National governments control economic growth through taxation, regulations, and stimulus packages. Tax cuts, especially for small and medium-sized enterprises, can boost growth, as can fostering innovation and a skilled workforce. Housing markets also contribute to growth. Governments can take preventive and passive measures to protect against harmful practices and allow for healthy competition.
National governments control most of the tools used to boost economic growth. These often come in the form of small changes to tax levels, government regulations and plans, or as part of a larger set of actions known as a stimulus package. A single individual or company rarely has the ability to influence an entire economy, but the actions of a group of companies such as retailers or banks can impact growth. Levers that can be applied to an economy include taxation, the money supply, quality control, and adjusting to the global business climate.
Taxation determines the amount of revenue a government obtains from the activities of its citizens or subjects. Tax increases do not automatically reduce economic growth, but they can reduce the activity that is taxed. Tax cuts are a hot topic whenever economies fall into recession.
Targeted tax cuts, such as capital gains taxes, corporate taxes and consumption taxes can have a positive effect and boost economic growth. Lower business taxes allow companies to make big profits or invest in hiring new staff members. Cuts in consumption taxes or taxes on the income of the poor create economic growth through increased consumption. Some economists believe that reducing the taxes of the wealthy in society also increases economic growth because the wealthy reinvest their savings by employing new staff members and creating new businesses.
A substantial part of economic growth is driven not by large companies, but by small and medium-sized enterprises. Small businesses tend not to have the same liquidity and cash reserves as large corporations. Governments and banks can boost economic growth by giving these firms access to finance. Policies such as quantitative easing, business assistance, and tax exemptions are policies that help finance and promote small and medium-sized businesses.
According to economist Joseph Schumpeter, new technologies and innovation destroy old markets and create new ones. Fostering innovative individuals and companies, therefore, creates an environment ripe for economic growth. The production of products and services and their sale are the main drivers of growth in developed economies. Manufacturing and other businesses therefore require the right circumstances to help boost economic growth. These circumstances include free or favorable international trade agreements, good and stable exchange rates, access to finance, and less or less complicated regulations.
John Maynard Keynes believed that an increase in employment leads to an increase in consumption and that this will increase economic growth. Keynes believed that the government should hire new workers to reduce unemployment. His detractors, however, believed that government should increase the money supply and instead allow the free market to hire employees. Most modern economists, including Paul Romer, agree that increased education and training automatically creates a higher quality workforce, which in turn fosters growth.
Economies such as those of the United States and Great Britain derive great growth from their housing markets. This occurs when buyers and sellers are able to generate profits from houses and other parcels of land. Homeowners are also able to tap into the value of the property should the need arise. Governments can boost economic growth by taking steps such as regulating mortgage lending, reducing property taxes, and adjusting inheritance taxes to keep the housing market healthy.
Governments can also take preventive and passive measures to increase and stimulate economic growth. For example, governments can use taxes and regulations to curb bad practices, such as buying debt or risky investments, thereby preventing actions that could harm economic growth. They can also choose not to act if a company goes bankrupt. Artificial safeguarding of businesses held back Japan’s economy in the 1990s, while allowing business failures means that only the most successful – and therefore profitable – companies compete.
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