Assignment 2: Monetary and Fiscal Policies
P3: Outline how both fiscal and monetary policy decisions have affected a selected business.
M2: Analyse the effects of fiscal and monetary policies for a selected business in terms of the market in which it operates
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
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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
Tesco's has recently had to make many changes in their staff and have had to change the management structure to be able to pay every manager fairly and pay the wages for their general employees. These effects were taken place due to a major profit change and an unstable financial system. Another effect that has been changed is the Tesco pension scheme back in 2012. The Tesco pension scheme had changed due to financial problems however this would mean employees who have a pension scheme with Tesco will have to work longer if they were in their early 60's . This became a challenge for Tesco's as they couldn't afford to pay out on pension schemes at that precise moment.
Tariff and Tax: The trade of a business organization also gets affected by the tariff and Tax laws. This could influence both positively or negatively. If the global market’s tax and tariff rate is high then TESCO could face difficulties to compete with those countries companies.
Tesco are Britain’s biggest supermarket and due to this they employ thousands. The government can give Tesco grants and money to invest back into Tesco. The government will benefit because if Tesco invest the money wisely they will have a successful year therefore the government will receive more tax. An example of Tesco receiving a government grant was in 2009 when they received £5 million to open a new store in Glasgow.
Another internal economy of scale from which Tesco benefit is technical. As they grow, they are able to use the latest equipment and incorporate new methods of production. An example of is their new self-service checkouts from which people can purchases their goods from a machine using a scanner. This increases efficiency and productivity, reducing average costs of output because it means they don’t have to employ as many workers.
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
The fiscal policy affects Tesco due to an increase in income tax which will cause the all customers to do less spending and have their spending habits change. This will affects Tesco’s profits, stock and cause them to lose stores and job losses which will create bad morale. Tesco’s market share might decrease depending on the effects on the competitors. Also Tesco will do less investment due to less profit to be able to spend. An increase in VAT will affect Tesco they will gain less profits for the same amount of sales. Tesco will either have to increase their
Corporation tax increase would affect Tesco has their profits are low compared to previous years and wouldn’t be able to do investments or campaigns to try to increase sales. This would allow their competitors do keep doing successful campaigns and investments, which will steal customers causing Tesco to go into a negative multiplier effect. But, Tesco’s competitor’s profits would also decrease causing them to do less investment and provide less money to their campaigns. This would allow Tesco to try to do a more successful campaign than their competitors to steal customers, increase sales and profits to get back to their 33% market share.
Fiscal Policy can be explained in many ways, for example. Fiscal policy is the use of the government budget to affect an economy. When the government decides on the taxes that it collects, the transfer payments it gives out, or the goods and services that it purchases, it is engaging in fiscal policy. The primary economic impact of any change in the government budget is felt by particular groups—a tax cut for families with children, for example, raises the disposable income of such families. Discussions of fiscal policy, however, usually focus on the effect of changes in the government budget on the overall economy—on such macroeconomic variables as GNP and unemployment and inflation.
Tesco operates in 14 different countries. Therefore its performance may be influenced by the local legislation and political factors. There are
How can monetary policy and fiscal policy greatly influence the US economy? Keynesian economics says, “A depressed economy is the result of inadequate spending .” According to Keynesian the government intervention can help a depressed economy through monetary policy and fiscal .The idea established by Keynes was that managing the economy is a government responsibility .
An economic factor that might affect Tesco is the demand of the consumer and customer which will decrease with the different problems; people are having in the world. As the demand decrease so the economy of the business will decrease and the profit of the business will decrease too. This refers in the fiscal and monetary, for example since when the government decided to raise the VAT from 17.5% to 20%, the business increase their goods price and due to that reason the customers do not purchase enough goods like they used.
Monetary policy affects the aggregate demand by altering the supply or cost of money. One of which is the alteration of the rate of interest. By reducing the interest rate, it encourages consumers and businesses to borrow and spend or invest instead of saving their money. As a result, the supply of money increases. When there is more money, it
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Profits for Tesco’s operations in Europe, Asia and Ireland increased by 78% during the last fiscal year. The company has a strong brand image, and is associated with good quality, trustworthy goods that represent excellent value. Tesco’s innovative ways of improving the customer shopping experience, as well as its efforts to branch out into finance and insurance have also capitalized on this.