How Does the Economic Policy of a Country Affect a Business?

Economic policies set by governments usually have broad effects on businesses. Depending on the size of the country, governments spend up to trillions of dollars in a single year. The United States, with one of the most powerful governments in the world, had a $3.7 trillion budget for fiscal year 2012, according to National Priorities Project, a nonprofit group dedicated to helping people understand the federal budget and economic policy. Direct spending is just one way countries affect businesses. Economic policies that affect legislation also have a big impact.

An increase in corporate income taxes has a direct effect on a business. A tax increase on business profits hurts a company’s overall financial performance. Some corporations and small businesses argue that businesses should pay less in taxes, not more. The companies maintain that with a lower tax base they can boost the economy by investing more money in the business, resulting in more jobs. When business tax rates increase, some companies respond by raising prices on goods and services.

More spending by the government may help certain businesses. For example, businesses such as construction companies and engineering firms benefit when a government uses taxpayer dollars to spend billions on new roads, bridges and airports. Defense firms specializing in military weapons systems rely almost entirely on governments committed to a strong defense. That’s why defense contractors spend considerable time and effort trying to affect economic policy decisions.

Usually, a government cannot increase spending in one area without taking away from something else. A government with an economic policy dictating more money spent on defense may have to reduce support for building more schools, for example. That could result in less work for construction firms, forcing companies in that industry to reduce staff or freeze open positions.

A country’s economic policy could also affect wages. Increases to a national minimum wage benefit workers by allowing them to earn more money for the same work. That’s usually good for the workers, but it can be challenging for businesses because it increases costs. Labor costs are usually a company’s greatest expense. Some corporations argue that they cannot compete against companies located in countries offering a much lower minimum wage. That can result in a company transferring many job functions to foreign countries.