Government Objectives and Policies 

The government can change the way businesses work and influence the economy either by passing laws, or by changing its own spending or taxes. For example: 

• extra government spending or lower taxes can result in more demand in the economy and lead to higher output and employment 
• governments can pass legislation protecting consumers and workers or restricting where businesses can build new premises. 

Government Spending 

One of the roles of most governments is to provide a range of public services. These might include health care, education, defence, care of the elderly, transport network, child protection, etc. 

Taxation 

The main types of tax include: 

• Businesses can build new premises 
• Income tax taken off an employee’s salary. This results in less money to spend in the shops. ● Value added tax (VAT) added to goods and services. A rise in VAT increases prices. 
• Corporation tax is a tax on company profits. A rise in this tax means companies keep less of their profits leading to less company investment and the possible loss of jobs. 

Vocabulary: 

Fiscal Policy – using changes in taxation and government expenditure to manage the economy. 

Constraints on Public Spending 

• Public sector organisations that provide services directly may be required to reduce their funds, such as hospitals, schools, universities, social services, etc. This will affect companies because they have lower revenues from those laid off in the public sector. 
• Private businesses that rely for part or all of their businesses on public-sector contracts would be affected. For example, government-owned private construction companies cancel projects such as road and railway building companies, house building and maintenance
• Cuts in pensions and other government payments. Some countries cut down on pensions and social security payments. 

Social Security Payment – money taken by the British government from people’s wages to pay for the system of payments to people who are unemployed or ill. 

How can Governments Affect Business Activity? 

The government can affect business activity in many ways: 

➢ Changes in law 

➢ Influence the rate of interest and exchange rates in the economy 

➢ Changes in government expenditure and taxation 

➢ Introduce policies that directly impact the business 

Infrastructure Provision – The essence of good governance is infrastructure provision which will ensure sustainable growth and development of Nations.This includes schools, hospitals, transportation, etc. 

Legislation –the procedure by which laws are made or implemented. 

Consumer Protection – Consumers want to buy good quality products and to receive good customer service at a fair price. You are looking for reliable and clear information on products. Some companies may use anti-competitive practices or conflicting practices without governmental regulation to exploit consumers. These involve: 

• Increasing prices to higher levels that they would be in a competitive market. 
• Price fixing, where a number of firms agree to fix the price of a product to avoid price competition 
• Restricting consumer choice by market sharing 
• Raising barriers to entry by spending huge amounts of money on advertising, which smaller companies could not match, for example. 

Consumer issues covered by legislation 

Competition Policy – Governments should try to encourage competitiveness. This helps avoid anti-competitive practices and the exploitation of consumers. They do this by: 

➔ Encourage the growth of small firms – There will be more competition if more small businesses are encouraged to join market shares. With many little companies, a very large company will less likely dominate the market. 

➔ Lower Barriers to entry – More businesses will join a market if entry barriers are lessened or removed. It will get more competitive. 

➔ Introduce anti-competitive legislation – Many countries have legislation that promotes competitiveness. These regulations are typically aimed at protecting consumers against monopoly exploitation, merger.

➔ Environment Legislation – Business activity can have a negative impact on the environment. For example, water pollution may be caused by businesses dumping. 

Trade Policy – Despite the advantages of international trade, sometimes governments believe that restricting trade is in the national interest. This is called protectionism and might be used to: 

• Protecting jobs if foreign competitors threaten the survival of domestic producers. 
• Protect infant industries (new industries that are yet to get established) 
• Infant industries – New industries that are yet to be established. 
• Prevent dumping – dumping is where a business sells goods in another country often below cost. 
• Raise revenue from tariffs. 

Government cause trade barriers to restrict trade: 

❖ Tariffs – a tax on imports, which makes them more expensive. 

❖ Quota – a physical limit on the amount allowed to import into the country. 

❖ Subsidy – the giving of financial support, such as grant or tax breaks, to exporters or domestic producers. ❖ Administrative barriers – the use of strict health and safety or environmental regulations and specifications to make importing more awkward. 

Effects on Interest Rates on Businesses and Consumer Spending 

Interest – price of borrowed money (and the reward for savers) 

– The use of interest rates to help control the economy is called Monetary Policy. 

– Higher interest rates mean that it is more expensive to borrow money so demand in the economy is likely to fall. 

As interest rates rise, both businesses and consumers are reducing spending. This will reduce income and reduce stock prices. On the other hand, if the interest rates have decreased significantly, consumers and businesses would increase spending, which will increase stock prices. 

An increase in interest rates can affect a business in two ways: 

• Customers with debts have less income to spend because they are paying more interest to lenders. Sales fall as a result. 
• Firms with overdrafts will have higher costs because they must now pay more interest. 

The impact of a change in interest rates varies from business to business. Firms that make luxury goods are hit hardest when interest rates rise. This is because most customers cut back on non-essentials when their incomes fall as a result of interest rate rises.