Fiscal Policies mean changes by the government in the TAX rate or public-sector government spending in order to influence business activity.
The government first collects TAX revenue, in addition to other sources of revenue from sales of public land or privatization of state-owned businesses. Then, the government spends the money on public projects including social security payments, healthcare system, public education, public transportation, infrastructure such as new roads, bridges and airports, and so on.
There are two types of fiscal policies.
- Inflationary fiscal policy. This expansionary policy is used to boost business activity to get the economy out of a recession and reduce unemployment. TAXes will be decreased while government spending will be increased to speed up economic growth.
- Deflationary fiscal policy. This constraining policy is used to slow down business activity to cool the economic growth and lower inflation. TAXes will be increased while government spending will be decreased to slow down economic growth.
Examples of government spending
The government will spend money on government-sponsored projects in industries owned and controlled by the state. This government spending will usually impact very large businesses in the public sector in the following areas:
- Transportation. Airlines, trains, buses, subways and TAXI companies will benefit from increased spending on public transportation systems – both developing the new ones and improving the current ones.Â
- Construction. Engineering and construction companies will benefit from new public transportation building schemes for railways, roads and airports. Companies providing basic materials such as steel, cement and glass will see increase in demand. Architects and civil engineers will now work on more projects.
- Education. Public schools will benefit. The government may decide to build more schools, add new facilities to the current schools or purchase more resources to better equip classrooms. Book publishers and school uniform manufacturers will face increased demand. Also, there will be higher demand in recruitment of teachers, early education specialists, and so on.Â
- Healthcare. New public hospitals will be built and the current ones renovated. There will be more pharmacies opening up as well. Smaller healthcare providers such as local clinics will receive more support from the government. Also, pharmaceutical companies will see increased demand for medications as more hospitals and pharmacies are going to be opened.
- Military. The military companies will benefit. For example, Lockheed Martin and Raytheon Technologies in the US. If the government decides to better equip the army, or increase spending on security, army contractors will be given more projects.Â
The government spending can be relatively minor. In this case, it will only affect one industry, a few businesses and a certain part of the country.
Or, the government can decide on gigantic government expenditure plans. In that case, there will be a macro-economic effect that will be noticed by virtually all industries.
