Economic policies are the actions through which the authorities try and create the best possible economic environment for businesses and individuals.
Economic objectives are what the government wants to achieve and include:
- Stable prices
- Steady and sustained economic growth
- Low unemployment
- A balanced balance of payments
The governments key economic policy objective is to achieve high and stable levels of growth and employment
The government uses a range of policies to attempt to achieve their objectives
Fiscal Policy
Fiscal policy monitors how government spend their money and how they control their taxes.
Contractionary fiscal policy
- This is done when the government reduces spending or increases taxes higher
- They try to increase their PSBR( public sector borrowing requirement) to fund the tax drops they also do this to reduce its surplus on its budget for the fiscal year.
Expansionary fiscal policy
- This is when the government cut taxing or increase government spending.
- They will increase the amount the government borrows to fund the expenditure.
Direct and indirect Taxes
Direct taxes are taxes of income and expenditure e.g. income tax, corporation tax (levied on company profits).
Indirect taxes are taxes such as VAT (value added tax), changes in this type of tax has a rapid effect on the level of economical activity.
E.g. an increase in VAT will cut consumer spending and in turn lower levels of economic activity
Goverment Expenditure
Governments spend in two ways:
- 1. Transfer payments – money spent on unemployment benefits, pensions etc
- 2. The infrastructure – this includes spending on houses, roads, education etc
Monetary Policy
This looks at controlling the amount of money in circulation and therefore spending and economic activity
Monetary policy covers:
- Changing interest rates (the most commonly used tool by recent UK governments)
- Controlling the money supply
- Manipulating the exchange rate
Changes to Interest Rates
If interest rates increase it is likely that consumer spending will decrease reducing the level of economic growth which can lead to falling sales for businesses as demand may be reduced
If interest rates decrease then demand is likely to increase leading to an increase in economic growth which leads to an increase in sales for businesses
Impact of changes to interest rates Small firms are most vulnerable to changes in rates especially if they have a high level of borrowing
Firms with lots of overseas trade may also be heavily affected as a rise in interest rates tends to increase exchange rates
Intervention vs. Laissez Faire
- Government intervention is where the state has a high level of involvement in business matters
- Laissez faire is a policy where governments reduce taxation and spend less on supporting business activities
- Government intervention tends to increase costs and decrease competitiveness of businesses
- The laissez faire approach helps to increase the level of entrepreneurs in an economy
- A disadvantage of the laissez faire approach is it doesn’t protect struggling industries and poor regions
Privitisation
- Privitisation is where the ownership of businesses is transferred from the state to private individuals
- This was a common occurrence in the UK in the 1980s and 1990s
Advantages
- Removes potentially inefficient monopolies offering consumers more choice and better products
- Private businesses are more likely to adopt longer term strategies
- It creates revenue for the government
Disadvantages
- In reality it may not create more efficient industries
- As these businesses now have shareholders they have not adopted long term strategies instead adopting shorter term strategies to get the returns demanded by shareholders
Summary
- There are a number of EU and UK laws which govern how businesses operate
- Health and safety law aims to protect employees and ensure that the work environment is safe
- Employment law includes individualist and collectivist legislation
- Consumer protection laws protect the consumer and ensure that they know what they are getting
- Competition law aims to prevent unfair competition
- All laws incur costs for businesses that can impact their profitability
- Economic policy is the actions that the government takes to meet economic objectives such as an increase in economic growth
- Monetary polices aim to control the amount of money in the economy usually through the manipulation of interest rates
- Fiscal policies look at government incomes and expenditure
- Government intervention describes where the government plays a key role in business activities whereas a laissez faire policy is one with little government involvement
- Privatisation is the sale of public companies to private individuals
