Government Impact on Business: Taxes, Spending & Interest Rates (Cambridge (CIE) O Level Business Studies)

Revenue may fall for many businesses

• Increased income tax reduces customers' disposable income leading to lower demand

• Increased VAT makes selected products more expensive and customers may switch to alternatives

Operating costs will rise as a result of increased taxes such as VAT and National Insurance contributions

• Higher costs may be offset by charging higher prices

• Higher prices may lead to lower sales and profit may fall

Import costs are increased when customs duties are raised

Business spending and investment may be lower as a result of increases in corporation tax as less profit is retained to fund business expansion

Operational decisions may be affected by increases in business rates and taxes related to employing workers

• Businesses may choose to forego business improvement or relocation, or employ fewer workers as a result of increased costs

In some cases, businesses may take steps to try to avoid paying specific taxes or pay lower rates of taxation

• Move the business to a low-tax location

• Change production methods to reduce the use of highly-taxed components

In Serbia, state-owned businesses were privatised in 2016, including Galenika, a pharmaceutical company, and Železara Smederevo, a steel producer

The government of Chile has significantly increased spending on schools to equip young people with IT skills required by its growing technology sector

In 2022, China enacted its Anti-Monopoly Law, which changed rules related to competition and business mergers

Businesses will have to pay more on new loans. If their existing loan is a variable-rate loan, they will have to pay a higher amount back each month

Exporting businesses may see demand for their products overseas fall as higher interest rates usually strengthen the value of the domestic currency, making their products more expensive abroad

Customers are less likely to purchase goods on credit when interest rates are high, leading to a fall in sales

Businesses may be less willing to make  capital investments when their retained profit may be more profitably invested into a savings scheme

The business may increase investment as borrowing should be cheaper and retained profits attract low levels of interest

New products targeting wealthier/credit customers are developed

Assets are available for future expansion and improve the businesses balance sheet

Product portfolios are broadened, attracting new market segments

Spending on internal training may be reduced as higher-quality staff are available

Specialist education and training businesses may start up or expand to meet increasing demand for their services

Spending priorities can change when governments change so reducing spending on internal training could be short-sighted

Businesses may seek long-term government supply contracts to ensure future revenues

Domestic manufacturers may lower their prices to allow them to compete with cheaper imports

Retailers of household appliances may choose to stock imported goods over domestic brands 

Lower prices could lead to lower profit margins unless products can be made more cheaply - this could affect quality

Retailers may increase profit on sales but need to implement controls to ensure products continue to meet customer expectations

Businesses use higher retained profits to reward shareholders with increased dividends

Businesses no longer take steps to avoid paying taxes

Shareholders are more likely to invest, increasing capital available for business expansion

Government tax revenue barely changes, allowing for continued investment in public services