GOVERNMENT OBJECTIVES AND POLICIES

TAXATION:
The money raised from taxation is used by a government to help fund its spending on
public services. Businesses and individuals pay taxes. Some taxes are direct, which means
they are charged on income. Examples include income tax, which is paid on personal
income, and corporation tax, which is paid on company profits. Some taxes are indirect,
which means they are levied on spending. Value Added Tax (VAT), which is paid when
buying goods and services, is one. Governments may change levels of government
spending and taxation to influence total demand in the economy. This is called fiscal
policy and is likely to have an impact on businesses.
● If income tax were lowered, there would be more spending in the economy.
Businesses may respond by increasing production and expanding. In some
countries, income tax rates may be cut to help the low paid.
● Businesses may respond to higher corporation tax by cutting investment
or reducing dividends. However, in recent years a number of governments have cut
corporation tax rates. Examples include Croatia, Denmark, Egypt, Estonia, Finland, Latvia,
Lesotho, New Zealand and Norway. One reason why governments are cutting rates of
corporation tax is to attract foreign businesses to locate operations in their countries.
This will help to create jobs and improve living standards.

CONSTRAINTS ON PUBLIC SPENDING:

In recent years, some governments have tried to constrain levels
of public spending. One reason for this was because some
countries built up massive debts as a result of the financial
l crisis in 2008. The effects on businesses of such constraints
can be severe.

HOW CAN GOVERNMENTS AFFECT BUSINESS ACTIVITY?

● Change the law
● Influence the rate of interest and exchange rates in the economy
Change levels of government expenditure and taxation introduced policies that have a
direct impact on businesses such as giving subsidies to farmers.

INFRASTRUCTURE PROVISION:
In most countries, the government is responsible for developing and
maintaining the nation's key infrastructure. This includes building schools, hospitals,
roads, bridges, dams, railway systems, power generators and government offices. These
projects can be very expensive, often costing millions or even billions of dollars.

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GOVERNMENT OBJECTIVES AND POLICIES

LEGISLATION :
Without government intervention, some businesses may not meet the needs of certain
stakeholders. Some might go further and exploit vulnerable
stakeholders. One of the roles of the government is to provide a legal framework in which
businesses can operate and ensure that vulnerable
groups are protected.

Competition policy :
Governments should try to promote competition. This helps to prevent anti- competitive
practices and consumer exploitation.
● Encourage the growth of small firms: If more small firms are
encouraged to join markets there will be more competition. With more small firms
the market is less likely to be dominated by one very large firm.
● Lower barriers to entry: If barriers to entry are lowered or removed then
more firms will join a market. This will make it more competitive.
● Introduce anti-competitive legislation: Many countries have laws that
help to encourage competition. Such laws are often designed to protect consumers
from exploitation by monopolies, mergers and restrictive practices. Some
countries have special bodies or agencies that are responsible for managing all
policy relating to competition and consumer protection. They may also carry out
enquiries into mergers, takeovers and anti-competitive practices.