Impact of Government Spending on Tesco

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

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.

Below shows the multiplier effect in action;

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

Introduction

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.

Findings

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.

Conclusion

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.

Recommendations

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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