Fiscal and monetary policies are some of the most commonly used and referred to technical terms in business dailies. They are mentioned on a regular basis, for the obvious reason that they have a lot of implications for the future profits of small and large businesses alike. Their mass appeal makes them a topic of common interest; hence, they get reported and commented on a lot.
Fiscal and monetary policies are the two tools government has to manage the private sector of the economy. Fiscal policy is similar to the annual budget of your household. The government estimates the money needed for different expenses (defense, education, healthcare, etc.) and in turn estimates how much it needs to “earn” to meet those expenses. The government earns money by taxing its citizens. Thus collecting taxes and in turn allocating that money to different departments constitutes fiscal policy.
Fiscal policy impacts business organizations as different sectors of the economy may be taxed differently. The government may levy a heavy tax on wine manufacturers but not so heavy a tax on defense equipment manufacturers. (This would largely be arbitrary, but policymakers will find some way to explain it. For an example of such a contrived explanation, policymakers could determine that guns are a matter of national security and the government should encourage making them.) All sorts of taxes impact organizations directly or indirectly. For example, personal taxes impact the amount of money consumers will spend, which in turn affects the revenues of companies manufacturing various consumer items. Apart from taxes, expense allocations of the government also impact businesses of the country. For example, the government may decide to open subsidized hospitals for minority communities, which creates business for the healthcare sector.
Tax cuts and increased spending are called loose monetary policy or fiscal stimulus. Tax increases and spending cuts are often referred to as fiscal tightening or fiscal austerity.
Monetary policy refers to the tweaking of different interest rates through the actions of government entities. This is a function usually performed by the central bank of a country and impacts how money is lent to and by banking institutions. The central banking institution has the liberty to decide the interest rate for mandatory deposits by private banks in the central bank. The rates decided by the central bank in turn influence the rates private banks charge from the citizens of the country for business or personal loans. Reserve requirements are also set by government agencies, which can impact lending. Higher reserve requirements mean that banks must have more deposits or other qualifying assets to lend money. Lower return requirements allow banks to lend more from the same asset base.
Policies that encourage more lending and lower interest rates are said to cause looser monetary policy. Monetary tightening results in less lending and higher interest rates.
Note that fiscal and monetary policies have varying implications for different organizations. The same policy may be good for the technology sector but poor for the manufacturing sector. That is why the stock prices of different companies respond differently to the news of a policy decision. However, tighter fiscal policy and tighter monetary policy are typically seen as being challenging for business, at least in the short term. Looser monetary policy and looser fiscal policy is generally perceived to promote business and business investment, at least in the short term.
