18- Government Economic Policies

8/13/2019 18- Government Economic Policies

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Government Economic Policies

Lesson outcomes:

Demonstrate an awareness of the impact thattax and interest rate changes might have on

business decisions

Know how interest rates affect business Know how different tax changes affect

business


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Controlling the economy

The policies the governments use to control

the economy

Monetary

Fiscal

Supply side


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Changes in government policy

The main tools that the government uses to managethe economy are taxation and spending.

Monetary Policy- involves the government changingthe quantity of money available and changing thebase rate of interest.

Fiscal Policy- involves the government altering itstaxes and spending in light of what is happening inthe economy.


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the economy

Monetary

Fiscal

Supply side


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Monetary Policy

Using higher interest rates will impact a

business in three main ways:

1. Increases interest costs and reduces profits

for business that have very high debts

2. Reduces consumer borrowing and this

reduces demand for goods bought on credit

3. Tends to lead to an appreciation of the

countrys exchange rate.


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Interest rates

The interest rate is a cost or a reward

It is a cost for borrowing, or a reward forlending or saving

It is usually written as a percentage


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If interest rates increase

People will save

Businesses will borrow.

Individuals will borrow.

People and businesses will pay on their loansand mortgages

Overall people will spend . money on goods andservices

Demand for goods and services ..


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the economy

Monetary

Fiscal

Supply side


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Fiscal Policy

Includes Taxation

Public Expenditure

Public borrowing

Politics influence fiscal policy

Government

Spending


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Government Spending

The government spends money

1. To provide goods and services2. To help poorer or unfortunate people in the

community

3. To help businesses


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Why does the government make

us pay taxes?


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Why pay taxes

1. It pays for the goods and services the

government provides.

2. The government uses taxes to raise the price

of some goods that cause external costs so

that people buy less of them. E.g. Cigarettes,

alcohol and petrol.


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Taxation

Taxation comes in two forms:

Direct taxationtaxation on income andprofits (income tax, National Insurance and

corporation tax).

Indirect taxationtaxation on spending (VAT

and custom & excise duty).


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Value added tax (VAT)added to goods

and services. A rise in VAT increases

prices

20%


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Corporation taxis a tax on companyprofits. A rise in this tax means

companies keep less of their profits

leading to less company investment andthe possible loss of jobs

c. 30%


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Customs and Excise duty - Customs Duty is a tax

charged on importation of goods produced

outside the European Union (EU).Excise Duty is a tax on certain goods such as

alcohol and tobacco.


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Questions4 marks each

1. The basic rate of income tax rises to 25%(from 20%)

How could this affect businesses?

2. The government cuts local governmentspending

How could this affect businesses?


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If the government wants to slow the

economy down it would

. Taxes

..spending

This would be that people would have money to spend on goods and

services

The economy would get ..


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If the government wants to speed the

economy up it would

. Taxes

..spending

This would be that people would have money to spend on goods and

services

The economy would get ..


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the economy

Monetary

Fiscal

Supply side


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Supply side policies are used by

government to improve the efficient

supply of goods and services in theircountry


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Supply side policies

Privatisation:- The aim is to use the profit motive to make businessmore efficient

Focus on increasing supply in the economy by: Helping markets to work more efficiently to increasecompetitiveness of industries

Include policies to: Retrain people to meet employers needs

Improve the efficiency of the labour market

Contribute to: The reduction of unemployment

Economic growth


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Activity 4.2 Pg 58

Activity 4.3 Pg 62

Documents

18- Government Economic Policies