40. Impact of Government economic policy

Economic policy is the grouping of actions taken by the Chancellor of the Exchequer to try to achieve the government's economic objectives.
Government economic objectives
1. Stable exchange rate: measures volume/amount of foreign currency that can be bought with one unit of domestic currency. Stable exchange rate -> firms can forecast profit/loss they make from exporting/importing. -> more trade -> boosts UK economic activity.
2. Favourable current account balance: the difference between export income and import expenditure. Gov avoids current account deficit. -> fall in collective net worth.
3. Low unemployment: If reduced, output should increase. Spending levels should increase (wages not benefits) -> help firms grow and expand.
4. Low inflation: percentage change in avg. price level. Price stability = easier to compete home + abroad, encourages investment -> stronger economic growth.
5. Economic growth: total value of all goods/services increase in a year. Standard of living increase. Avg income rises -> consumers more money -> larger markets -> add opportunities.
Coping with crisis
1. (2008) Risky lending and riskier borrowing. In fear of bank collapse, people withdrew cash -> governments had the ability and the will to step in to (try to) solve the free market crisis.
Government economic policies
1. Fiscal policy
  1. Government's budget. (Tax and spending)
  2. How does gov expenditure affect firms?
    1. Increase in gov spending means more money in economy -> markets grow.
    2. Around 40% of UK economy relies on government spending; construction (roads, schools), publishers, computer suppliers.
    3. Reduced spending on NHS: -> cut turnover for construction -> multiplier effects -> drug manufacturers, medical equip.
  3. How does taxation affect firms?
    1. Largest component of gov income from income tax. If income tax increases -> demand falls -> consumer spending falls.
    2. VAT -> makes goods more expensive (20%)
    3. Excise duties (indirect taxes levied + VAT) -> petrol, cigs, alcohol.
    4. Corporation tax: imposed on companies profit. 28% to 24% -> increased opportunity to invest (retained profit)
  4. Types of fiscal policy:
    1. Expansionary: spending exceeds tax income. Benefits firms short-term as total level of spending in economy will rise.
    2. Contractionary: expenditure is less than income. (depresses level of spending in economy)
    3. Neutral: 'balanced'
2. Monetary policy
  1. Concerns the availability and price of credit. Implemented by the Bank of England. Monetary Policy Committee sets interest rate.
    1. Interest rate: price of borrowed money. Increase makes borrowing more expensive. Saving is attractive.
    2. Recession: decrease. Boom: increase.
      1. Boom -> demand high -> inflation
        Increase in interest rates reduces borrowing, threat of inflation reduces.
  2. The impact of interest rates on business costs: Loan capital -> expand rapidly. Highly geared firms can be vulnerable to interest rate changes. -> lower profits.
  3. Impact on business revenue: Interest rates influence spending -> increase reduces spending as they cut into disposable incomes.
    1. Mortgage repayments
    2. Consumer credit
    3. Impact on investment: cost of funding will increase.
    4. Impacts on the exchange rate: affects price of imports/exports.
      1. Interest rate goes up, foreign investors buy pounds.
Supply-side policies
1. Increase economy's productive capacity. An attempt to make it easier for UK firms to supply customers with goods/services.
2. Types of supply-side policy
  1. Privatisation: selling state-owned to private-sector. -> more efficient if competition.
  2. Deregulation: involves removing legal barriers to entering an industry. -> makes markets more competitive. -> increase efficiency.
  3. Increase the incentive to work: benefits/ social security could be reduced. Income tax rates could be cut. Personal tax allowance could be increased -> help firms who need extra labour -> wage rates may fall.
  4. Flexible labour market legislation: favours employer rather than employee. More flexible by.. Enable employers to dismiss workers with few legal formalities. (may encourage employers to take on new staff when they wish to grow because the same staff can be released quickly and at little cost in a downturn.
    1. In addition, reduce non-wage labour costs for the employer.
  5. Immigration: influx of labour will increase labour supply, lifting economy's productive capacity. Help ease skill shortages.
  6. Transport and infrastructure: million of £'s are lost due to congested roads and slow and antiquated railways. If improved costs of operating will fall -> increase profitability and desirability of investing.
  7. Education and training: increase effectiveness of education -> increase in productivity. -> lower costs.

Next up

40. Impact of Government economic policy

Description

Resource summary

Similar

	Created by charcrawford about 11 years ago