Impact of Government Spending on Tesco
Info: 8304 words (33 pages) Dissertation
Published: 28th Sep 2021
Government spending may refer to any expenditure made by local, regional or national governments. In most countries, including the UK, government spending makes up a significant proportion of the GDP (Gross Domestic Product). Spending can be carried out in many different areas such as investments, loans, acquisitions and transfer payments. The main areas of UK government spending are pensions, health, education, debt interest and defence.
There are many different reasons for government spending which include:
- To supply goods and services that the private sector would fail to do such as public goods including defence, roads and bridges, hospitals and schools as well as welfare payments and benefits
- To improve the output of the economy such as spending on education and training to improve labour productivity
- To reduce the negative effects of externalities (which are third party effects arising from production and consumption of goods and services for which no appropriate compensation is paid). An example would be pollution controls
- To subsidise industries who may need financial support. For example, transport infrastructure projects will improve the tourism industry to different areas. These projects are unlikely to attract private finance unless the public sector provides some of the high-risk finance. An example of the government providing financial support would be in 2009 when the UK government provided huge subsidises to the UK banking sector to help deal with the financial crisis. Another industry which receives large government subsidies is agriculture.
- To help redistribute income and achieve more equity
- And to help inject extra spending into the economy which helps to increase economic activity.
Government Spending must be funded. The funding comes from taxation and government borrowing – through selling government bonds. They sell government bonds at a fixed interest rate. Investors such as individuals, insurance companies and other governments are willing to buy these because they are very safe and secure. The government must prepare a budget for their spending each year. This is known as The Budget to the public on the last Wednesday in March before the new fiscal year.
Government spending can occur in many different ways which include spending on transport, paying unemployment benefits, giving money to local councils, funding wars, pensions and health care. Theresa May intends to increase government spending on health care and in particular, mental health care.
Government spending can be classified into two different groups:
- Current spending – the day to day expenditure in the economy. Examples include the provision of health care in hospitals, providing education in schools and the purchasing of medicine.
- Capital spending – the spending on capital projects. Examples include new flood defences, new power stations or the building of new roads and schools.
Government spending is the main stimulator of growth in the economy. Spending must be financed and the government has the power to make decisions such as how much to spend and how this expenditure is financed. Different types of governments will choose to spend differently. For example, a conservative government or labour government may have very different plans when it comes to government spending. It is important to spend to stabilise the economy.
The level of government spending has many direct and indirect effects on all businesses. For firms selling goods and services to individual consumers and to other firms increased government spending may mean higher taxes and higher taxes reduce the ability of customers to purchase goods and services, which is likely to reduce consumer spending. Consequently, increased government spending is often at the expense of private sector spending and is therefore potentially harmful to some firms. On the other hand, many businesses rely on government spending for their revenues and profits. For businesses that supply services to the public sector, demand is directly linked to how much government is spending. Examples include construction firms that build and repair the road network and IT system consultants who work for public sector organisations.
Government spending has implications for Tesco as an organisation. If there is a fall in government spending, it will lead to lower aggregate demand for goods and services. Therefore, there will be a slowdown in economic growth, and if it is serious then it may cause a recession. This may lead to people becoming unemployed and if there is a fall in consumer spending it will have the same effect as there will be less demand for goods and services causing a fall in sales for Tesco. A fall in consumer spending will affect some business more than others. When incomes fall, we tend to reduce demand for luxury goods such as more expensive items rather than Tesco home brand items. Firms selling mandatory items such as bread and milk will not be affected. Tesco sell both items so may see a decrease in their luxury item goods.
In response to falling demand, businesses such as Tesco often look for ways to retain business. The fight for market share becomes more intense and they will often start price wars which are good for consumers but reduce profitability for Tesco as they aren’t making as high as returns on their products and services. This is an example of how a decrease in government spending indirectly affects Tesco.
Examples of ways in which Tesco are impacted by different areas of government spending can be seen below.
Increased spending on construction; this can allow for more of the UK population to have safe and secure housing and most importantly, housing that they can afford. If people can afford their housing and have more money to spend on goods and services, Tesco will benefit here as more people can afford their goods and services and so sales increase. Increased spending on construction can also impact Tesco as they may have more access to open more stores across the country as the government funds different building projects. This impacts Tesco as they are able to expand and maximise their sales, profits and market share too.
Increased spending on mental health; just as Theresa May plans to increase the spending on mental health, this will have implications for Tesco. If there are more resources and help available in relation to mental health, it should allow for a more healthy population. As a result of this, Tesco staff will have more mentally healthy staff. This will impact Tesco as they will have to pay less sick pay, have staff which are happier and more secure in their jobs and have a more productive and efficient workforce. This will mean Tesco will have to recruit less as they have a healthy workforce and this will save them money – allowing them to increase their profits as a result.
Increased spending on renewable energy schemes; at the end of 2016, the UK government announced their plans to increase spending on renewable energy schemes. For example, they plan to have enough renewable electricity to power around one million homes and businesses and reduce carbon emissions by around 2.5 million tonnes per year from 2021/22 onwards.
This will have an impact on Tesco as their stores become more efficient as a result of government spending. This will impact Tesco by allowing them to reduce their costs and increase their profits. It can also impact them as customers save money on their homes and have a higher disposable income to spend money with Tesco, resulting in Tesco increasing their sales.
Increased spending on roads and transport; infrastructure projects such as roads, airports, water systems and telecommunications are the foundations of stronger economies. They have a huge multiplier effect as when you put up a power plant; you not only generate employment directly through construction and operations at the power plant, but also create an industrial base around the plant who would want to tap the power. These industries would get more entrepreneurs and employ more labour. This increase in employment in an area means that people have jobs and will have more money to spend on goods and services in the local area. So, for example if a Tesco store was nearby, this would attract the worker to purchase from the store. This shows that government spending in an unrelated area to Tesco has an impact on them as they can increase their sales and the money they generate. Infrastructure is seen as the key to wiping poverty.
Capping benefit payments; reducing the amount of money given to families out of work, or single parent families will certainly reduce the disposable income that they have. This will mean they have less money to spend on goods and services across many different industries. The benefit cap was introduced at £26,000 per year (£500 per week) which is the average income of a family in the UK. For single people with no children it was set at £18,200 per year (£350 per week). From autumn 2016 it will be reduced to £20,000, except in London where it will be reduced to £23,000. Capping benefit payments indirectly impact Tesco as government spending is lower in this area and people will not be able to afford some of the goods and services which Tesco have on offer. In particular, the luxury products which Tesco offer will decline with regards o sales and this will impact Tesco’s profits too.
More areas of government spending and their impacts on Tesco will be looked at below.
Public services via central and local government agencies
Public services are any services which are provided by or funded by the government and include health and education. Many different public services are run by both central and local government for example the NHS is run centrally, but local areas have their own individual trusts that look after the care needs in their area. In England, spending is introduced through central government departments such as the department of health, local governments such as the City of London council and central and local government agencies such as DVLA.
In Northern Ireland, spending is carried out by Northern Ireland Departments such as the Northern Ireland Executive, local government such as Newry Mourne and Down District Council as well as Northern Ireland government agencies such as the Housing Executive. These different departments will be allocated spending budgets by the government.
The Audit Commission was replaced by Public Sector Audit Appointments Ltd, National Audit Office, Financial Reporting Council and Cabinet Office in April 2015. These are central government agencies that monitor local government agencies to compare how they are doing and how effectively and efficiently government money is being spent.
Public services impact Tesco as they may offer grants to improve stores across the UK. For example, Newry Mourne and Down District Council may offer a cleanup operation around a Tesco store or offer them a grant to improve the sight of one of their stores. This will impact Tesco as their business becomes better for their customers and is free to them of course which does not eat into their profits.
Private and voluntary sector business organisations
Private and voluntary sector business organisations are also impacted by government spending. The government always has different investment plans for different sectors and if the government invests in a particular sector, this leads to business being generated for the private sector. This is because when a new business opens in a particular area, jobs are created and other local businesses benefit from the increased trade in the area. Tesco are impacted here as the government spend money to develop the sites in which they wish to open a new store within. For example, if Tesco have plans to open a new store in Northern Ireland, the government may spend money to clear the sight which they are to start building on. This will reduce the costs for Tesco and will benefit them in the future.
As well as the private sector, government spending also affects the voluntary sector which includes charities and other voluntary organisations. This is because grants are more readily available for such organisations when government spending is high. This allows voluntary organisations to benefit greatly from the increased capital the government is supplying them with. If spending is cut, these organisations may struggle to find other sources of finance. From 2009 and into the economic recession, voluntary organisations struggled as there were cutbacks in government spending and people did not have the disposable income to contribute to their local charities.
The level of spending in private and voluntary sector business organisations depends on the government’s priorities for the UK and the policies they have in place.
If the government increases spending this can impact directly and indirectly on private businesses. It impacts directly if the government gives the business support in the form of loans or advice or buys directly from them such as taxi firms and computer manufacturers. This is because the government and the business are dealing with each other without any intermediaries. It also impacts indirectly as it increases employment in the economy which may lead to an increase in demand as more people will be employed and subsequently have more money to spend. Increases in welfare payments will also impact on demand for a business’ goods services indirectly as people have more disposable income. The opposite may happen if the government cuts back on spending. Tesco are also impacted by government spending in the private sector as if they help finance a new store to open, it will create jobs in the local area and this means the area becomes more affluent and unemployment levels decrease. This in turn will mean more people have a higher disposable income and can actually purchase more products and services from the Tesco store which positively impacts Tesco too. It is like a cycle whereby the government spend money in a business and it benefits the whole community and economy as a result.
Voluntary organisations such as charities and community groups will be directly affected by government spending as there will be more government grants available for such organisations when government spending is high and less grants available when the government cuts back on spending. They will also be affected indirectly by government spending as members of the public will have more money to donate to them if government spending is high due to more people being employed and little money to donate if government spending is cutback due to less people being employed. Decreases in government spending will also indirectly affect them as the government will not be providing the same amount of services and there will be more need for help from charities such as homeless charities.
Deficit funding is where the government spends more than what it takes in so it is losing money. This means it must borrow money from banks, government bonds or through selling assets.
The difference between spending and money received in any given year is known as the Public- Sector Net Cash Requirement (PSNCR). As the PCSNR builds up over the years – it is then known as the national debt. Britain still owes money from the Second World War and this shows the scale of debt which some economies are in.
If there are not enough people working to pay taxes, the government will need to boost spending to increase aggregate demand and try to break this trend. If the government’s borrowing and debts become too large, it may become impossible for the government to pay the money back. This is referred to as ‘defaulting on a debt’ and with economies so interlinked, other countries may be affected.
Tesco are impacted by deficit funding as this implies lower taxes which means people have less to pay and have a higher disposable income. This may lead to people buying more when they shop in Tesco and this impacts Tesco through increased sales and profits. However, in the future the government may have to increase taxes or cut spending in order to reduce the deficit and this may cause reduced incentives to work meaning there are more people unemployed.
This results in people having less money to spend and so Tesco’s sales and profits fall which have a huge impact on the entire organisation.
If the government sells more bonds this is likely to cause interest rates to increase. This is because they will need to increase interest rates in order to attract investors to buy the extra debt. If government interest rates increase, this will push up other interest rates as well which mean more people will save their money and not borrow. This leads to decreased spending and as a result Tesco may be impacted by a slowdown in sales and a decrease in customers.
Government spending and the multiplier mechanism
Increases in government spending have a multiplying effect on the economy. As government spending stimulates demand, it multiplies and creates a lot of demand in other sectors.
This then encourages business to invest to meet the growing demand for their products and services. Likewise, if the government cuts back on spending, the demand in the economy decreases which means that businesses feel uncertain about investment as their confidence in the economy is reduced. They may cut back on the business’ production of products and services.
The government may budget for a surplus or deficit in any given year.
Budget deficit – when a government budgets to spend more than it receives in the form of taxes in each year. Spending is greater than taxes received here.
Budget surplus – when a government budgets to take in more in the form of taxes in each year than it spends. Taxes received are greater than spending here.
Balanced budget – when the government budgets to spend the same amount as it receives in taxes. Taxes and spending are equal here.
In the current climate, the government mostly budget for a deficit because there is so much need for spending in the economy. Although, before George Osborne left office his plans were to cut back on spending and get back to a budget surplus by 2020 and reduce the debt they inherited from the previous Labour Government. Theresa May still wants to follow this but her target surplus is much lower. As Prime Minister she believes people must live within their means.
Tesco are impacted by the different budgets in which the government set in relation to spending. If the government budget for a deficit, Tesco may benefit. This is because the government will be spending more on businesses and so demand increases for Tesco’s goods and services. This will allow Tesco to increase sales, profits and will be in a better position to expand. Sometimes the effect of a fall in spending is hard to predict. If it is a temporary blip, it is not serious for businesses. However, if an initial fall in spending causes rising unemployment and other people to reduce spending, the initial fall can become magnified and cause a serious decline in Tesco’s sales and profits and in general economic growth
An example of the multiplier effect impacting Tesco would include an increase in welfare payments. This government spending indirectly impacts on Tesco as more people have a higher disposable income. They can use this disposable income on whatever they like and it is likely that they will purchase more luxury products which Tesco has to offer such as luxury food or cleaning equipment. This has a multiplier effect across the economy as it will lead to increased spending, an increase in aggregate demand and Tesco benefit here in the form of increased sales and profits and will find that the company is in a much better position financially and economically.
Local impacts of funding
As well as funding regional areas, governments also spend money in local areas. Many types of local funding are now carried out on what is known as a bid basis. For example, schools and colleges must submit tenders and bid for government money. It is not handed out freely.
SRC must bid for extra funding and for the delivery of different projects, private organisations such as farmers must bid for government funding and charities and voluntary organisations such as community groups have to bid for funding. Individuals must complete and submit application forms for allowances and grants such as hardship funds, disability allowances and family allowances. This should help to reduce government spending as people and businesses now must put in more effort in order to get government assistance.
Tesco are impacted by local government funding. If Newry Mourne and Down District Council offered a local store a grant which would help them develop a larger car parking area for example, Tesco would benefit greatly here in the form of more customers being able to visit the store. This would be at a zero cost for Tesco and they would be able to grow and become larger as a result. Local funding for local businesses has a great impact for business and the wider community and Tesco would certainly be positively impacted here.
Private Finance Initiatives
Private Finance Initiatives are a way in which the government increases spending in conjunction with businesses. This also helps the government to reduce their borrowing requirements. It involves awarding contracts to private sector organisations and businesses who provide a service that was previously provided by the public sector. An example would be the councils working with private contractors to carry out a building project of new homes. This would benefit local people as more housing would be provided.
In some circumstances, PFIs mean that an asset such as a school or hospital remains owned by the private sector and money needs to be paid to that owner to use those facilities over a period of time. The government may buy the property back off the private sector to generate revenue for themselves in the long run.
PFIs would indirectly impact on Tesco. If we take the example above of the council working with private contractors to carry out a building project of new homes, this would benefit local people as more housing would be provided. If more housing is being provided, it may draw people into that particular area. Once in the area, they may shop at their local Tesco store which will allow Tesco to access a range of new customers and increase their sales and profits too.
Impact of changes in the economic environment on Tesco
Government spending has many different impacts on Tesco which have been explained above. This report will go into an extensive evaluation on the impact of changes in the economic environment on Tesco. Research will be carried out on how the company has been impacted as well as how other competitors in the same market have been impacted by the same changes.
The economic environment is the external factors that influence the business. The economy is made up of buyers, investors, sellers, the government and bankers. The economic factors have the largest impact on any business. A stable economy is important for Tesco because;
- Prices stay stable and do not vary
- There is steady growth within the business
- Unemployment figures remain constant
- Exchange rates stay stable
- There is good customer confidence and they buy more goods.
The business environment can change frequently which change the ways in which business operate on a daily basis. Changes that can occur with changes in the economic environment include an increase in the price of goods and services, changes in credit available and the cost of credit to businesses, changes in the supply of labour, government policy changes and changes in business legislation.
An evaluation on the impact of different changes in the economic environment on Tesco will be looked at below.
Changes in unemployment rates; high levels of unemployment have different impacts on business. High unemployment means less people are working in the economy and so they have lower incomes meaning they have less money to spend on goods and services. This reduces the demand for goods and services especially luxury goods and services. This will impact negatively on Tesco as products which may have been in high demand a while ago may no longer be in demand due to more people being unemployed and this reduces Tesco’s sales and subsequently profits too.
When there are high levels of unemployment, Tesco may find it easier to recruit and be able to pay lower rates of pay as there will be a higher number of people looking for work and so taking advantage of this, Tesco may be able to increase their profits. Low levels of unemployment also have different impacts on businesses. This means that more people are working in the economy and so they have higher incomes and so are able to spend more on goods and services. This should increase the demand for goods and services, particularly luxury goods and services. This is good for Tesco as more people will have a higher disposable income which can be spent with them. This will mean that more products and services will be purchased and so sales and profits begin to increase. Tesco may find it more difficult to recruit however and they may have to pay higher rates of pay to attract staff as there will be less people looking for work. Tesco may also have to look at recruiting workers from abroad as there simply isn’t enough of a selection in the UK. This can lead to increased costs and a reduction in Tesco’s profits. Unemployment rate is one of the factors that affect the company’s profitability. Unemployment decreases the demand for its products and services and in the end, its profitability and this is something which Tesco is good at dealing with as they both luxury and cheaper goods to suit the everyday customer.
Changes in national living wage; increases to a national minimum wage benefit workers by allowing them to earn more money for the same work. That’s usually good for the workers, but it can be challenging for Tesco because it increases costs. Labour costs are usually a company’s greatest expense. Some corporations argue that they cannot compete against companies located in countries offering a much lower minimum wage. That can result in a company transferring many job functions to foreign countries such as Tesco responding by sourcing products from countries such as China and sourcing their clothing stock from places such as India. The introduction of the national living wage in April 2016 resulted in a cost for Tesco which would exceed £500 million by 2020. This shows that Tesco have been paying their staff lower than this in the past and so their ability to adapt to a change in this economic factor isn’t very good as the company has now had to endure a serious increase in financial costs.
Renewable energy schemes; through the government introducing policy in relation to renewable energy, they pay energy users who invest in small-scale, low-carbon electricity generation systems for the electricity they generate and use and provide incentives for businesses to install renewable heating instead of fossil fuels. This has implications for Tesco and Tesco respond. Tesco have a long term goal to become a zero carbon retailer by 2050 and they have zero-carbon stores to meet this goal. Their special stores use a mix of environmentally-friendly design, materials and technologies to ensure that all energy- consuming equipment, no matter how big or small, is as efficient as possible – whether that be the refrigeration system or the hand drier in the toilets. Tesco are impacted positively by renewable energy schemes as it will save the company costs and expenses. This will allow them to maximise their profits which can lead them to expand much more easily. The impact of an increase in renewable energy schemes is definitely good for Tesco and as more schemes are introduced, Tesco are left with more incentives to save money.
Increasing university fees; there was a 17% fall in the number of first year undergraduates at UK universities in the first year of higher tuition fees. This doesn’t look good for the economy as it would seem that fewer people would graduate in specialised industries. However, it may have benefitted Tesco as more people looked for full time employment instead of going to university. This impacted Tesco as they had a greater number of people to choose from when recruiting. They also had the option of more skilled people when recruiting as they may have had a 17% increase in people to choose from. However, the increase in university fees may have negative also be negative for Tesco. If people graduate with greater debt with their education fees, they may spend less so that they are able to pay off their debt. These cuts in their spending may be with Tesco as they attempt to save money and this ultimately damages Tesco sales which they will have to look for ways to improve again. So, increasing university fees is good and bad for Tesco. Tesco will have to ensure that they look out for trends in the shopping patterns of university graduates and adapt their business operations accordingly such as lowering or increasing prices of particular goods and services.
The recession; recession occurs when people involved in business become more cautious and customers cut back on spending and start to save more, looking for deals and discounts in stores. Recession means that there are less goods and services being produced from one quarter to the next. An economy is generally considered to be in recession if GDP has contracted for two consecutive quarters. Manufacturers and sellers cut back on their orders, produce fewer goods and start to cut back costs in general, including by laying off workers (just as Bombardier and Caterpillar announced in 2016) and reducing hours of work. Just like growth, this leads to a ripple effect in the economy. Due to the fact that economic recessions will put Tesco’s customers under money worries, they will only be purchasing items which they really need, more so than what they want as they simply cannot afford to treat themselves to the more luxurious items. For example, Tesco customers may want some luxuries such as chocolate, sweets and crisps. However, they only need basic and essential items such as toothpaste, break, milk and household items.
Tesco have been successful in the recession which began at the end of 2007 as they have offered their own brand of products, which is a cheaper alternative for customers. Recession has had a big ripple effect on the economy, which has led to banks not lending money, higher unemployment figures and businesses closing down. A recession will make business demand decrease, as well as the demand for products and services decrease. This affects the departments in Tesco greatly and they need to ensure they remain competitive during desperate times for the consumer. During the decline of global retail overall sales, Tesco have still shown a growth of 13% within the UK markets and 26% internationally .They have won several retail awards for keeping up their standards and providing best retails services keeping in mind their corporate responsibilities . They are continuously expanding with propositions of opening several stores on an international level. This shows that they have done excellent as they were largely impacted by the recession which was detrimental to the economic environment over the past number of years. According to the London Evening Standard newspaper, finance director Laurie McIlwee said that “yes”, Tesco have coped very well in the economic recession in 2010 – adding that customers got used to relying on Tesco for practically everything, becoming addicted to the club-card and the free car parking along the way. During the recession, Tesco were also more successful than any other competitor such as Sainsbury’s and ASDA as they remained the dominant player in the UK with a market share of more than 30%.
Rates revaluations; the UKs largest supermarkets are being hit with increasingly disproportionate hikes in business rates that will spell more pain for them in times of recovering from an economic recession. Tesco, Sainsbury’s, ASDA and Morrison’s face an additional bill of more than £110,000 per superstore in 2015-16 compared with 2010-11. This occurs at a time when small businesses have seen their bills reduced. This increase of rates for only the bigger supermarkets is seen as unfair and has many implications for Tesco. This means increasing Tesco’s rates which is an increase to their expenses and takes away capital which can be used to expand and which eats up the company’s profits. It may also impact Tesco as they have to increase their price of goods and services to cope with these increased business rates and so consumers stop shopping with them and go to other smaller stores who don’t have to increase their prices to cope with an increase in business rates. This is bad for Tesco and has a negative impact for them a premise which they’ve owned for a few years and were able to make a healthy profit on, the rates are now changing and their profits may be diminished in a way. Tesco have coped well though as the company is always expanding so they have subsidised these rising rate expenses and the business have grown.
Changes in tax rates; an increase in corporate income taxes has a direct effect on a business such as Tesco. A tax increase on business profits hurts a company’s overall financial performance. When business tax rates increase, Tesco may respond by raising prices on goods and services. Increase in taxation is the largest source of revenue for the government is income tax and is levied against interest, dividends, capital gains and income. Therefore, the highest earners end up paying high taxes. However, increase in tax affects consumer spending in different ways including. When taxes are placed on specific products, consumers tend to look for substitutes that are available at cheap prices. This has implications for Tesco as they may have to reduce the prices of their products to compete with other competitors such as ASDA and LIDL. This also impacts Tesco as a smaller price being charged means profits aren’t as high as the firm would wish for them to be. It is imperative to note that consumer spending is often two thirds of GDP. Therefore, increasing taxes reduces disposable income. This means that consumers will only spend the money they have on essentials and no additional products. With an increase in tax, consumer spending reduces and causes fluctuations in the economy because of the attitudes of clients or consumers towards the state of economy. This also has implications for Tesco who may have to compete in an economy which is struggling and so they will struggle too with imports and daily running of their stores. It is clear that rising tax rates have negatively affected Tesco as it greatly increases their expenses and this subsequently reduces the profits the company makes which are essential to have for expansion of the company. However, if we look at Tesco compared to other competitors such as ASDA or LIDL, they are the fastest growing supermarket and have clearly coped the best with increases in tax rates in the past.
To continue providing the certainty that businesses need to make their long-term investments, the government is recommitting to the business tax road map and the principles that it sets out. This includes cutting the rate of corporation tax to 17% by 2020 and reducing the burden of business rates by £6.7 billion over the next 5 years. This has positive implications for Tesco as their tax is reduced and so they have the opportunity to use such capital on daily operations or even to expand, which otherwise would have been paid in tax. This also impacts Tesco as they are able to maximise their profits even further as an expense has been significantly reduced.
This may enable the company to invest in other areas as seen in the past such as insurance and clothing. Another implication of this reduction in corporation tax is a better opportunity for Tesco to import goods from abroad as they are paying less tax on the money they are making and so can afford to import in greater volumes for cheaper prices. Tesco are currently doing this very successfully and a lower tax rate would only help them even further as their costs reduce and profits increase. This would be excellent for Tesco as they strive to remain as the leading supermarket in the UK in the following years.
Changes in government spending; If different areas of government spending are cut, then the UK’s productive capacity may suffer in the long term. Cutting spending in roads and transport may mean these areas become insufficient for use and can restrict people travelling to and from places. Tesco customers may not be able to use roads which they deem too dangerous due to insufficient repair and this has implications for Tesco as they lose customers and subsequent sales. It may also mean that Tesco cannot import products from other countries if transport isn’t appropriate to do so which may mean they have to source their goods and services more locally and at a higher cost. However, capital spending is often the easiest place to make spending cuts, because in the short term, people don’t lose out. If you reduce pensions, people notice straight away. If you reduce capital investment, it will affect people 10 or 20 years in the future. If the government make spending cuts to pensions for example, people may immediately try to save money for themselves in the future. This attempt as saving money for people may be reducing their spending on their weekly groceries and so ultimately Tesco suffer with a decrease in their sales. The government must ensure they give different policies equal attention as changing one will ultimately change another and this has implications for Tesco such as having to decrease their prices of their products and services so that people can afford to buy them. In the fiscal year ending in 2016, total UK public spending was £761.9 billion. In the fiscal year ending in 2017, the UK public spending is expected to be
£784.1 billion. This will be great for Tesco as there will almost certainly be money directly or indirectly spent which will aid the company. For example, as Theresa May plans to increase spending in mental health, it will allow for a more healthy population and workforce which will impact on Tesco positively. Tesco have coped well in the past with decreases in government spending though as they have so much profit to reinvest in the company and so are very successful in this area of the economic environment.
Apprenticeship schemes; the UK government work alongside Tesco to deliver apprenticeship schemes which aim to tackle youth unemployment. In 2012, Tesco announced that they will create 20,000 new jobs in the UK over the next two years in a bid to tackle growing youth unemployment. These schemes are much cheaper for Tesco as they don’t have to go through the whole recruitment process which is expensive for them. In addition to this, Tesco can keep on the apprentices if they show potential which means Tesco have highly skilled workers for a cheap price. This impacts Tesco as they are able to maximise their productivity and skills of their workforce and as the government is directly funding this, Tesco have little expense. This allows them to increase their profits at a very small price as well as have the opportunity to gain themselves an excellent corporate social responsibility and corporate image. Tesco have been fantastic in past at delivery these apprenticeships schemes and more than 72% of those enrolled end up fulfilling a permanent job with the company. This shows Tesco’s excellent ability to deliver on government-funded schemes and the benefits for themselves have been outlined above.
Leaving the EU; in the immediate aftermath of the Brexit vote, there was uncertainty which led to a dampening of consumer confidence and this impacted Tesco. Nobody knew the government’s plans with regard to spending and this led to fear in the general public. Psychology of the consumer is critical and this was unfavourable by consumers. Consumers did not – and many still do not – feel ‘better off’. For retailers such as Tesco, there was also uncertainty of the direction of their business. It prevented Tesco from making any huge plans as retailers didn’t know how bad the exchange rate was going to turn out to be. Brexit also impacted Tesco as the cost of goods purchases overseas will effectively become more expensive and as a result, some of the burden may eventually need to be shared with consumers in the form of increased prices for goods and services. This will further impact Tesco as many of their customers stop purchasing with them and this means Tesco’s sales fall and so do their profits. They may also lose many customers to other competitors who may be able to offer products which they source locally at a lower price.
In the immediate aftermath of the referendum, I think Tesco didn’t do as well as they should have. Multinational household goods giant Unilever has reportedly demanded a 10 per cent price rise in Tesco products, including those made in the UK, to offset the higher cost of imported goods. The two companies had a huge price war on their products and services and although Tesco have got majority of their customers back, they still lost a proportion of them which shows they weren’t exactly fully ready for the result of the referendum – which was shocking to many businesses across the country.
Pensions schemes; under UK law, employers will have to provide a workplace pension for eligible staff by 2018. An employer’s pension scheme can have a huge impact on the way a business operates. Pension schemes can continue to be a cash drain on employers, restricting their ability to use working capital to grow the business. They also represent a significant risk for the employer and it is a risk managed by trustees who may not share the employer’s risk management objectives. This can weaken the balance sheet, limiting the organisation’s ability to raise further capital. This has had an impact on Tesco as their pension deficit had risen to £4.2 billion in 2015. This shows they are struggling with the impacts of a pension scheme as the government have decided the employer should contribute too, as well as the employee and them. This has actually put some companies out of business and has caused Tesco to consider pulling out of offering their employees’ pension schemes. Tesco have definitely struggled with the idea of a compulsory pension to all employees which the government has introduced. This can be seen by their huge debt and inability to continue offering everyone pensions due to the huge impact it has had on the company’s profits. Tesco have been loyal to their staff up until now though as they have put pension packages in place.
Inflation; inflation means that the costs for Tesco will increase. For example, they will have higher energy bills, higher transport costs, higher costs for raw materials and higher cost of services such as internet services and insurance. Due to these increases in costs, Tesco must choose whether to pass on these costs to consumers in the form of higher prices for products and services which may lead to a decrease in demand, or they can absorb the increase in costs and do not pass them on to the consumer. This means that profits for Tesco will fall so they must find other ways of trying to reduce costs. As costs are rising, Tesco must reduce their costs of production or the price they pay for goods and services to suppliers to be able to compete with competitors such as ASDA and Sainsbury’s and survive. Tesco must ensure they plan for inflation as if they cannot pay their debts, the company could face bankruptcy. Changes in inflation rates creates uncertainty for businesses and it is difficult for them to cost out contracts and set their prices accurately and therefore Tesco’s prices may have changed when we compare the price of products and services today and five years ago. Tesco have coped well though with changes in inflation rates over the years as they have always remained a market leader with the largest market share and brand loyalty. They are quick to change prices of goods and services with changing inflation rates and this ability to adapt quickly to an ever- changing economic environment is an attribute to the company’s international success.
This document went into a detailed explanation as to what government spending is and by referring to current examples, identified the impact of changes in government spending on Tesco. The document then went into an extensive evaluation of the impact of many different changes in the economic environment on Tesco. To do this successfully, current articles, newspapers, the internet and other media were looked at. Ways in which Tesco may respond to these changes were also evaluated.
Tesco are a leading supermarket in the grocery industry and so there are little recommendations to make. The company are extremely well prepared for different changes in the economic environment and because of this preparation, they’re ready for major changes such as Brexit which has taken effect already and will begin to affect businesses even more as 2017 goes on.
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