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How Government Fiscal Policy Affects A Business

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Introduction

´╗┐Unit 38- D2 Fiscal policy is a policy that aims to control government spending using taxation to control the demand in the economy. AL-MURADs objective is to make profit and increase their sales. They want their business to survive. Direct and indirect taxation help AL-MURAD achieve their aims. Corporation tax is a tax on company profits. Most businesses try to pay the least amount of Corporation tax that they possibly can and this can be done through reinvesting back into their company for the future. AL-MURAD needs to pay less Corporation tax so their cost and revenue can increase. Value added Tax (VAT) is a tax that is charged on most goods and services that VAT registered businesses provide in the UK. It is also added to some goods that are brought into the UK form countries outside the European Union. AL-MURAD has to pay VAT. If the government reduces VAT, AL-MURAD can take the advantage of that as they import tiles from other countries. ...read more.

Middle

This can affect whether the external investors of AL-MURAD want to invest in UK or not. A fall in interest rate will affect the confidence of investors from overseas who want a larger return on their money. This can affect AL-MURAD as the external investors might not invest in AL-MURAD which can lead to AL-MURAD compromising with their costs. Reducing the exchange rate can occur by lowering interest rates or selling sterling. Raising interest rates and buying foreign currency will have the opposite effect as this will reduce aggregate demand and reduce inflation. During the low interest rate AL-MURAD will have more demand of products as people will be buying their products. They are more likely to even increase the cost. If AL-MURAD is making very high profit then they can even have a high labour cost which will be affordable for their business. Inflation is the measurement of the increase in prices. The target for the UK government is to keep inflation at around 2 per cent to support employment and economic growth. ...read more.

Conclusion

If inflation levels are high, the cost of wages is high and employers may try to control this by reducing their employee numbers, which then leads to a reduction in aggregate demand. This means that even AL-MURAD would tend to do so. They would even want to get rid of some of their workers as high employment would take their business to a loss site. AL-MURAD can face problems due to the employment rate being high as they will have to take on more workers as well. A good supply of money in the economy means that businesses should feel confident to invest in the future by taking on new employees. If more people are working, aggregate demand is likely to go up and, therefore, business confidence should go up again as more spending takes place. This will benefit AL-MURAD as their business confidence will rise and they will be able to spend more money on new machinery and other appliances and they will try to open new factories. But if the inflation was low and employment was high AL-MURAD will have to compromise on this as well, as they won?t have enough money in the business to spend. ...read more.

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