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

A government wants to raise employment in a depressed region while also limiting its own spending. Which policy is best suited to both aims?

Tax holidays for firms that locate and hire in the region best meet both aims. They create an incentive to employ people there while costing the government little direct spending. State-owned factories require heavy outlay, and a higher minimum wage or income tax would discourage hiring or demand.

  1. AOffering tax holidays to firms that locate and hire in the regionCorrect
  2. BBuilding a new state-owned factory in the region
  3. CRaising the national minimum wage sharply
  4. DIncreasing the rate of income tax on regional residents

Explanation

A tax holiday gives firms an incentive to locate and hire in the region, and the government gives up tax revenue only if firms actually come, so direct spending stays low. A state-owned factory needs large spending, a sharply higher minimum wage tends to reduce hiring, and higher income tax cuts regional demand.

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