These operations generate social costs which are not directly linked to the production process itself and when these costs are greater this is called negative externality. (Gillespie A. 201 0) On the other hand, operations which benefit society but do not directly generate income for a business are positive externalities. Reasons behind imposing these taxes would be to reduce negative externalities an organisation or organisations may have on society or the economy at large. Government subsides can be used as a fiscal policy tool.
These are vital to increase expenditure within the economy. Schwartz and Clements (2002) describes subsides as ‘any government assistance that allows consumers to purchase goods and services at prices lower than those offered by a competitive private sector or raises producers incomes beyond those that would be earned without this intervention. ‘ This definition stretches subsides to reflect a broad range of government activities which will assist turning the economy around to produce a better outcome.
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Depending on which activity the government wishes to support, generally subsides are largely for the benefit of the wider public for example creating employment or the provision of basic needs for he poor. For large businesses like Tata Steel, winning government subsidies may mean proving to the government the benefits to the society (e. g. job creation). Being a private company, Tata Steel may struggle in a failing economy because there is little or no government intervention. A government’s decision to bail out a struggling private company may be based on how much value the company brings to the economy.
Because Tata Steel employees a large number of employees within the LJK, if it buckles under financial strain, this may justify government intervention because of several easons: Loss of jobs does not benefit the society but increases the overall unemployment rate within the LJK. Furthermore, governments may have to draw from their budget to help unemployed citizens during these times and this will have an adverse effect on the overall money supply within an economy. While governments intervention through subsides has its positives, governments may decide to cut subsidies as well.
In October this year, The Telegraph published a report detailing the UK coalition governments decision to end ‘green subsides’ in an attempt to bring down energy bills. This month Tata Steel announced cutting 900 jobs in its UK business mainly due to the high energy costs in the LJK. Karl Kohler (CEO) of Tata Steel Europe argues that the UK business pays higher prices for electricity than its European peers which has forced the management to restructure its operations. This has also given strength to Tata Steel’s competitors in Germany and France.
Another area that the government involves in is interest rates which can be described as ‘the cost of borrowing money’ (Gillespie 2010). These are determined by the Bank of England Monetary Policy Committee (MPC) which meets every onth to review the current UK and global economy. Any changes in interest rates will affect both demand and supply. Aggregate demand can be influenced by interest rates as consumers save rather than spend. On one hand, as customers focus on saving rather than spending businesses will suffer because they have on the Other hand higher borrowing costs.
When looking to expand its capital investment, Tata Steel may also have to consider the level of interest rates – both actual and forecasted percentages. The main reason behind this is that rising interest rates will mean that it will be costly for Tata Steel to borrow. In a struggling economy, the MPC are more likely to lower interest rates to make it cheaper to borrow money. Gillespie argues that low interest rates are actually a reaction to falling income. Between 2009 and 2012, interest rates were relatively low in the I-JK and have been frozen at 0. % from March 2009. (BBC 201 2) These low interest rates were a result of the economic recession experienced by the LIK economy and the rates were an attempt to push aggregate demand. However, this meant that the cost of borrowing was reduced and companies like Tata Steel benefitted from more capital projects as it became easier to borrow money. An example to illustrate this is the recent investment in two new vacuum arc re-melting (VAR) furnaces at the Stocksbridge Site in Sheffield. This will also help the business to become much more efficient and productive.
The MPC’s decision on interest rates has to be in line with the government’s current inflation target (currently maintaining an average of 2% consumer price inflation). Inflation may affect businesses in certain ways. One of the main effects of increased inflation for businesses is the rising costs. For Tata Steel, example costs will be energy and gas costs. An increase in inflation will put the business under pressure to ncrease the prices on its products in order to meet costs and overall profit targets. If costs become greater however, profits will be in danger.
As a privately run company, Tata Steel relies heavily on investment. Struggling profits may deter future investment for the company leaving fewer funds for the company. A price increase In certain steel grades that Tata Steel supplies will have a roll-on effect on its competitiveness. Within the steel industry and even within the overall economy, customers are constantly looking for competitive prices. Tata Steel will be in danger of losing business to other teel suppliers who are able to offer slightly lower prices than Tata Steel.
Tata Steel’s European operations employ over 50,000 employees and wages are an important factor as it contributes to motivation and overall productivity and efficiency of the workforce. Any increases on inflation will mean employees may demand this increase on their wages. If employees are not satisfied this can lead to trade union intervention and even industrial action. If Tata Steel decides to increase wages due to a rise in inflation this may lead to a wage- price spiral. Please see appendix 1) Another part of the monetary policy is xchange rates. Through government policies, the government may decide to nudge the currency value higher or lower within a period of time. Any changes in interest rates are likely to affect exchange rates as well. The UK economy does not have a fixed exchange rate but works on a floating or fluctuating exchange rate. Changes in exchange rates mostly affect businesses which trade internationally and businesses need to be able to anticipate and react to changes in the value Of the currency.
Tata Steel trades internationally and any exchange rate fluctuations will have an effect on its operations. The blow of a change in exchange rates will be felt more or less depending on the proportion of steel that Tata Steel exports. A strong pound may be an indication that the economy is in a good position financially. In a situation where the pound strengthens, both import and export companies will be influenced. Tata Steel exports largely worldwide and because it’s a core product supplied, the steel produced is sold to many other end users for future trade or sale.
Exporting worldwide means Tata Steel in the UK needs to keep a heads up on current exchange rates as they may also determine prices nd overall competitiveness within the steel industry. One of the main consequences of a strong pound for Tata Steel is how it becomes more expensive for buyers outside the UK to purchase the material. The steel industry, in which Tata Steel operates in, is a highly competitive market and sales volumes are likely to decline in a situation like this, as consumers may look for cheaper suppliers elsewhere to supply the steel.
In a situation where the pound depreciates import costs will go down making it much cheaper to import. Imported raw materials for example will be much cheaper to import nd this will have a roll on effect to production. Once production costs reduce, the business will be in a better financial position in terms of cash flow and profitability. Falling value of the pound on the foreign currency markets can give I-JK businesses a competitive edge if prices are maintained in pounds. This is because prices will be lower in foreign currencies.
In a situation like this, Tata Steel would have to be in a position to expect and satisfy demand from other countries because of the low prices. Demand will in effect boost sales and sales will affect overall profit margins for Tata Steel. However, luctuating exchange rates make it relatively difficult for a business to plan and can cause businesses to act abruptly in order to adjust or reduce the impact of an over or under valued exchange rate. During exchange rate change periods, Tata Steel may find its self in a considerably better position because of its operations in several markets abroad.
Negative changes in one currency may be balanced out by positive currency changes in another market. Governments decide to manage economies in different ways. Another way used to by governments – including the CJK government to manage economies is quantitative easing. This is a monetary policy that a government may use to improve supply of money and/or reduce borrowing costs in an economic crisis. This policy can also be used to counter possible deflation. (London Business School LBS 2009) Quantitative easing (QE) is usually used as a last resort when other monetary policies e. cuts in interest rates have been attempted. In 2008, the Monetary Policy Committee of the bank of England took a decision to implement QE when Gross Domestic Product (GDP) fell 1. 6% and the economy suffered a recession. This meant purchasing assets, mainly UK government bonds. Ganley J. (2010) describes it s a Way Of ‘creating money electronically. While the major reasons for implementing monetary policy are to increase the supply of money and to increase aggregate demand, the LBS (2009) argues that the ultimate government aim behind QE is to prevent inflation dropping below the current 2% target.
However, it is vital to have an understanding of the effects of QE on the economy and businesses during an economic crisis. By improving the money supply, this in theory should increase customer confidence and encourage borrowing which will ultimately increase demand. Quantitative easing can be used as a way of lowering interest rates. Though this may be largely directed to the housing market and mortgage lending, it is worth pointing out the effects it has on other industries as well like the steel industry.
As mentioned earlier, Tata Steel would be in a position to invest in its operations internally – a short term strategy for a long term gain. It will help the company stabilise through an economic tide but it will also ultimately boost the company when the economy booms again. Some economists believe that the best way to benefit a struggling economy and increase demand is by decisions taken by a government to stimulate spending and change tax rates. This is called the Keynesian approach – a school of thought that claims that government intervention is the best way to mitigate an economic recession.