The Role of the Government

The Role of Government

Intervention:
Government Policies to Achieve Objectives:
 Three types of economic systems:
1. Planned/command - govt. complete control of economy.  Fiscal policy - taxation + spending.
 No private enterprise i.e. all public sector e.g. N.Korea.  Monetary policy - IR + money
2. Market Economy: Less govt. intervention, mainly all private supply.
sector e.g. USA.  Supply side policy.
3. Mixed - Both public + private sector e.g. UK.

Government Objectives:

 UK Govt. 5 main objectives:  BOP - (Balance of Payments): Records the
1. Continuous, stable economic growth - 2% pa. monies coming in + out of the country. A deficit
2. Sustainable development - environmental exist when import values > export values.
protection whilst pursuing economic growth.  Tourist import - results in money leaving the
3. Low inflation CPI = 2%. country.
4. Low unemployment.  Tourist export - results in money coming into
5. Balance of payments equilibrium or low BOP deficit. the country.

Fiscal Policy:

 A fiscal policy is when the government will change taxation and/or own spending in order to change the level of
economic activity. There are two types:
1. Expansionary fiscal policy - tax is cut or increased spending on services i.e. health, education, transport,
defence etc. Total spending from the govt. will rise benefiting businesses and the economy.
2. A contractionary fiscal policy is when expenditure is reduced or tax is raised. This reduces spending in the
economy in order to cool it down.
 Tax + expenditure - immediate effect activity but extent depends on type of tax + nature of govt. spending.
 Direct Tax = income tax, corporation tax - implications for businesses depend on product type e.g. luxury goods
- significant effect.
 Indirect Tax - VAT, increase = reduced consumer spending extent fall will depend on the price elasticity of
product. Side effect of rise = inflationary.

Method Impact on Business Evaluation
Lower Basic Rate of  Increased consumer disposable income -  Impact will depend on what is happening -
Income Tax (E.F.P.) increased demand. interest rates + wages increases.
 Increased worker motivation - pay rise -  Are workers really motivated by a small
encourage overtime + promotion - extra effort reduction. Higher rate of tax was not cut +
now rewarded. increase number of income earners now pay tax.
Lower Corporation  Increases profits after tax - used to pay higher  Company profits fell due to credit crisis, lower
Tax (E.F.P.) dividends, increasing investment in company corporation tax - limited impact in ST.
from retained profits.  Corporation tax rate much lower in other
 Lower corporation tax - encourage more countries e.g. Ireland + Poland.
businesses to set up.
Higher Fuel Duty  Higher transport costs - cost push inflation.  Firms more affected by road haulage costs than
(C.F.P.)  Higher inflation - tax increases = higher wage others.
rises - cost push inflation.  Tax increases - small impact on inflation
compared with higher costs caused by world oil
+ food prices + £ depreciation = raised import
prices.
High Alcohol Duty  Reduce spending in pubs - consumers prefer  Demand - price inelastic.
(C.F.P.) cheaper home drinks
Increased Spending  Increased demand for construction company  Occurred - downturn in commercial property
(E.F.P.) services. demand - construction companies fewer orders.
 Improvement in quality + educational standards  Expansion higher education take several years
of labour force - help productivity. before benefits received.
Increased  Government spending - more in economy than  Government borrowing - interest rates stay
Government Budget is taking in taxes + increase economic growth. higher so Bank of England - finance deficit.
Deficit (E.F.P.)  Increased deficit will boost demand + output in
economy by raising government spending above
tax revenues.