Fiscal Policy and Economic Performance

Question: Discuss about the Fiscal Policy and Economic Performance. Answer: Introduction GDP of an economy is the total value of goods and services produced in a country. These goods are produced by businesses, hence it can be said that the GDP of an economy is affected by the business. Similarly a business is affected by the economic performance of a country since most of the business decisions depend on the economic growth. The economic growth can be controlled by the government using various tools like fiscal policy, monetary policy in order to keep a balanced growth. The report discusses how the fiscal policy and the domestic and foreign economic performances impact the business. Fiscal Policy Fiscal policy refers to the federal governments taxation and spending activities. The fiscal policy has an effect on the overall economy including individuals and businesses. The government uses fiscal policies to stabilize a countrys economy. The government can increase its spending either by increasing the tax or by government borrowing. Increased spending leads to increase in the economys GDP. A higher GDP means growth and development in the economy and in an economy performing well, the businesses flourish as the consumers have high spending power and thus the demand for their goods and services increase and so their profit levels. Impact of Fiscal Policy on Business The various effects the fiscal policy has on a company are discussed below: 1. Costs of borrowing when the government has an expansionary policy which requires increased government spending, the government tends to borrow money in order to finance its spending. This may lead to an increase in the interest rate; a higher interest rate will increase the borrowing costs of the firms. With a difficulty in obtaining funds, the business activity may be slowed down. Hence, a lower interest rate by the government is in favour of the businesses. 2. Consumer Spending the fiscal policy of the government has a direct effect on the consumer spending. Increased government spending means more government jobs which will increase the consumer spending and the businesses will benefit from this as the demand for their goods and services will increase. Moreover, if the increased government spending is coupled with low taxes, the economy has all the more disposable income in hand. The demand for non-essential luxury goods specially increase on such occasions. 3. Tax policies governments taxation policy has a direct impact on the business owners. With an increase in business tax, the profits available to business owners decrease and vice versa. Also if the government increases the individual tax, the disposable income of the consumer reduces and therefore the demand for goods and services also decrease, thus affecting the business of the owners. 4. Unemployment - if there is unemployment in an economy, the government uses its fiscal policy to generate employment by reducing its interest rates and maintaining growth oriented fiscal policies. This will lead to expansion of business and thus additional hiring thus creating employment. If the government has tight fiscal policies, companies will resort to firing employees to reduce their costs(Fatas, Mihov, NA). Impact of Domestic and Foreign economic performance on Businesses Gross domestic product is one of the best indicators of an economys performance and growth. Economic growth leads to improvement in standard of living, expanding of the new and existing markets. Economic growth happens when there is efficiency in utilization of existing resources and new investments take place. This leads to increased incomes which fuel the demand for goods and services and thus encourage further economic growth. Also GDP is used by the central bank to set the interest rates. In times of slow economic growth, the bank lowers the interest rates which make borrowing less expensive. Thus lower interest rate stimulates business and consumption. The business owners can obtain loan for undertaking new business activities and thus look at growth. The business owners base their decision of employment or new business opportunities on the economic growth of the country. If the economy is growing, businesses would increase employment, expand their operations, invest in new plant and equipment and other assets. Foreign investment plays an important role in fuelling the economic growth of an economy. The investment in an economy increases which leads to generation of employment. Higher employment leads to increase in demand for goods and services and thus increases business prospects for companies. Domestic savings also increase as a result of foreign investment as the money which would have been utilized for investment can now be saved and used to increase the standard of living by buying luxurious goods. This will further increase demand for goods of domestic producers. Also the foreign aid brings in the latest technology which is not available in the domestic market. The technology can be used by domestic producers to reduce their input costs and thus increase profitability. Thus we see that foreign investment supplements the economic growth. (Kabete, 2008) Businesses also evaluate the economic growth and development of foreign countries as it provides them with an opportunity to expand their operations in a country where they can earn higher income. A developing economy provides with ample opportunities for capital investment, the results of which bear success fruits for the business owners. (Ekanayake, Chatrna, NA) Thus we see that not only the domestic economic performance is of importance to the business owners, rather a good foreign economic performance also provides opportunities to business owners to expand their business overseas and take the benefits of the economic growth of other country. However, each country has its government regulations in place to keep check of domestic money not flowing out of the country. Therefore, a business can venture outside only within the regulatory limits. Conclusion A business must consider the economic growth and the fiscal policy of the government while formulating its business strategies and plans. Firms selling necessities like supermarkets are less affected by the ups and downs in the economic growth. However, the non-essential luxury products prosper only in when the economy is experiencing economic development and growth. (Mandel, 2007).The business use the GDP data to make their strategic decisions and the government uses the GDP data to control the economy. With the use of its fiscal and monetary policy, the government is able to influence the economic growth which gets reflected in the GDP data of the economy. (Rothbard, NA). Therefore, in order to make full use of the opportunities or to be prepared for the threats posed by the government policies, the fiscal policy, domestic and foreign economic performance are of paramount importance to the business owners. References Fatas, A., Mihov, I., (NA), the Effects of Fiscal Policy on Consumption and Employment: Theory and Evidence, Journal of International Economics Kabete, C.N., (2008), Foreign Aid and Economic Growth: The Case of Tanzania, Masters of Arts in development studies, and Institute of social studies Ekanayake, E.M., Chatrna, D., (NA), The Effect of Foreign Aid on Economic Growth in Developing Countries, Journal of International Business and Cultural Studies Mandel, M., (2007), Does GDP matter anymore?, Bloomberg Business Week Rothbard, M.N., (NA), What Has Government Done to Our Money? The Economic Effects of Inflation, Ludwig Von Mises Institute