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Unit 38 - Business and the Economic Environment
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Conor Cunningham P3 D1
P3 – Government spending and its impact on Tesco
Government spending may refer to any expenditure made by local, regional or national
governments. In most countries, including the UK, government spending makes up a significant
proportion of the GDP (Gross Domestic Product). Spending can be carried out in many different
areas such as investments, loans, acquisitions and transfer payments. The main areas of UK
government spending are pensions, health, education, debt interest and defence.
There are many different reasons for government spending which include;
To supply goods and services that the private sector would fail to do
such as public goods including defence, roads and bridges, hospitals
and schools as well as welfare payments and benefits
To improve the output of the economy such as spending on education and training to
improve labour productivity
To reduce the negative effects of externalities (which are third party effects arising from
production and consumption of goods and services for which no appropriate
compensation is paid). An example would be pollution controls
To subsidise industries who may need financial support. For example, transport
infrastructure projects will improve the tourism industry to different areas. These
projects are unlikely to attract private finance unless the public sector provides some of
the high-risk finance. An example of the government providing financial support would
be in 2009 when the UK government provided huge subsidises to the UK banking sector
to help deal with the financial crisis. Another industry which receives large government
subsidies is agriculture.
To help redistribute income and achieve more equity
And to help inject extra spending into the economy which helps to increase economic
activity.
Government Spending must be funded. The funding comes from taxation and government
borrowing - through selling government bonds. They sell government bonds at a fixed interest
rate. Investors such as individuals, insurance companies and other governments are willing to
buy these because they are very safe and secure. The government must prepare a budget for
their spending each year. This is known as The Budget to the public on the last Wednesday in
March before the new fiscal year.
Government spending can occur in many different ways which include spending on transport,
paying unemployment benefits, giving money to local councils, funding wars, pensions and
,Conor Cunningham P3 D1
health care. Theresa May intends to increase government spending on health care and in
particular, mental health care.
Government spending can be classified into two different groups;
Current spending – the day to day expenditure in the economy. Examples include the provision
of health care in hospitals, providing education in schools and the purchasing of medicine.
Capital spending – the spending on capital projects. Examples include new flood defences, new
power stations or the building of new roads and schools.
Government spending is the main stimulator of growth in the economy. Spending must be
financed and the government has the power to make decisions such as how much to spend and
how this expenditure is financed. Different types of governments will choose to spend
differently. For example, a conservative government or labour government may have very
different plans when it comes to government spending. It is important to spend to stabilise the
economy.
The level of government spending has many direct and indirect effects on all businesses. For
firms selling goods and services to individual consumers and to other firms increased
government spending may mean higher taxes and higher taxes reduce the ability of customers
to purchase goods and services, which is likely to reduce consumer spending. Consequently,
increased government spending is often at the expense of private sector spending and is
therefore potentially harmful to some firms. On the other hand, many businesses rely on
government spending for their revenues and profits. For businesses that supply services to the
public sector, demand is directly linked to how much government is spending. Examples include
construction firms that build and repair the road network and IT system consultants who work
for public sector organisations.
Government spending has implications for Tesco as an organisation. If there is a fall in
government spending, it will lead to lower aggregate demand for goods and services.
Therefore, there will be a slowdown in economic growth, and if it is serious then it may cause a
recession. This may lead to people becoming unemployed and if there is a fall in consumer
spending it will have the same effect as there will be less demand for goods and services
causing a fall in sales for Tesco. A fall in consumer spending will affect some business more than
others. When incomes fall, we tend to reduce demand for luxury goods such as more expensive
items rather than Tesco home brand items. Firms selling mandatory items such as bread and
milk will not be affected. Tesco sell both items so may see a decrease in their luxury item goods.
In response to falling demand, businesses such as Tesco often look for ways to retain business.
The fight for market share becomes more intense and they will often start price wars which are
good for consumers but reduce profitability for Tesco as they aren’t making as high as returns
on their products and services. This is an example of how a decrease in government spending
indirectly affects Tesco.
,Conor Cunningham P3 D1
Examples of ways in which Tesco are impacted by different areas of government spending can
be seen below.
Increased spending on construction; this can allow for more of the UK population to have safe
and secure housing and most importantly, housing that they can afford. If people can afford
their housing and have more money to spend on goods and services, Tesco will benefit here as
more people can afford their goods and services and so sales increase. Increased spending on
construction can also impact Tesco as they may have more access to open more stores across
the country as the government funds different building projects. This impacts Tesco as they are
able to expand and maximise their sales, profits and market share too.
Increased spending on mental health; just as Theresa May plans to increase the spending on
mental health, this will have implications for Tesco. If there are more resources and help
available in relation to mental health, it should allow for a more healthy population. As a result
of this, Tesco staff will have more mentally healthy staff. This will impact Tesco as they will have
to pay less sick pay, have staff which are happier and more secure in their jobs and have a more
productive and efficient workforce. This will mean Tesco will have to recruit less as they have a
healthy workforce and this will save them money – allowing them to increase their profits as a
result.
Increased spending on renewable energy schemes; at the end of 2016, the UK government
announced their plans to increase spending on renewable energy schemes. For example, they
plan to have enough renewable electricity to power around one million homes and businesses
and reduce carbon emissions by around 2.5 million tonnes per year from 2021/22 onwards.
This will have an impact on Tesco as their stores become more efficient as a result of
government spending. This will impact Tesco by allowing them to reduce their costs and
increase their profits. It can also impact them as customers save money on their homes and
have a higher disposable income to spend money with Tesco, resulting in Tesco increasing their
sales.
Increased spending on roads and transport; infrastructure projects such as roads, airports,
water systems and telecommunications are the foundations of stronger economies. They have
a huge multiplier effect as when you put up a power plant; you not only generate employment
directly through construction and operations at the power plant, but also create an industrial
base around the plant who would want to tap the power. These industries would get more
entrepreneurs and employ more labour. This increase in employment in an area means that
people have jobs and will have more money to spend on goods and services in the local area.
So, for example if a Tesco store was nearby, this would attract the worker to purchase from the
store. This shows that government spending in an unrelated area to Tesco has an impact on
them as they can increase their sales and the money they generate. Infrastructure is seen as
the key to wiping poverty.
, Conor Cunningham P3 D1
Capping benefit payments; reducing the amount of money given to families out of work, or
single parent families will certainly reduce the disposable income that they have. This will mean
they have less money to spend on goods and services across many different industries. The
benefit cap was introduced at £26,000 per year (£500 per week) which is the average income of
a family in the UK. For single people with no children it was set at £18,200 per year (£350 per
week). From autumn 2016 it will be reduced to £20,000, except in London where it will be
reduced to £23,000. Capping benefit payments indirectly impact Tesco as government spending
is lower in this area and people will not be able to afford some of the goods and services which
Tesco have on offer. In particular, the luxury products which Tesco offer will decline with
regards o sales and this will impact Tesco’s profits too.
More areas of government spending and their impacts on Tesco will be looked at below.
Public services via central and local government agencies
Public services are any services which are provided by or funded by the government and
include health and education. Many different public services are run by both central and local
government for example the NHS is run centrally, but local areas have their own individual
trusts that look after the care needs in their area. In England, spending is introduced through
central government departments such as the department of health, local governments such as
the City of London council and central and local government agencies such as DVLA.
In Northern Ireland, spending is carried out by Northern Ireland Departments such as the
Northern Ireland Executive, local government such as Newry Mourne and Down District Council
as well as Northern Ireland government agencies such as the Housing Executive. These different
departments will be allocated spending budgets by the government.
The Audit Commission was replaced by Public Sector Audit Appointments Ltd, National Audit
Office, Financial Reporting Council and Cabinet Office in April 2015. These are central
government agencies that monitor local government agencies to compare how they are doing
and how effectively and efficiently government money is being spent.
Public services impact Tesco as they may offer grants to improve stores across the UK. For
example, Newry Mourne and Down District Council may offer a cleanup operation around a
Tesco store or offer them a grant to improve the sight of one of their stores. This will impact
Tesco as their business becomes better for their customers and is free to them of course which
does not eat into their profits.
Private and voluntary sector business organisations
Private and voluntary sector business organisations are also impacted by government spending.
The government always has different investment plans for different sectors and if the
government invests in a particular sector, this leads to business being generated for the private
sector. This is because when a new business opens in a particular area, jobs are created and
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