What is the Impact of fiscal policy on business?

Answer 1

The federal government uses fiscal policy -- taxation and government spending -- to steer the economy in the right direction by increasing or decreasing the demand and availability of goods and services. Fiscal policy can encourage investment, create jobs and pave the way for long-term economic growth. For retail businesses, fiscal policy affects consumer demand, the cost of doing business, investment decisions and the ability to compete.

Consumer Demand

Tax-related fiscal policy affects retail businesses by changing the amount of disposable income people have to spend. Higher taxes, or an expansion of taxable items, lowers consumers' net income, making them more budget conscious and apt to limit expenditures to necessities. Lower taxes leave more money in consumers' pockets to spend on goods and services retailers offer. Fiscal policy that involves government spending and adds to the federal deficit can lead to higher interest rates. This can increase the cost of credit and mortgages that may make consumers think twice about purchases. It also may encourage them to save, leaving less of their take-home pay for trips to the store.

Cost of Doing Business

When fiscal policy results in higher interest rates, retailers pay more for lines of credit. Higher interest rates, when they attract foreign investors, raise the value of the U.S. dollar, which gives retailers more purchasing power when buying merchandise from foreign suppliers in their local currency. Because the retail industry imports nearly 98 percent of clothing sold in the U.S., fiscal policy can influence a retailer's operating costs. Taxes also affect retail business expenses. Fiscal policy that increases the employer portion of wage taxes for Social Security and Medicare add to the cost of doing business.

Related Reading: Impact of the Retail Margin on Profit

Investment Decisions

Fiscal policy influences how much risk a retailer takes. When Congress introduces tax credits for investing in business expansion, or tax incentives to hire and train employees, retailers may feel confident in hiring workers or opening new locations. Lower corporate tax rates also free up cash to reinvest in facilities and merchandise selection.

Competitiveness

Uncertainty about the economy keeps shoppers out of stores; uncertainty about fiscal policy makes retailers, like other business professionals, wary. As long as customers delay major purchases and reduce their number of store visits, retail businesses must keep prices low and cut costs, including hiring, in order to remain competitive.