Economic Changes: Fiscal and Monetary Policy (AQA A Level Business): Revision Note
Exam code: 7132
Fiscal policy
Fiscal policy refers to how the government uses taxation and public spending to influence the economy
Any changes to fiscal policy may impact business growth
Government spending and economic growth
Increased public spending, especially on infrastructure, education, and health, can boost economic activity and improve long-term productivity
Investment in transport networks (e.g. roads, railways) reduces costs and time delays for businesses, encouraging private sector investment
Spending on healthcare and education builds a healthier, more skilled workforce — making employees more productive and increasing business efficiency
Reductions in government spending
When governments cut spending (to reduce national debt or budget deficits), it may reduce demand in the economy
Public services (e.g. NHS, schools) may face constraints, reducing support for business operations
Public sector wage caps or delays in funding can lead to strikes, absenteeism, and disrupted supply chains — especially where services like transport or healthcare are critical to business functioning
Funding fiscal policy
Increased spending may be funded by:
Higher taxes (e.g. Corporation Tax, National Insurance)
Government borrowing, which can raise future tax burdens
For businesses, this can mean:
Higher operating costs
Reduced consumer spending if taxes on households rise, which leads to less demand for business products
Case Study
Impact of Fiscal Policy Cuts on MetroMed Logistics
Business Overview
MetroMed Logistics is a UK-based company providing medical supply deliveries to NHS hospitals and private clinics across the North of England
Policy context: 2023-2024
The UK government reduced long-term infrastructure funding, including scrapping the full HS2 route to Leeds
Health budgets were tightened, with NHS Trusts asked to find savings and limit external contracts
Public sector pay disputes led to widespread strike action among healthcare and rail workers
Impact on MetroMed Logistics
Contract reduction
NHS orders fell as hospitals cut non-essential supply contracts
MetroMed lost two delivery contracts in West Yorkshire worth £2.3 million annually
Transport disruption
Rail strikes disrupted their inter-city courier services
Delivery reliability fell by 18%, damaging relationships with key clients.
Employee turnover
Staff left due to uncertainty and increased workload during strike periods
Recruitment costs rose by 22%
Business Response
Shifted to a regional delivery model to reduce reliance on national infrastructure
Invested in electric vans to reduce operational costs and access green subsidies
Diversified into private healthcare contracts to reduce exposure to NHS budget volatility
Outcome
By mid-2024, MetroMed stabilised its income and reduced costs by 12%
The firm launched a new warehousing hub in Sheffield, securing 50 new clients
Monetary policy
An interest rate is the percentage charged on borrowing and the percentage earned on savings
Monetary policy refers to decisions made by the Bank of England (BoE) regarding the base interest rate
The base interest rate is the rate set by the Bank of England that influences the cost of borrowing and the return on savings across the economy
Commercial banks and lenders base their rates on the Bank of England’s base rate, typically charging more for loans and offering less for savings
Interest rates are adjusted by the Bank of England to help control inflation, manage economic growth, and influence consumer spending
The impacts of interest rate changes
Business Area | Impact of rising interest rates | Impact of falling interest rates |
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Borrowing and finance |
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Capital investment |
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Consumer demand |
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Export competitiveness |
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Case Study
CoolHome Appliances Ltd
Business Overview
CoolHome is a mid-sized UK-based company that designs and sells energy-efficient refrigerators and home appliances across the UK and EU
Background
In response to persistent inflation, the Bank of England raised the base rate from 4.5% to 5.25% over six months in late 2024
Commercial banks passed these increases on to businesses and consumers
Business Impact
Finance costs rise
CoolHome had recently taken a £2.5 million variable-rate loan to open a new warehouse
Annual loan repayments increased by £62,500, forcing the company to cut marketing spending
Demand for their products fell
Rising mortgage rates hit household budgets. Sales of premium smart fridges dropped by 18% in Q3 2024
Retailers delayed stock orders, increasing inventory holding costs
Export pressure
The pound appreciated due to the higher interest rate
The stronger pound meant that CoolHome's appliances became 8% more expensive in euros
Orders from France and Spain declined by 15%
Business Response
Paused plans for expanding into Italy in 2025
Shifted focus to the UK budget market segment by launching a lower-cost range
Offered interest-free instalment payment plans to customers so as to offset consumer reluctance to buy on credit
Outcome
While profits dipped 9% year-on-year, CoolHome retained market share through strategic repositioning
The firm’s flexible financing and product adaptation softened the impact of the rate hike
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