Both fiscal and monetary policies influence a business organisation in many ways. When an organisation is influenced automatically stakeholders will be affected as well.
The Fiscal Policy: The measures that are taken by the government to stabilize the economy by increasing or decreasing the levels of taxes and adjusting the government’s expenses are called the fiscal policy. Reducing unemployment rate, addressing inflation borrowing and repaying stimulating economic growth are still part of the fiscal policy.
There are two types of fiscal policies: discretionary and automatic. The discretionary policy is decided by one-off changes. The automatic policy states that the economy can be stabilised by processes called fiscal drag and fiscal boost. The fiscal drag is the process that draws people into paying higher taxes as a result of a rising income.
The fiscal boost works in a similar way but in the opposite direction. If there is a decrease in the people’s income this process will make sure that people will pay taxes according to their new income.
The Monetary Policy: Influencing the economic activity through interest rates exchange rates, control of money supply and having control over banking lending and crediting is called the monetary policy.
The Bank of England’s Monetary Policy Committee (MPC) has the responsibility for monetary policy in the UK. Both the monetary policy and the fiscal policy impact businesses. The way that monetary policy impacts the business is through interest rates. If the interest rates go up, in case of a loan, the interest amount expected to be paid back will be higher therefore that business will have to cut some other expenses in order to cover the rise. On the other hand, if the interest rates go down, the business will experience a rise in profit as it will have to pay less interest on any loans
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