Explain fiscal policy effect on business
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Fiscal policy refers to economic decisions and actions of a government used to control and stabilize a country's economy. In the United States, the Federal Reserve Board sets monetary policy. Decisions on federal interest rates and tax policy are core policies that ultimately affect companies.
Costs of Borrowing
A main component of U.S. fiscal policy is the setting of federal funds rates. These are the rates the government charges banks for the money they use to make residential and commercial loans. Typically, banks pass on increases or decreases in rates to customers. If the government raises borrowing rates to combat inflation, businesses usually experience higher borrowing costs. If the government lowers rates to encourage economic growth, businesses can usually get lower-cost financing.
Consumer Spending
Consumer spending is a major driving force behind economic success. Government fiscal policy is often used to encourage or stabilize consumer spending for a healthy economy. If the government sets policies of easing loan rates and investing in bonds and financial securities to jump start the economy, this can ultimately result in consumer confidence and spending. In general, if the economy is growing and consumers have money, businesses of all sizes benefit. If your business sells non-essential luxury goods, you especially benefit from increased consumer buying power.
Tax Policies
A major way in which businesses are affected by fiscal policy is in tax rates. Over time, the U.S. government constantly establishes tax policies that raise or lower business taxes. If policies reduce your tax burden, your earnings after taxes grow. This increased profit allows you greater opportunities to reinvest into business growth or to pay out dividends to company owners.
Unemployment
Overall levels of unemployment are often a factor in government fiscal decisions. If unemployment is relatively high, the government is more likely to implement or maintain low interest rates and other growth-oriented fiscal policies. The motive is to encourage business expansion and additional hiring. In some industries, companies base decisions on future human resources needs on current fiscal policy. If the government wants to curb overheated economic expansion with tighter fiscal policies, some companies immediately respond by curbing further hiring
Costs of Borrowing
A main component of U.S. fiscal policy is the setting of federal funds rates. These are the rates the government charges banks for the money they use to make residential and commercial loans. Typically, banks pass on increases or decreases in rates to customers. If the government raises borrowing rates to combat inflation, businesses usually experience higher borrowing costs. If the government lowers rates to encourage economic growth, businesses can usually get lower-cost financing.
Consumer Spending
Consumer spending is a major driving force behind economic success. Government fiscal policy is often used to encourage or stabilize consumer spending for a healthy economy. If the government sets policies of easing loan rates and investing in bonds and financial securities to jump start the economy, this can ultimately result in consumer confidence and spending. In general, if the economy is growing and consumers have money, businesses of all sizes benefit. If your business sells non-essential luxury goods, you especially benefit from increased consumer buying power.
Tax Policies
A major way in which businesses are affected by fiscal policy is in tax rates. Over time, the U.S. government constantly establishes tax policies that raise or lower business taxes. If policies reduce your tax burden, your earnings after taxes grow. This increased profit allows you greater opportunities to reinvest into business growth or to pay out dividends to company owners.
Unemployment
Overall levels of unemployment are often a factor in government fiscal decisions. If unemployment is relatively high, the government is more likely to implement or maintain low interest rates and other growth-oriented fiscal policies. The motive is to encourage business expansion and additional hiring. In some industries, companies base decisions on future human resources needs on current fiscal policy. If the government wants to curb overheated economic expansion with tighter fiscal policies, some companies immediately respond by curbing further hiring
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