Fiscal and Monetary Policies: Analyzing Impact on UK Businesses

This presentation examines the impact of monetary and fiscal policies on business organizations in the UK. It discusses how monetary policy, through tools like bank rates and quantitative easing, influences cash flow, inflation, and investment. The analysis covers the Bank of England's strategies and their effects on firms' profitability and economic stability. Additionally, the presentation explores fiscal policy, focusing on taxation, expenditure, and investment policies, and their role in managing unemployment and stimulating economic growth. The document highlights how government actions in adjusting taxes and public spending affect the overall business environment and economic integrity of the UK. Desklib offers this and many other study resources for students.

A
PRESENTATION MONETARY
AND FISCAL POLICY

INTRODUCTION
• Business environment refers to the such factors which reflect the internal and external working of the organisation. It also determines
various major benefits which is to be undertaken in respect of fulfilling the needs and demands of the customer and also helping the
organisation to manage the overall productivity of the economy. In respect of environment the major business occurs from the
management of business through suppliers, buyer or by conducting any social activity.
• In such manner, by adapting the advanced technology and also carrying any social activity enhances the business for longer time
period. Present report is based upon the analysing the impact of fiscal policy and monetary policy in respect of carrying any activity
in business organisation in UK.
• It also carrier’s various aspects which is relating to forming any development in global and regional aspects which shape the business
activities in better scale. The report also carries various factors which identifies the needs and demand of the fiscal policy in respect
of attaining any transaction or expanding any business activities.

A) IMPACT OF FISCAL AND MONETARY POLICY IN CONTEXT OF
BUSINESS ORGANISATION IN UK
• Monetary policy:
• Monetary policy is the instrument that is used by the nation central bank to control cash flow in the nation. In
case of economic fluctuation many times cash flow increase and decrease in the economy. Both conditions are dangerous
for the nation. If money supply increase in the market then in that case liquidity increase which means that people have
more money to spend which ultimately lead to increase in the inflation rate in the nation (Hansen, 2018).
• On other hand, in case there is decrease in the liquidity in the market and in that case, it is possible that demand for
products get declined in the market which ultimately lead to deflation in the economy. Both inflation and deflation are
harmful for the economy. Deflation is more dangerous then inflation. This is because if there is inflation then in that case
with its decline demand increase gradually which ultimately benefit the nation economy.

CONTINUE
• On other hand, if there is deflation in a nation then it means that there is no demand in the market. Ultimately,
profitability of the firms shrinks and they failed to survive in the market. All these things lead to increase in
unemployment on large scale in the nation. In such kind of situation monetary policy acts as a tool that assist
nation in dealing with inflation and deflation pressure. Monetary policy tools that central bank of England use is
given below.

CONTINUE
• Bank rate: It is the rate at which Bank of England lend money to the commercial banks in the nation. When this
rate is increased loans for commercial banks become dearer and this impact is passed to the final clients or those
who take loan. Means that if loan is increased by the central bank of England then in that case loan will become
dearer. This will lead to change in people behaviour and they will take less loan for their business and home need
etc. Opposite to this in case central bank reduce interest rate then in that case commercial banks will got loan at
cheaper rate and commercial banks will lend money at cheaper rate (Williams, 2016). Hence, more and more
people will take loan from the bank. In order to understand overall impact of monetary policy on nation economy
it is necessary to analyse to understand impact of monetary policy on nation economy. Important point to note is
that few months ago central bank of England raise bank rate by 0.25% to 0.75%.

CONTINUE

CONTINUE
• Facts reflect that from 2010 to 2015 bank rate was constant at 0.50%. Thereafter, this rate gets declined to 0.25%. Same rate remains
constant till 2017 and after that bank rate start rising to 0.50 and remain till mid of 2018. After mid of 2018 sharp fluctuation or traction can
be observed in above chart and interest increased to 0.75% from 0.50%. It can be said that after 2017 bank rate keeps on increasing
consistently.
• It is very important to identify impact of such kind of hike in interest rate on the nation economy. First it is necessary to understand game of
gain and loss in context of higher interest rate. In case as we see Bank of England increase interest rate to 0.75%. Due to increase in interest
rate those who save money in banks will earn more interest. On other hand, those who take bank loan will have to pay more. It is well
known fact that firms take large amount of loan in a year. Increase in interest amount will heavily affect firm’s profitability (Bianchi and
Ilut, 2017). If economic condition of the nation is not good then in that case firm’s performance heavily get affected and further elevation
in interest liability have a huge impact on their profitability. This may lead to cutting down of the firm business operations and elevation in
unemployment rate in UK. So, higher percentage of interest rate may affect nation.

CONTINUE
• In present case main reason behind increase in interest rate was elevation in inflation rate. Target of Bank of England is to contain
inflation rate to 2%. It was expected that inflation rate will breach 2% level and due to this reason interest increased to 0.75% which is
higher since 2009 recession time period. Assumption is that increase in interest rate will lead to dearer bank loan and hire interest
payment liability which to some extent will reduce investment from people side (Ćorić, Šimović and Deskar-Škrbić, 2015). If people
still consistently make investment then their savings will decline which will lead to less demand in the market and curb in inflation rate.
• However, this thing if remain continue in upcoming time period then in that case economy may face big trouble. This is because due to
increase in interest rate inflation rate will come in control but due to availability of loan at cheaper rate investment by the firm will also
reduce. If investment will reduce then slowdown will be observed in the company operations and ultimately, they will start facing loss in
the business (Ban, 2015). Such kind of thing cannot be assumed good for the firm. In turn business firms will not do well it will
definitely affect UK economy. In this way monetary policy affect UK economy.

QUANTITATIVE EASING
• It is another important tool that is used by the Bank of England to stabilize the nation economic condition. Under this approach Bank of
England make purchase of government bonds from banks and pension funds. This inject liquidity in the market. Ultimately bank lend
more money to the business firms which promote investment in the nation economy. This lead to increase in employment rate, growth in
nation economy and revival of demand in the market for product. In order to understand significance of the quantitative easing program
it is necessary to analyse few facts. Across the world, two nations namely USA and UK adopt quantitative easing approach on large
scale. Since 2008 USA Federal reserve make a purchase of bond valued at $3.7 trillion and UK Bank of England make a purchase of
$550 billion purchase of government bonds in the market. Till the time role played by quantitative easing program in economy recovery
is debatable. However, central banks of USA and UK rely heavily on quantitative easing program because it assists them in injecting
more and more cash in the economy which ultimately promote nation economic growth (Chamberlin, 2015).

CONTINUE
• UK economy now is on growth track and due to this reason now Bank of England increase interest rate to
0.75%. US Federal reserve already start sale back of asset purchased during QE program. Bank of England is
also planning to do same thing. It just wants to ensure that in case any economic turmoil happened there is
sufficient amount of fund to absorb any jerk. It is observed that after initiating quantitative easing program after
2009 in UK situation become better and those who comes in low income slab are also earning more. This
promote consumption in the economy and lead to further elevation in demand in the market. All these things
ultimately lead to increase in spend in the economy from people side. Hence, profitability of the firms gets
increased. It can be said that quantitative easing plays crucial role in recovery of the UK economy.

FISCAL POLICY
• Fiscal policy is the one of the important tool that is used by the nation government to fight with member of problems like
unemployment etc. It can be observed that when economy gone through recession then in that case government boost its capital
expenditure on the public infrastructure. Such kind of thing provide employment to large number of people in the economy
(Hommes, Massaro. and Salle, 2019). Major instruments that comes under fiscal policy are taxation policy, expenditure policy,
investment policy, disinvestment policy and debt as well as surplus management. In the taxation policy government decide the
tax rate that will be charged on the different slabs. Government on yearly basis evaluate tax slab and, on that basis, decide
whether to change tax rate or values determined previously will also be carry forward (Leith, Moldovan and Rossi 201). It is the
determination of tax rate which determine amount of revenue that will be earned by the Government during entire financial
year.

CONTINUE
• . Many times, during recession time period investment from business firms declined. In that time Government by making public expenditure
inject money in the economy. Thus, it can be said that fiscal policy plays vital role in growth of the nation. It is this policy which determine
amount of tax that will be received by the government. It is the fiscal policy which lead to creation of more and more employment
opportunities in the nation and at the workplace. Thus, it can be said that overall fiscal policy benefits a lot to the business firm
• Fiscal policy mainly carried or related with the word taxes. As it is in the hands of the government to impose taxes on particular products or
services or mainly it can be related to norm or regulation which manage the overall working of the company. As government carry major
rights in respect of adjusting the taxes as by this aspect they protects the economy of the country and also impose restriction in respect of
importing or dealing in any goods and services outside country (Mason. and Jayadev, 2018). In respect of UK, their major aspects is to deal in
exporting business but restrict the transaction relating to importing of goods. The main reason of taking this action is that they had to secure
the integrity and dignity of the country by increasing the economy of the country and also enhancing the manpower in country. In this respect,
government takes the power to impose fiscal policy in relation to adjusting their taxes so that they manage the economy in better way.