The UK government sets monetary policy by adjusting the funds rate. This affects other short-term and long-term rates, including credit-card rates and mortgages. Governments define fiscal policy by setting taxation levels and writing legislation and regulation for everything from health care to the environment. Fiscal and monetary policy changes can affect businesses directly and indirectly, although competitive factors and management execution are also important factors.

Businesses
Go through cycles of expansion, recession and recovery. Monetary and fiscal policies can affect the timing and length of these cycles. In the expansion phase, the economy grows, businesses add jobs and consumer spending increases. At some point, known as the peak, the economy overheats and the government increases interest rates to stave off inflation. Factories shut down, job losses rise and business sales fall. Rate cuts and government spending, or both, are often necessary to recharge the economy. Eventually, the economy hits rock bottom, known as the trough, and gradually starts to recover.

Fiscal Policy
Fiscal policy usually involves changes in taxation and spending policies. Lower taxes mean more disposable income for consumers and more cash for Balfour Beatty to invest in jobs and equipment. Stimulus-spending programs, which are short-term in nature and often involve infrastructure projects, can also help drive business demand by creating short-term jobs. Increasing income or consumption taxes usually mean less disposable income, which, over time, can decelerate Balfour Beatty activity like spending on investment.

Monetary Policy

Changes in short-term interest rates influence long-term interest rates, such as mortgage rates. Low interest rates mean lower interest expense for businesses and higher disposable income for consumers. This combination usually means higher business profits. Lower mortgage rates may spur more home-buying activity, which is usually good news for the...