Impact on businesses of government policy AS Business Studies Impact on businesses of government policy

Government spending and taxation

Government spending and taxation The government can change the way businesses work and influence the economy either by passing laws, or by changing its own spending or taxes. For example: Extra government spending or lower taxes can result in more demand in the economy and lead to higher output and employment. Governments can pass legislation protecting consumers and workers or restricting where businesses can build new premises.

Government and taxation The main types of tax include: Income tax taken off an employee's salary. This results in less money to spend in the shops. Value added tax (VAT) added to goods and services. A rise in VAT increases prices. Corporation tax is a tax on company profits. A rise in this tax means companies keep less of their profits leading to less company investment and the possible loss of jobs. National Insurance contributions are payments made by both the employee and the employer. They pay for the cost of a state pension and the National Health Service. An increase in this tax raises a company's costs and could result in inflation. Two roles: Take tax from business and workers Taken from bitesize

Money out Money in

Implications of government decisions on business Governments can control the rate of interest and the amount of money circulating in an economy. Government can also affect the amount of borrowing or credit available from financial institutions like banks. This is called MONETARY policy and they manipulate these variables to achieve their political party’s objectives The rate of interest is the price of money and the key instrument of monetary policy

Government policy continued The government may change the way that it spends and this may effect business The government may change the tax that it charges in the UK and this may effect business There are consequences for business of unemployment and inflation Business will be effected by changes in the exchange rate Changes in economic indicators such as unemployment will have a knock on effect to business (such as demand or larger pool of applicants for vacancies )

Changes in taxation – effect on business If the % of VAT goes up a business will have to pass this cost on to the consumer so if makes goods more expensive to buy The alternative is that the business absorbs this extra costs and the price of the goods remain the same to the customer – therefore lowering profit margins

Lower real wages as inflation rises As the cost of goods rise this means if your wages stay the same you may not be able to buy as much…

Glossary Interest rates – cost of borrowing, the price of money Inflation rates – rise in cost of goods and services to buy (persistent increase in costs) Unemployment rates – rise in numbers not in employment Tax – monies demanded from the government so they have money to spend elsewhere like the NHS and on roads and education Exchange rate – the rate at which one currency can buy another £1 = $1.67

How will the following government decisions impact business? Over to you How will the following government decisions impact business? Changing interest rates? Changing the exchange rate?

What are the consequences for business of changes in: Over to you ...Group B What are the consequences for business of changes in: The unemployment rate? The rate of inflation?

Sample question 1 [8] [8]

Answer question 1

Sample question 2 Between 2009 and 2011, the annual rate of CPI inflation was above the UK government’s target range. Which one of the following could be an effect of higher inflation rates for UK manufacturer’s, such as JCB Ltd? A Fall in cost of supplies B Reduction in real wages for its staff C Increase in exports D Increase in recruitment [4]

Answer question 2 Answer option B – reduction in real wages - Inflation is a persistent increase in the aggregate/general level of prices in an economy (1 mark) - Which can cause the cost of living to increase because less can be bought for the same amount of money (1 mark) - So unless wages are increased in line with prices, consumer purchasing power will fall (1 mark) - Cost of supplies is likely to increase during inflation because the stock may be purchased from within the UK from suppliers charging higher prices (1 mark) - Exports may fall because UK goods may become less price competitive given inflation (1 mark)

Sample question 3 (from second half of the paper) Exchange rates and interest rates are economic external influences. Assess their likely significance to Cebu Home. [12]

Answer question 3 Level of answer Marks (per factor) Level 1 1 e.g. the exchange rate is the price of one currency in terms of another, or interest rates are the price of money paid to lenders or by borrowers Level 2 2 e.g. higher interest rates may cause a reduction in the demand for Cebu Home furnishings. Level 3 3 4 e.g. exchange rates may affect cost of importing products, e.g. a fall in costs if the pound strengthens might lead to an increase in profit. e.g. increases in interest rates could cause a reduction in disposable incomes, which will mean spending on luxuries such as home furnishings might fall, so Cebu Home’s sales/stock turnover will fall. Level 4 5 6 e.g. Cebu Home imports its stock from the Philippines so the cost of stock is likely to be affected by fluctuations in the exchange rate because a strong £ will make furniture purchasing cheaper. However, quality may be more important than price, in which case the strong £ will not be significant. e.g. if interest rates fall this may lead to an increase in consumer borrowing like mortgages which may increase the demand for Cebu Home furniture. However, the changes in interest rate may not actually affect her typical customers (thespians) because they will not need to borrow to buy the products, in which case demand for Cebu Home homeware may not decline if interest rates increase.

Sample question 4 Throughout 2007, the UK experienced a gradual decline in interest rates. Which of the following is the most likely consequence for a small electrical retailer? A Spending on stock decreases B Staff wages are increased C Borrowing increases D Average cost of stock increases [4]

Answer to question 4 Answer C – borrowing increases Interest rates are the price of borrowing money (1 mark knowledge/understanding), so a reduction in interest rates effectively means a reduction in the cost of borrowing (1 mark analysis), which, other things being equal, should lead to an increase in the demand by businesses for investment funds not an increase in bank deposits (1 mark evaluation). • A fall in interest rates means that the cost of servicing debt falls (1 mark knowledge) which may lead to an increase in profits (1 mark analysis) which will not necessarily be spent on increasing the wages of staff (1 mark evaluation).

Sample question 5 The value of the £ (pound sterling) fell against the euro in late 2008 and 2009. This change would have most likely benefited British: A tourists holidaying in France and Spain B exporters who sold their products in countries using the euro C consumers, because overall the inflation rate fell as a result D importers, because they were able to improve their profit margins

Answer to question 5 Answer option B - exporters Definition of exchange rate, i.e. the price of one currency in terms of another (1 mark); - Because the relative price of British exports will fall as a result (1 mark); - Which, providing competitiveness is based on price, will increase demand (1 mark) - British tourists abroad will get less foreign currency for their £ sterling which will make things more expensive (1 mark) Spiced / wpidec

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