A state is a territory where one central culture, a set of ideals, and a set of laws has been imposed. A modern state has its own government, armed forces, and a civil service, which carries out the work of the government. The state generally manages police and other emergency services, and the departments of health, education, and WELFARE. It also has a CENTRAL BANK.
A state employs a large workforce of civil servants to carry out its many functions. These state employees include police officers, health inspectors, teachers, and office workers. Together, they represent a large part of the total workforce. In the UK, for example, 17 percent of all workers are employed by the state.
States were first created many thousands of years ago, mainly to fight wars and defend territory. Today, states do more than this. They provide a form of central control for public services, and look after the welfare of their citizens.
Each year, a government decides how much money the state will need to pay for its public services. Most of this is raised via a TAX on its citizens and businesses, but states can also charge for services—for example, through road tolls. If a state gets into debt, it may also borrow money from private corporations or from wealthier nations.
Tax is the money that citizens and companies have to pay to the government, helping the state raise the funds it needs to operate. A state may impose direct taxes on an individual’s income or property, or indirect taxes on business trade in goods and services.
A state can use tax incentives to encourage its citizens to make certain economic choices. Most people try to avoid paying large amounts of tax, so a state can actually encourage participation in an activity by lowering or removing the tax on it. The opposite is true when a state raises taxes. For example, some governments impose high taxes on cigarettes and alcohol to discourage people from consuming these harmful products, which are known to create health risks.
Some economists argue that lowering taxes enables business and industry to create more wealth, which in turn provides the state with a smaller share of a much larger amount of money. In the 1980s, US President Ronald Reagan’s government tried this. The business economy improved, but the US shortfall in income almost doubled.
Welfare is the financial assistance that a country or state provides to help people in need. Government welfare support may include payments to unemployed workers or disabled people who cannot work, or social security payments for retired people. Welfare benefits can also be provided to all citizens in forms such as public education.
Each nation makes a political decision about how much welfare to provide to its citizens. Politicians debate over how much a person’s welfare is their own responsibility, or the responsibility of the state. Some developing countries have little money for welfare, and the needy must rely on charity for help instead.
A state tries to control its economy through a central bank, which has the power to control the rate of interest that affects the lending and borrowing of money. The bank uses its power to ensure economic stability, preventing sharp swings between growth and decline.
Interest is what money costs. People pay a price to borrow money—for example, to make a large consumer purchase—and that price is called interest. The central bank sets a basic interest rate called the base rate, which private banking companies follow when people arrange to borrow money from them.