Effects of Fiscal Policy on Private Business Investment

Fiscal sustainability is important as it refers to the affordability of the government spending and taxation programs in the investing activities. It is important as it plays a critical role in maintaining and supporting the government programs in the future. Economic growth occurs when the government activities commence through infrastructures such as road, hospitals, and schools as they relate to everyday activities (Sercu, 2011). Changes in technology, natural resources per worker, human and physical capital per worker have contributed to economic growth (Kurian  & John, 2009).

Business investments register a growth when there is an increase in capital per worker. In return, this generates a higher output per worker due to the efficiency experienced in the working environment. As a result of the high output by every worker, there is an increased yield which promotes greater economic growth (Sercu, 2011).

Interest rates have a direct effect on the incentive of investment. High interest rates tend to limit investors in that if the risk involved is high and the rate of return is low few investors will be willing to consider the investment (Mankiw, 2012). Low-interest rates tend to show that that fluctuation of the currency is low and the current value has appreciated tend to encourage investors to invest more. An increase in the market reduces the incentive to invest because the risk involves is high and it has a direct effect on the value of the currency (Kurian  & John, 2009). This also implies that only the risk takers will consider the investments due to the high rate of the interest in which the return may not yield back. It is, therefore, true to say that lower interest rate encourages more and additional investment spending which boosts the economic growth (Mankiw, 2012).

Large government budgets that show a deficit have an effect on the equilibrium interest rates. This increases government borrowing thus decreasing the demand for valuable funds which has a negative effect on the equilibrium rate (Mankiw, 2012). The interest rate falls lower decreasing the quantity demanded.

In conclusion, government borrowing is crucial and its sustainability shows the level of government borrowing which should be maintained at equilibrium (Kurian  & John, 2009). It is, therefore, important to maintain the debt level that is sustainable so that the lenders may not lose confidence to the government in order to maintain economic growth and increase the incentive to investments.

 

 

 

 

 

 

 

 

 

 

Reference      

Kurian, N. J., & John, J. (2009). Sub-national fiscal sustainability in a globalised setting. Newcastle upon Tyne, UK: Cambridge Scholars Pub.

Mankiw, N. G. (2012). Principles of macroeconomics. Mason, OH: South-Western Cengage Learning.

 Sercu, P. (2011). International Finance: Theory into Practice. Princeton: Princeton University Press.