Government Policies on Business

Government policies definition

Government policies refer to the actions and decisions made by governments at various levels to achieve specific goals and objectives. These policies can affect different aspects of society, including businesses, the economy, and the overall welfare of citizens. Governments use policies to address issues such as economic growth, social welfare, security, and international relations.

Government policies that affect businesses can be divided into two categories: macroeconomic policies and microeconomic policies. Macroeconomic policies impacting companies include fiscal policy, monetary policy, and trade policy. Microeconomic policies include regulatory policy, tax policy, and industrial policy.

Objectives of government policies on business

Economic government objectives are goals that a government wishes to achieve in the economic context.

In most economies around the world, there are four key government objectives:

• Maintaining full employment

• Ensuring price stability

• Achieving economic growth

• Having a balance of payments.

Let's examine each of these objectives further:

Government Policy Objectives: Economic growth

The first and also most important objective is achieving economic growth.

Economic growth is important as it ensures better living conditions for citizens within an economy. Sustainable economic growth also contributes to a lower unemployment rate and higher tax revenues for public spending.

The government can stimulate economic growth through demand-side and supply-side policies:

• Demand-side policies include fiscal policies, such as reducing tax and increasing public spending, and monetary policies such as lowering interest rates.

• Supply-side policies include non-interventionist and interventionist policies. Non-interventionist policies emphasise the role of the market in economic growth and include policies such as tax cuts, free-market agreements, privatisation, and deregulation. Interventionist policies, on the other hand, give the government more control over economic activities. Some examples include increased funding for training, education, and infrastructure.

Demand-side policies aim to increase aggregate demand (national expenditure) whereas supply-side policies try to improve aggregate supply (national output) and productivity.

Government Policy Objectives: Reducing unemployment

Another main goal of the government is to reduce unemployment and provide more jobs for people in the economy.

Unemployment can be caused by a reduction in output or employee misconduct. Unemployment can put a strain on the economy as it reduces the living standards of unemployed people and limits their spending. This also puts businesses in a financial struggle as they make fewer sales.

In reality, full employment is very unlikely to happen due to frictional unemployment, in which job seekers delay working in search of the best employment. Frictional unemployment isn't all bad, as it means people are looking for jobs that suit their skills. However, the desirable frictional unemployment rate is around 2-3%.

There are two ways for the government to reduce unemployment:

• Increase aggregate demand: the government can enact fiscal policy (lower tax and increase public spending) to encourage consumption while providing more jobs in public services such as road building or bridge construction.

• Provide subsidies or cut taxes: the government can inject funds into certain business sectors to encourage companies to hire more people, thus reducing the unemployment rate. Another solution is to reduce taxes so that businesses will have the incentive to hire new staff.

Government Policy Objectives: Inflation and price stability

The government also works hard to achieve price stability by keeping inflation at a low level.

Generally, inflation reduces consumer purchasing power due to increased price levels. This means consumers are willing to spend their money, thus dropping the level of consumption. Businesses will make fewer sales as a result, which reduces production and the need for workers.

With that being said, a low inflation rate can benefit an economy, since it makes exported products cheaper and more competitive. In addition, firms are more likely to borrow money for investment and growth when the inflation rate is low.

To keep inflation at a low level, the government can introduce a contractionary monetary policy. Here, the central bank will reduce interest rates, which causes the cost of borrowing money to increase. As a result, consumers will be discouraged from borrowing and spending on goods and services. With lower consumption, price levels will drop and so will inflation.

Government Policy Objectives: Balance of payments

The final objective of the government is to maintain a satisfactory balance of payment.

A balance of payment deficit happens when the value of imports exceeds the value of exports. A balance of payment surplus, on the other hand, occurs when the value of exports exceeds the value of imports.

Balance of payment deficit, as well as surplus, can stimulate economic growth in the short run. However, in the long run, a balance of payment deficit can lead to a huge national debt, as the government borrows money from other countries to pay for exports. Meanwhile, a balance of payment surplus can make the economy heavily dependent on exports and more vulnerable to global crises.

To deal with a balance of payment deficit, the government can enact supply-side policies to improve the competitiveness of exports and domestic goods.

Impact of government policies on business

To achieve its objectives, the government needs to implement government policies. Government policies can have a significant impact on businesses by creating an environment that either supports or hinders their growth. This impact can be seen in areas such as taxation, regulation, subsidies, and infrastructure development, which can affect businesses' costs, competitiveness, and market opportunities.

There are two main types of government policies: macroeconomic policies, which affect the whole economy and, indirectly, businesses, and microeconomic policies, which affect individual businesses. Depending on the type of policy, it affects business differently.

Let's take a look at the impact of different government policies on individual businesses:

• Regulatory policies refer to the regulation of business activities. Examples of regulatory policies include environmental regulations, health and safety regulation and consumer protection regulations.
• Tax policies are used to affect the economic activity of businesses as well as to minimise the negative social and environmental effects of business activity. For example, the excise tax on alcohol is used to reduce alcohol consumption and treat patients dealing with alcohol-related diseases.
• Industrial policies are used to support specific industries. For example, research and development grants can encourage businesses to invest in highly desired innovations like vaccines.
• Fiscal policy refers to the use of public spending and taxes to influence aggregate demand and economic development. For example, the expansionary fiscal policy during an economic recession involves tax cuts and/or increased public spending to raise aggregate demand.
• Monetary policy mainly refers to the use of interest rates to influence macroeconomic factors. For example, expansionary monetary policy involves lowering the interest rate and increasing the money supply to encourage borrowing, spending, and investment.
• Supply-side policies are government policies that aim to increase aggregate supply and the level of productivity within an economy. For example, interventionist supply-side policies that involve government intervention, such as investing in education and infrastructure to improve productivity.

Macroeconomic Government Policies

Fiscal policy

It is made up of two opposite policies: expansionary fiscal policy and contractionary fiscal policy.

Expansionary fiscal policy uses tax cuts and/or increased public spending to raise aggregate demand, whereas contractionary fiscal policy uses tax increases and/or reduced public spending to lower the aggregate demand. The former is adopted during the economic recession to encourage more economic activities, whereas the latter is used to fight inflation.

Another use of fiscal policy is to maintain a balanced budget in government.

A budget deficit can result in growing debt as the government has to borrow money from other countries to pay for its expenses. To reduce a budget deficit, the government can adopt a contractionary fiscal policy. That is to raise taxes (revenues) and reduce public spending (expenses).

Monetary policy

Similar to fiscal policy, monetary policy is made up of expansionary and contractionary monetary policy.

Expansionary monetary policy works by lowering the interest rate and increasing the money supply in the market. This lowers the cost of borrowing money and encourages people and firms to borrow more and spend what they borrow. As a result, consumer spending and investment will increase, contributing to a more robust economy.

Contractionary monetary policy, on the other hand, works by increasing the interest rate and reducing the money supply. Here, the consumers and businesses are discouraged from spending and investing, which causes the economy to slow down. Interest rates in monetary policy are regulated by the central bank.

Supply-side policies

As mentioned earlier, supply-side policies can be split into interventionist supply-side policies and non-interventionist supply-side policies.

Interventionist supply-side policies include government provisions for private sector firms, education, training and infrastructure projects. Here, the government plays a central role in increasing the aggregate supply.

Non-interventionist supply-side policies use tax cuts, free-market agreements, privatisation or deregulation to regulate the supply of goods and services within an economy. Here, the market plays a central role instead of the government.

To conclude, there are two main tools for the government to regulate an economy and achieve economic objectives: monetary policy and fiscal policy. Both of them can be further divided into expansionary and contractionary policies.

Government policies mainly use taxes, public spending, and interest rates to influence the level of consumer spending and demand on the market, which help to stimulate business activities or fight inflation. There are also supply-side policies that use interventionist and non-interventionist techniques to influence aggregate supply (national output).

Advantages of government policies on business

Government policies can have many positive impacts on business and workers, such as:

• Grant subsidies: Governments can provide subsidies to certain business sectors to promote their growth and development. This can help businesses to reduce costs, improve efficiency, and increase their competitiveness.

• Tax exemptions: Governments can incentivize the production of certain goods or products by imposing tax exemptions on them. This can encourage businesses to produce more of these products, which can help to drive economic growth.

• Stable political system: A stable political system can create a predictable business environment that attracts foreign investors. This can lead to increased investment, job creation, and economic growth.

• Lower taxes or interest rates: Governments can lower taxes or interest rates at specific times to encourage investment and spending. This can help to stimulate economic activity, create jobs, and increase consumer spending.

• Minimum wages: Governments can set minimum wages that influence business costs. This can help to ensure that workers are paid fairly and can afford the goods and services that they need. It can also help to reduce income inequality and improve social welfare.

Government policy constraints on business

On the other hand, government policy can put a constraint on business development. For example, excessive taxation can create extra costs for the business which affects its ability to invest in new developments.

The government can also influence the interest rate. A rise in the interest rate can increase the cost of borrowing, discouraging businesses from raising funds for growth and expansion. Increased interest rates also lead to less consumer spending and thus lower revenue for the business.

In a short term, the government may print excessive money, causing inflation and a rise in the prices of goods. This spells trouble for both businesses and consumers.