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ACCA Applied Knowledge · Business and Technology · Political and legal factors affecting business

A government is in a recession and wants to stimulate demand through fiscal policy. It plans to cut corporate tax rates and increase public spending on infrastructure, financed by borrowing. Which statement about the likely consequences for businesses is most accurate?

Construction firms may see higher demand, while increased government borrowing may later create pressure for higher taxes or interest rates. Infrastructure spending benefits some sectors more than others, and lower corporate tax lifts after-tax profit. Claims of equal benefit or lower profits for all are wrong.

  1. AConstruction firms may see higher demand, while the increased borrowing may raise future tax or interest rate pressureCorrect
  2. BEvery business will benefit equally because spending increases across the whole economy at once
  3. CBusinesses will see lower after-tax profits because government borrowing always reduces demand

Explanation

Infrastructure spending directly benefits construction and related suppliers, and lower corporate tax raises after-tax profit. Borrowing may later require higher taxes or push up interest rates (crowding out). The effect is not equal for all firms, and borrowing does not always reduce demand.

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