Governmental Opportunities and Constraints

Content

• Government policies affecting business:– UK and EU Law

• Health and safety• Employment• Consumer protection• Competition

– Economic policy• Fiscal and monetary policies• Intervention vs. laissez faire• Privatisation

Business Law

• There are a number of different laws that govern how businesses operate

• There are three main sources of these laws:– Acts of parliament– Common Law– European Law

Health and Safety Law

• This aims to discourage dangerous practices by businesses and protect the workforce

• Main act is the health and safety at work act, 1974• Health and safety executive oversee the act• This has increased costs but also ensures that

accidents are reduced

Employment Law

• Employment laws cover individual and collective labour laws

• Individual labour laws look at the rights and obligations of individual workers

• Collective labour laws look at the activities of trade unions and the conduct of industrial relations

Individual Labour Laws

• The Sex Discrimination Acts, 1975, 1986• The Race Relations Act, 1976• The Disability Discrimination Act, 1995• The National Minimum Wage Act, 1998

Collective Labour Laws

• Employment Acts, 1980,1982• The Trade Union Act, 1984• The Trade Union Reform and Employment Rights

Act, 1993• The Employment Relations Act, 1999

Employment Laws and Business

• Employment laws may increase costs of labour• However they can increase motivation as workers

are better paid and feel more secure• Collective labour has allowed the workforce to

become more flexible

Consumer Protection

• Consumer protection legislation aims to safeguard consumers against:– Businesses charging excessive prices / rates of interest– Unfair trading practices– Unsafe products– Having insufficient / incomplete information to base

purchasing decisions on

Consumer Protection Laws

• Sale of Goods Act, 1970• Consumer Protection Act, 1987• The Weights and Measures Act, 1986• The Consumer Credit Act, 1974• The Control Of Advertising – this is controlled by:

– The Trade Descriptions Act, 1968– Advertising Standards Authority

Impact of Consumer Protection Laws

• To meet all these laws / requirements can prove expensive to businesses

• It can also lead to higher consumer expectations which add further costs to businesses

• Small businesses feel the impact of these costs the most

Competition Law• This is meant to create free and fair competition in the UK and the EU• Unfair competition may arise because:

– Monopoly power is abused – Mergers and takeovers– Restrictive practices

• The Competition commission investigates unfair competition practices

• The office of fair trading ensure all firms comply with relevant legislation

• Watchdog organisations monitor some firms that have over 25% of the market e.g. OFTEL and BT

Key Competition Laws

• Fair Trading Act, 1973• Restrictive practices acts, 1956, 1968 and 1976• The Competition Acts, 1980, 1990• The EU’s competition policy:

– Laws prevent any activities restricting free competition in the EU– Laws stop any firm abusing a dominate position in any EU market– The EU controls any merger creating a new firm with a turnover

greater than £4.2 million

Economic Policy

• Economic policies are the actions through which the authorities try and create the best possible economic environment for businesses and individuals

• Economic objectives are what the government wants to achieve and include:– Stable prices– Steady and sustained economic growth– Low unemployment– A balanced balance of payments

Economic Policy

• The governments key economic policy objective is to achieve high and stable levels of growth and employment

• The government uses a range of policies to attempt to achieve their objectives

What is fiscal policy• Fiscal policy monitors how government spend their money

and howthey control their taxes. • Contractionary fiscal policy: this is done when the

government reduces spending or increases taxes higher, they try to increase their PSBR( public sector borrowing requirement) to fund the tax drops they also do this to reduce its surplus on its budget for the fiscal year.

• Expansionary fiscal policy: This is when the government cut taxing or increase government spending. They will increase the amount the government borrows to fund the expenditure.

Direct & indirect taxes

• Direct taxes are taxes of income and expenditure e.g. income tax, corporation tax(levied on company profits).

• Indirect taxes are taxes such as VAT (value added tax), changes in this type of tax has a rapid effect on the level of economical activity. E.g. an increase in VAT will cut consumer spending and in turn lower levels of economic activity

Government Expenditure

• Governments spend in two ways:1. Transfer payments – money spent on

unemployment benefits, pensions etc2. The infrastructure – this includes spending on

houses, roads, education etc

Monetary Policy

• This looks at controlling the amount of money in circulation and therefore spending and economic activity

• Monetary policy covers:– Changing interest rates (the most commonly used tool

by recent UK governments)– Controlling the money supply – Manipulating the exchange rate

Changes to Interest Rates

• If interest rates increase it is likely that consumer spending will decrease reducing the level of economic growth which can lead to falling sales for businesses as demand may be reduced

• If interest rates decrease then demand is likely to increase leading to an increase in economic growth which leads to an increase in sales for businesses

Impact of changes to interest rates

• Small firms are most vulnerable to changes in rates especially if they have a high level of borrowing

• Firms with lots of overseas trade may also be heavily affected as a rise in interest rates tends to increase exchange rates

Intervention vs. Laissez Faire

• Government intervention is where the state has a high level of involvement in business matters

• Laissez faire is a policy where governments reduce taxation and spend less on supporting business activities

Government Intervention vs. Laissez Faire

• Government intervention tends to increase costs and decrease competitiveness of businesses

• The laissez faire approach helps to increase the level of entrepreneurs in an economy

• A disadvantage of the laissez faire approach is it doesn’t protect struggling industries and poor regions

Privatisation

• Where the ownership of businesses is transferred from the state to private individuals

• This was a common occurrence in the UK in the 1980s and 1990s

• Advantages of privatisation:– Removes potentially inefficient monopolies offering consumers

more choice and better products– Private businesses are more likely to adopt longer term strategies– It creates revenue for the government

Disadvantages of Privatisation

• In reality it may not create more efficient industries• As these businesses now have shareholders they

have not adopted long term strategies instead adopting shorter term strategies to get the returns demanded by shareholders

Summary• There are a number of EU and UK laws which govern how businesses operate • Health and safety law aims to protect employees and ensure that the work environment is

safe• Employment law includes individualist and collectivist legislation • Consumer protection laws protect the consumer and ensure that they know what they are

getting • Competition law aims to prevent unfair competition • All laws incur costs for businesses that can impact their profitability• Economic policy is the actions that the government takes to meet economic objectives such

as an increase in economic growth • Monetary polices aim to control the amount of money in the economy usually through the

manipulation of interest rates• Fiscal policies look at government incomes and expenditure • Government intervention describes where the government plays a key role in business

activities whereas a laissez faire policy is one with little government involvement• Privatisation is the sale of public companies to private individuals