HOW GOVERNMENT ECONOMIC POLICY AFFECTS BUSINESS
What decisions the government makes about its own spending – GOVERNMENT SPENDING – and its raising of money – TAXATION – has a big effect on businesses:
TAXATION
There are two basic types of tax:
1. DIRECT TAXES: these are taken directly from people’s
wage packet – P.A.Y.E.
2. INDIRECT TAXES: these are placed on spending eg. Value Added Tax (17.5%)
Increased taxes are bad for business because:
· people have less money to spend on their products
– their disposable income has fallen
· they will have to pay higher taxes on their profits
You can work out the reverse reasoning for lower taxes and why they should be good for business.
INTEREST RATES
This is what is charged on loans – the extra money that lenders charge
for the risk of lending out money and to compensate them for the fact that they
do not have the money to spend. It is how banks and building societies make
their profits – by lending at a higher rate of interest than they pay
to their depositers:
High interest rates are bad for business because:
· if people are paying high interest rates on their mortgages, credit
cards etc. they will have a lower
disposable income
· high interest rates will mean that businesses will have to pay more
for the loans that they take out for expansion.
You can work out the reverse reasoning for lower interest rates and why they should be good for business.
High interest rates are good for savers however
INFLATION
This means RISING PRICES. Businesses generally do not like inflation because:
· Their material prices rise and it becomes difficult to estimate prices
for long term jobs
· Their workers ask for wage increases to keep up with inflation
· It becomes more difficult to sell their goods, especially exports (goods
sold abroad) because they have become more expensive.