Government Objectives economic policies

Governments want to influence the national economy so that it would achieve their
aforementioned objectives. They have a lot of power over business activity and can pass
laws to try to achieve their goals. The main ways in which governments can influence
business activity are called economic policies. They are:
 Fiscal Policy: taxes and public spending.
 Legislation\laws

 Monetary policy: controlling the amount of money in the economy through

interest rates.

Fiscal policy (Taxation) and Government expenditure

(a)Government expenditure
One of the roles of most government is to provide range of public services .These might
include:
-Health care
-Education
-defense
-transport network
-refuse collection etc
Generally ,high level of spending will be welcomed by businesses .Heavy government
expenditure on infrastructures like building schools, roads ,hospitals, railway systems,
power generators, can have big benefits on businesses .This is because private sector
businesses are likely to get most of the work. Construction companies and their suppliers
are likely to benefit the most .However there will be a multiplier effect .This means that
employees will spend some of the received from these businesses from the government.
This will boost demand for all types of goods and services because people will generally have
income (purchasing power) hence businesses sells will improve.

Constrain \limitation of public spending

Some governments have limited levels of public spending .One reason for this is because some
countries built up massive foreign debts as result of the financial crisis 2008.The effects on
businesses such limitations can be:

*Public sector organizations that supply services directly may get funding cut. For example
hospitals, schools, universities, social service providers may be forces to lay off staff to cope
with funding cuts. This will affect businesses because those people laid off in the public
sectors will have lower incomes. Therefore demand will fall and businesses will not need to
produce much.

*Private sector businesses that rely on public sector contracts for part or all of their business
will be hit. For example, private sector construction companies that carry out government
infrastructure work will lose revenue if the government cancels projects.
1. Fiscal policy (Taxation.
Fiscal policy is using changes in taxation and government expenditure to manage the
economy.
The money raised from taxation is used by the government to help fund its spending on
public services. Businesses and individuals pay taxes.
There two types of taxes: Direct taxes on income and indirect taxes on spending.
There are four common taxes:
(a)Direct tax
 Income tax
 Profits tax
(i)Income tax

Income tax is based on a percentage of your income. Income tax is usually progressive,
meaning that the percentage of tax you have to pay rises with your income. Effects on
business and individuals if there was a rise of income tax:
People will have less disposable income.
*Sales fall because people have less money to spend.
*Managers will cut costs for more profit. Workers might be made redundant.
*Businesses producing luxury goods will lose the most, while others producing everyday
needs will get less affected.
(ii)Profits tax or corporation tax

This is a percentage of the profit a business makes. A rise in it would mean:

*Managers will have less retained profit, making it harder for the business to expand.
*Owners |shareholders will get less return on capital employed (dividend).
*Potential owners will be reluctant to start their own business if the profit margin is too
low.
(b)Indirect taxes (Value added tax-VAT)
These taxes are a percentage on the price of goods, making them more expensive.
Governments want to avoid putting them on essential goods such as foods. A rise it it
would mean:
*The effect would be almost the same as that of an increase in income tax. People
would buy less but they would still spend money on essential goods.
*Again, real incomes fall. Costs will rise when workers demand higher wages.

2.Legislation
Without government intervention ,some businesses may not meet the needs for certain
stakeholders .Some might go further and exploit valuable stakeholders .One of the roles of
the government is to provide a legal framework in which businesses can operate and ensure
that vulnerable groups and protected .These areas of legislation has a particular impact to
businesses are outlined below:
(a)Consumer protection
Consumers want to buy good quality products at fair price and receive good customer
service. They want information about products that is accurate and clear. They do not want
to buy goods that may be dangerous , overpriced ,or sold to them or the grounds of false
claims. Without government regulation, some firms may exploit consumers by using anti-
competitive practices or restrict practices(attempts by firms to prevent or restrict
competitions).This might include:
-Increasing prices to high levels than they would be in a competitive market
-Price fixing (Firms agree to fix the price of a product to avoid price competition.
-Restricting consumer choice by market sharing
-Raising barrier to entry (Restrictions that mean it is difficult for new firms to enter a
market)
Legislation exists to prevent businesses from making false claims about the performance of
their products ,selling goods that are not fit for purpose .If businesses break the consumer
laws they may be fined and have to compensate consumers for any loss.
Consumers issues covered by legislation:
-The information given about the products
-Prices
-The safety of the product
-The quality of products
-The way products are promoted
-Customer payment methods
-Consumer rights
-Trading and age restrictions

Trade policy

Protectionism

This refers to the use of trade barriers such as tariffs , Quotas, and subsidy to protect
domestic producers.

Protectionism might be used by countries to:

-Protect jobs if foreign competitors threaten in the survival of domestic producers

-Protect infant industries (new industries that are yet to get established)

-Prevent dumping (where foreign producers sell goods below cost in a domestic market)

-Raise revenue from tariffs

Methods of Protectionism (Trade barriers)

Tariffs
A tariff is a tax on foreign goods upon importation. Tariff rates vary according to the type of
goods imported. Import tariffs will increase the cost to importers, and increase the price of
imported goods in the local markets, thus lowering the quantity of goods imported.
Quotas
An import quota is a type of protectionist that sets a physical limit on the quantity of a good that
can be imported into a country in a given period of time. This leads to a reduction in the quantity
imported and therefore increases the market price of imported goods. Quotas, like other trade
restrictions, are used to benefit the producers of a good in a domestic economy at the expense of
all consumers of the good in that economy.

Administrative Barriers
Countries are sometimes accused of using their various administrative rules (eg. regarding food
safety, environmental standards, electrical safety, etc.) as a way to introduce barriers to imports.

Embargo
An embargo is the prohibition of commerce and trade with a certain country, in order to isolate
it and to put its government into a difficult internal situation, given that the effects of the
embargo are often able to make its economy suffer from the initiative.

Subsidies
Government subsidies (in the form of lump-sum payments or cheap loans) are sometimes given
to local firms that cannot compete well against foreign imports. These subsidies are purported to
"protect" local jobs, and to help local firms adjust to the world markets.

Anti-dumping legislation
Supporters of anti-dumping laws argue that they prevent "dumping" of cheaper foreign goods
that would cause local firms to close down. However, in practice, anti-dumping laws are usually
used to impose trade tariffs on foreign exporters.

TRADE BLOC

A trading bloc is another potential barrier to international trade. A trading bloc is a group of
countries that work together to provide special deals for trading. This promotes trade between
specific countries within the bloc.

The European Union (EU) is an example of a trading bloc. All of the countries within the EU can
trade freely with each other, which means that no tariffs are put in place. This makes goods and
services cheaper, which is good for both businesses that export and businesses that import within
the EU. However, the EU also charges tariffs on many goods and services imported from outside
the EU, which makes them more expensive.
Trading blocs have the following advantages and disadvantages:

Advantages Disadvantages

Promotes free trade, which means trading Importing and exporting to countries outside the
without tariffs trading bloc can be expensive

There is often free movement of labour, eg Countries can often only be part of one trading bloc,
people, across trading blocs which means they cannot enter others

Creates good trading relationships with

other countries in the trading bloc

3. Monetary policy and interest rates

Governments usually have to power to change interest rates through the central bank.
Interest rates affect people who borrow from the bank. When interest rates rise:
*Businesses who owe to bank will have to pay more this will increase their total cost,
resulting in less retained profit thus limiting growth.
*People are more reluctant to start new businesses or expand because the cost of
borrowing is high.
*The purchase of capital goods such as tools and machines funded by borrowing is
discouraged because it is more expensive .This could means that the business may fail to
keep up with changes in technology thus affecting their competitiveness and growth.
*Consumers who took out loans such as mortgages will now have less disposable
income. They will spend less on other goods thus reducing business sales.
*Demand will fall for businesses who produces luxury or expensive goods such as cars
because people are less willing to borrow.
Higher interest rates will encourage other countries to deposit money into local
banks and earn higher profits. They will change their money into the local currency,
increasing its demand and causing exchange rate appreciation.

THE END