resources which engage learners and build their passion for the subject.

Bridgette Barrett

Reviewer: Bridgette Barrett

Expertise: Development Editor

After graduating with a degree in Geography, Bridgette completed a PGCE over 30 years ago. She later gained an MA Learning, Technology and Education from the University of Nottingham focussing on online learning. At a time when the study of geography has never been more important, Bridgette is passionate about creating content which supports students in achieving their potential in geography and builds their confidence.