Government Policies

Government policy can be referred to as the government’s political activities, strategies, and intentions concerning a specific cause. Government policies explain why things should be carried out efficiently and why they should be done in that manner. Public problems can arise in an infinite number of ways, each of which necessitates a unique policy response. Governments establish many policies to guide businesses. 

Taxation provides revenue for governments to spend. Increased spending necessitates tax increases or borrowing. Any increase in taxes will prevent investment, particularly among entrepreneurs who take the chance of starting and running businesses. Increased spending depletes the limited amount of savings, leaving us with less money available for private investment.

Industry Impact of the Government Policies

Government policies can impact what amount of tax the society pays, pension benefits, immigration checks and laws, fines for rule violations, the system of education, trade and business in an economy, and so on.

The government enacts a policy that alters social behaviour at the workplace. The government can make contracts to grow new technologies to bring about the necessary change. Reduced private investment also reduces the production of goods or services. This, in turn, may result in the loss of jobs.

Interest rates can be influenced by government policy, and an increase in interest rates raises the cost of borrowing. Higher interest rates will reduce consumer spending, while lower interest rates will lure companies to increase production. When there are high levels of inflation, businesses cannot thrive.

Understanding Fiscal Policies

To understand this policy, consider a weak economy to demonstrate how a government uses fiscal policies to influence the economy. The government may issue tax rebates to stimulate aggregate demand and economic growth.

The logic of this approach is that whenever people pay fewer taxes, they have a little more resources to pay or invest, which leads to increased demand. As a result of the increased demand, firms hire more people, lowering unemployment and creating fierce competition. As a result, wages rise, and consumers have more money to spend or invest. It’s a positive cycle or a positive feedback loop.

Instead of lowering taxes, a government seeks to stimulate the economy by increasing spending. Constructing more highways boosts employment, thereby increasing demand and growth.

Expansionary fiscal policies are typically deficit spending when expenditures exceed tax and other revenue receipts. In practice, deficit spending is usually a complex of tax reductions and increased spending.

Modifications in fiscal policy can result in variations in taxes, export, subsidies, rules, interest rates, licences, and other areas. Businesses must be adaptable to react to changing guidelines and policies. Government policies apply at all levels, from the national to the local, such as states and the municipalities, and each of these local authorities has its own set of rules.

Fiscal policy examples include reducing taxes to increase economic growth and mediating inflation to restrict economic growth.

Types of fiscal policy

The three types of fiscal policy are as follows:

Neutral fiscal policy

A neutral fiscal policy occurs when an economy is neither in recession nor expansion. The amount that measures the government’s spending is approximately the same as it has always been on an average over time; hence no changes are taking place that would affect the economy’s performance.

Expansionary Fiscal policy

The government employs expansionary fiscal policy to balance the business cycle’s contraction phase. It entails government spending surpassing tax revenue by a more significant margin than previously, typically implemented during recessions. Expansionary fiscal policies include increased government spending on the public and tax reductions to economic residents to increase their purchasing power. This example is one of the many fiscal policy examples.

Contractionary fiscal policy

This is a policy that raises tax rates while reducing government spending. It happens when the federal government’s budget deficit is even lower than it usually is. It can slow the economic growth and inflation caused by a substantial increase in consumption and excess money supply. When the economy’s aggregate income is reduced, the amount of money is available for consumers to spend. Contractionary fiscal policy is used when unsustainable growth occurs, resulting in inflation, high investment prices, recession, and unemployment.

These classifications can be confusing because cyclical fluctuations in the economy cause cyclical fluctuations in tax revenues and some forms of government expenditure, altering the debt situation; this is not considered policy change.

Conclusion 

The government initiates policies to overcome the specific complications. Government policies ensure that the economy’s future responsibilities are met. Governments use fiscal policy to regulate the amount of aggregate supply to meet desired economic goals, including price stability, job prosperity, and full employment. All the government policies ensure that the people are safe and healthy to help develop the country. Also, the government policies can vary from state to state, as some policies are restricted to a region only.