A2 - Business - The relationship between business and the political and legal environment

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The relationship between business and the political and legal environment

Government intervention in the economy

The UK has what is knwon as a 'mixed economy'. This means that the government plays a very significant role in the economy in terms of:

  • spending around 40% of the total GDP on important programmes such as education, health, defence, law and order and social security benefits, including pensions.
  • raising a similar proportion of GDP by taxing income earners, consumers and company profits.
  • owning and controlling resources such as the NHS, state schools, public corporations such as the BBC and London Transport (sometimes known as nationalised industries)
  • passing laws controlling many aspects of business activity.

Government decisions concerning these four areas is a form of government intervention in the economy that impacts on business strategy in major ways. Some economists argue against government intervention on such a large scale. These laissez-faire economists suggest that the economy and businesses within it would be more successful without government controlling so many resources and passing laws to govern many aspects of business life.

Laissez-faire versus interventionist government fiscal policies

Laissez-faire - arguements against government financial support

  • Government intervention for some industries is expensive - taxes will probably rise and this will lower consumers living standards. Taxes on firms not receiving subsidies could rise.
  • No 'level playing field' - it is unfair and anti-competitive to support some firms/industries and not others - and too expensive to give subsidies to all firms.
  • Breeds inefficiency - if managers think that governments will bail them out there is no profit incentive to reduce costs, develop innovative products and increase efficiency.
  • Might lead to governments in other countries giving even larger subsidies - free international trade will become distorted towards those countries subsidising most.
  • Businesses work best when they have minimum controls and support.
  • Failing businesses caused by globalisation cannot be kept going forever - economic changes are inevitable.
  • Profitable projects will always attract private investors prepared to finance it anyway.
  • Government support is like a sticking plaster - it does not solve long-term problems of poor competitiveness.

Governments intervention - arguments for financially supporting some industries

  • Supporting new businesses or subsiding those in trouble can icrease job opportunities and reduce costs of unemployment especially in depressed regions.
  • Subsidies and support do not have to be long term - just enought to help a business over its most risky periods.
  • Firms can use the financial support to invest in new technology that makes them more efficient and competitive.
  • If subsidies are given by other governments, it might make imported good cheaper in the UK which will benefit consumers - the EU and WTO will prevent extremem cases of government financial support.
  • Globalisation will lead to some business failures due to increased foregin competition - all the more reason to support other firms which could be successful in the future.
  • Business activity needs to be controlled but certain industries, e.g. high risk eco-energy projects or long-term investments like Airbus, will not get going


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