Government Impact on Business: Taxes, Spending & Interest Rates | Business Studies for GCSE/IGCSE - Year 11 PDF Download

The Impact of Taxation on Businesses

Government spending

• Typically, increased government spending is financed through either higher taxes or increased borrowing in the public sector.
• Boosting investment expenditure, such as in infrastructure like roads and hospitals, can stimulate business investment and foster economic growth.
• Targeting public sector spending towards enhancing specific skills within an economy can elevate productivity and reduce business expenses.
• In recent times, the UK government has shifted its focus towards reducing government expenditure:
  • Large-scale infrastructure projects have been curtailed or abandoned, like the downsizing of the HS2 rail project meant to link London with northern cities, adversely impacting business accessibility and workforce mobility.
  • Spending cuts have affected crucial services like healthcare and education as part of an austerity strategy.
  • Public sector wage increases have been restricted, leading to increased strike activity and consequent employee absenteeism, raising business costs.
• In contrast, the economic strategy of the Portuguese government during the same period has prioritized infrastructure spending and emphasized research and development (R&D) to foster economic expansion. Notably:
  • Expenditure on public services has increased while labor costs have decreased.
  • This approach has led to a rise in exports and attracted greater foreign direct investment, bolstering the growing economy.
• Supply-side policies are widely employed by governments to enhance economic efficiency, aiming to make domestic industries more competitive compared to their international counterparts. These policies focus on augmenting the supply of goods and services within an economy.