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Fiscal policy Essay

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The uk government sets monetary policy by adjusting the funds rate. This affects other short-term and long-term rates, including credit-card rates and mortgages. Governments define fiscal policy by setting taxation levels and writing legislation and regulation for everything from health care to the environment. Fiscal and monetary policy changes can affect businesses directly and indirectly, although competitive factors and management execution are also important factors. Businesses go through cycles of expansion, recession and recovery.

Monetary and fiscal policies can affect the timing and length of these cycles. In the expansion phase, the economy grows, businesses add jobs and consumer spending increases. At some point, known as the peak, the economy overheats and the government increases interest rates to stave off inflation. Factories shut down, job losses rise and business sales fall. rate cuts and government spending, or both, are often necessary to recharge the economy. Eventually, the economy hits rock bottom, known as the trough, and gradually starts to recover.

Fiscal Policy Fiscal policy usually involves changes in taxation and spending policies. Lower taxes mean more disposable income for consumers and more cash for tesco to invest in jobs and equipment. Stimulus-spending programs, which are short-term in nature and often involve infrastructure projects, can also help drivebusiness demand by creating short-term jobs. Increasing income or consumption taxes usually mean less disposable income, which, over time, can decelerate tescp actvitiy like spending on investment.

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Monetary Policy Changes in short-term interest rates influence long-term interest rates, such as mortgage rates. Low interest rates mean lower interest expense for businesses and higher disposable income for consumers. This combination usually means higher business profits. Lower mortgage rates may spur more home-buying activity, which is usually good news for the construction industry. Lower rates also mean more refinancing of existing mortgages, which may also enable consumers to consider other purchases. High interest rates can have the opposite impact for businesses: higher interest expenses, lower sales and lower profits.

Interest-rate changes can affect stock prices, which can impact consumer spending. Rate changes may also impact exchange rates — higher rates increase the value of the dollar relative to other currencies, which lowers import costs and increases export costs for U. S. businesses; lower rates may have the opposite impact, namely higher import costs and lower export costs. Tesco like every business will be affected by Monetary and Fiscal policies, whether this be directly or indirectly. Tesco PLC will be affected more indirectly by these policies and in this report I will explain how.

Fiscal Policy involves the Government changing the levels of Taxation and Government Spending in order to influence AD (Aggregate Demand) and therefore the level of economic activity. Monetary Policy involves using interest rates or changes to money supply to influence the levels of consumer spending and Aggregate Demand. The objectives of the government are: 1. low inflation CPI = 2% 2. Strong economic growth. 3. To Reduce unemployment 4. To avoid large deficit on current account balance of payments Fiscal Policy

The Fiscal Policy may be Expansionary or Deflationary. Currently the policy is expansionary. This involves increasing AD, therefore the government will increase spending and cut taxes. Lower taxes will increase consumers spending because they have more disposable income. This will worsen the govt budget deficit. The other method is Deflationary fiscal policy this involves decreasing AD therefore the government will cut their spending and or increase taxes. Higher taxes will reduce consumer spending. This will lead to an improvement in the government’s budget deficit.

Tesco will be affected by direct and indirect taxation which in turn has impacts on business costs, on aggregate demand, and therefore on business revenues. Direct taxation includes income tax, national insurance and corporation tax. Income tax and National Insurance (NI) are similarly affecting the consumer and operate exactly the same giving the same economic effects. Income tax and NI are the two biggest source of tax revenue for the govt, changes to either of these directly relate to disposable income, which in effect changes consumer demand.

Consumer demand is a major factor for Tesco as a business as and an increase would mean more sales and a higher income, a decrease would lead to lower sales and lower income for Tesco’s. A lesser income would mean smaller profits which in turn might mean lower investment and employment levels. Corporation tax is a tax on company profits which means it directly affects TESCO. A cut in tax means Tesco will have more disposable profits which they could use in many ways.

They could add to their reserves saving it for an emergency, or use the profits to finance investment, which will directly increase economic growth. Another use is reduce corporate debt, which will increase Tesco’s future profits. They could also give their shareholders bigger dividends, which could lead to bigger investments if shareholders invest their extra income back into Tesco. Indirect Taxes relates to VAT and Excise duties. VAT is sales tax which is collected by the business (Tesco) and given to the government.

Essentially if increased it would increase the price of Tesco’s products, this subsequently will more often than not lose consumer interest. Monetary policy The interest rates instance of the monetary policy focuses mainly the consumer, as it is the consumer spending that affects the whole process. The money supply method falls mainly to the banks and their reactions. Interest rates are essentially the cost of borrowing if the government increases interest rates then any consumer in debt would hence have a lower disposable income.

Monetary policy can cause issues because it affects people in different ways, people with large loans will be more affected by high interest rates than those with none For example if the consumer has a credit card debt and the interest rates are increased then monthly charges therefore would be increased leaving the consumer with not as much money. A common problem with lower disposable income is the consumers don’t spend as much of their income. This, for Tesco, means that there will be less demand for their products and services and in turn less sales and smaller overall profits.

Interest Rates will have a direct impact on Tesco Due to them having borrowed money they would have to pay higher rates and therefore directly are at a loss hence Tesco would have increase costs and therefore decreased profits. Tesco, to prevent this, in the long term would have to cut prices to encourage sales, but if this wasn’t an option, say to, too small profit margins then the company would have no job security in that a lot of its staff would be ‘laid off’. If this crisis continued then Tesco may eventually go bankrupt and fail.

This is not always the series of events in that it is directly related to Tesco itself, and how long interest rates will be up. You have to look at: how much debt does Tesco have? Do Tesco have a reserve fund, if so, is it enough? Can Tesco offset their sales in the UK with sales abroad in other countries? This is negative method for Tesco as a business as it only involves their profits reduced, but in the case of interest rates going down instead of up then everything would be vice versa and profits and job security would be at a high.

Another Monetary method used is the government looking and reacting to money supply. The current policy the government has put in use is quantitative easing which the full responsibility lays with Bank of England. Quantitative easing is another indirect approach in which it is up to the commercial banks and the consumer to decide how to go forward. The Bank of England firstly pumps money into all the commercial banks this is done by them buying assets such as bad loans from them. This is done so in turn the commercial banks will lend more money to the consumers.

As a consumer we must then spend this money increasing demand and therefore overall sales. If sales are up then profits too will be higher. This is a positive thing for Tesco has a larger demand for their products allow them to grow and expand due to greater profits. When an economy is in a recession the government has to act differently in order to increase demand and help businesses survive. The money supply method of the monetary policy is a good idea in theory but because of the current economic crisis, banks don’t feel secure enough to lend out there money as the return isn’t guaranteed.

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