The Effects of Fiscal Policy on Private Business Investment - Essay Example

MACRO & MICRO ECONOMICS of of affiliation The benefits of the private investments for growth and expansion of a nation’s economy is a well-founded fact. The private investment is regarded as a fundamental aspect in promoting a broad based and well-sustained growth (Razin, Assaf, and Jacob, 2006). This is immensely attributed to the almost immediate response of private investment to the dynamism of economic policies, which include the governmental fiscal policy. This essay seeks to examine the effects of the fiscal policies on the private investments, particularly, the fundamentalism of long-term fiscal sustainability for economic growth and development.

As a point of departure, private business investments are considered as fundamental channels in which fiscal policy influences the economic growth. For instance, the endogenous economic growth model explains the dynamism in the capital stock, which is believed to influence the long-term per capita growth rate. This can happen through two ways namely more quantitative investment and more-efficient investments. This follows that the aspect of fiscal policy can be said to influence investments by varying domestic demand, which influence the Growth Development Product (GDP) of a nation, thus influencing the economy growth of a country.

Considering a model of a tight fiscal policy where expenditure is reduced and increased taxation like in the case of the US, immense negative expectations are eminent. This reduces the viable incentives fro investments. On equal measure, the fiscal policy, particularly the short terms, can directly affect investment through the cost of capital attributed to the tax system (Razin, Assaf, and Jacob, 2006. This follows that, the long-term fiscal policy on well-designed tax system on liberalized and privatised programmes such as for the case of the US and UK, help private sector investments because of reduced direct government involvement.

For the case of government interest increase, foreign capital is attracted from the foreign investors and this increases the demand for the country’s currency. This implies that the value of country’s currency is increased. It is imperative to note that the increase in the currency value makes the exports from the country in question more expensive. On equal measure, when the government funds discrepancy with issuance of government bonds, the interests’ rates increases across the market due to the government borrowing which creates a higher demand for the credit in the financial markets.

It is imperative to note that, theoretically, the fiscal stimulus does not create inflation when it consumes resources, which would have been otherwise inoperative (Razin, Assaf, and Jacob, 2006). This follows that, the private sector is affected by the increased demand for the credit in the financial markets because the financial institutions tend to limit access of loans to the private sector and this reduces the level of production, hence hampering the ambitious investments projects from the private investors.

This calls for a long term and well structured fiscal policy to ensure that the private sector is not affected by the governments’ heavy borrowing. In conclusion, the private sector contributes immensely to the universal economic growth of a nation; hence, it needs protection from the governmental policies. This follows that, long-term fiscal policies for sustainable economic growth and development is a sure way of ensuring steady growth of the private investors. Bibliography Razin, Assaf, and Jacob A. Frenkel. 2006.

Budget Deficits and Rates of Interest in the World Economy. Cambridge, Mass: National Bureau of Economic Research.