Most governments in the world are trying to achieve economic stability because it is highly regarded as the prerequisite for attaining high levels of economic growth to meet the needs of every individual. The economic growth is measured by governments in terms of the annual change of real Gross National Product (GNP) per capita. GNP is sometimes replaced by Gross Domestic Product (GDP) in calculating growth because GDP is used worldwide to compare the progress of each country towards prosperity (Briscoe 2008). Economic growth allows every country to produce higher standards of living and more wealth. The strength of the economic growth generally impacts the construction industry because there will be an increase in the level of fixed investments in buildings, dwellings, and infrastructure (Briscoe 2008).
All governments aim to lower the level of unemployment because it corresponds to wasted labor resources. It is suggested that lower levels of unemployed workers are linked with decreasing inflation rates. Governments that initiate capital expenditure programs designed to create job opportunities for the unemployed will achieve higher construction activity (Briscoe 2008).
Controlling the price inflation is important because an increase in rates of annual price will create an adverse effect on its trade balance, as the relative price of exports increase and the import prices decrease (Briscoe 2008). Price stability benefits the construction industry because it will produce a high probability of meeting cost budgets of its clients (Briscoe 2008).
Every government desires to have a balance between the amount it invests and spends abroad with the amounts other governments invest and spend in it (Briscoe 2008). The strength of foreign exchange rate of a country is dependent on deficit balances on its current account (Briscoe 2008). Stable exchange rates will benefit the construction sector that performs work abroad and import huge volumes of components and materials (Briscoe 2008).
Fiscal policy pertains to the overall budget by the government sector relating to taxation and other sources of government expenditure, revenue, capital and transfer items and any necessary borrowing that might come up (Briscoe 2008). The British government manages the budget based on two main principles: the importance of maintaining the stability of the public sector debt at a sensible level and borrowing activity of the government should be based on investment purposes only (Briscoe 2008).
The key role of fiscal policy is to maintain the economic stability of a country to allow the realization of the main macroeconomic objectives. The expected impact of fiscal policy should be on economic growth and lowering levels of unemployment (Briscoe 2008). Annual adjustments of government budget are conducted to enhance the economy and to attempt to achieve a continued balance between investment and consumer expenditures (Briscoe 2008).
Fiscal policy is utilized by governments to make sure there is a fair distribution of the national GNP to every individual. Governments are more concerned in protecting the financial capability of the poorest sector in society rather than aiming to attain more equitable income or wealth distribution (Briscoe 2008). For the lower income group to be capable of spending on public goods and services, governments make adjustments on tax to collect revenue from the higher income sector in society and transfer payments to the lower income group (Briscoe 2008).
Fiscal policy coming from taxes and government revenues is also used by government to pay for public goods and services such as health, education, transport, law and order, defense, and other public services (Briscoe 2008). The British government has formed the Private Finance Initiative to finance various construction projects in the country. The initiative allows shifting the management and risk responsibilities to construction firms and their financial providers to eliminate the short-term burden on capital expenditures (Briscoe 2008).
The sources of fiscal revenue are income tax, corporate tax, and value-added tax. As the income tax of consumers increases, it will produce a negative impact on the demand for housing and construction services, particularly for first-time buyers who are most likely to get below-average salaries (Briscoe 2008). Corporate taxes decrease the possible profit that private construction firms are able to maintain and use for their new investment in building construction and other related capital investments (Briscoe 2008). There is a substantial expenditure in the administration of revenues from value-added tax (Briscoe 2008). Some small construction firms that are not registered for value-added tax are able to achieve construction contracts at a lower price than larger firms that are required to make returns from value-added tax (Briscoe 2008).
Monetary policy is basically concerned with the attainment of price stability by establishing interest rates and with the control of external exchange rates. It is typically managed by banking authorities. It is utilized mainly to regulate economic inflation. Measures to address when pressures in inflation begin to increase include increasing interest rates and tightening money supply (Briscoe 2008). They are reversed when it is perceived necessary to increase spending without resulting to substantial increase in price and wage (Briscoe 2008).
Monetary policy is also utilized to monitor the currency exchange rate. The central bank enables to buy and sell huge amounts of the domestic currency to try to address short-term irregularities in the exchange rate (Briscoe 2008). Its ability to regulate the currency exchange rate in the long run will be more limited because capital and trade flows will become the primary determinants (Briscoe 2008).
Interest rates are the key instrument to affect monetary policy. Adjustments to the base rate made by central banks, where they are prepared to lend to other banks and financial intermediaries, have a related effect on the interest rates charged by commercial banks to their clients. The interest rates charged by commercial banks to their borrowers are usually at a higher level compared with bank rate (Briscoe 2008).
The central bank is also responsible for the licensing and monitoring of approved financial institutions to make sure that they operate sensibly to keep effective liquidity ratios (Briscoe 2008). The Open Market Operation in Great Britain is established to raise the monetary base of the banking system of the country in order for the banks to increase their loans and improve cash reserves (Briscoe 2008). Another monetary instrument that the central bank can utilize is its ability to intervene in the international money for a short period of time (Briscoe 2008). Furthermore, the central bank may also desire to make interventions to hinder the rapid rising of its currency against other currencies in the world (Briscoe 2008). Its powers to make interventions are a short-term measure in an attempt to achieve significant stability in exchange rates (Briscoe 2008).
Changes in monetary policy can have a significant impact on the construction industry that is highly dependent on credit and finance for both short- and long-term objectives. Most construction firms use bank overdrafts which are important for ensuring continuous flow of cash on construction projects where payments are often made for design, subcontracting, direct labor cost, and materials before receiving revenue from customers upon completion of work (Briscoe 2008). The interest rates that construction firms are obliged to pay on the loans is a key determinant of the profitability of the individual construction project and the overall business (Briscoe 2008). Moreover, bank finance can also be critical to first-time buyers who may intend to delay their decision to purchase a house when the open market operations are carried out to decrease the money supply, causing the lending firms to limit the number of borrowings they can provide in a certain period of time (Briscoe 2008).
Briscoe, G. (2008). The impact of fiscal, monetary and regulatory policy on the construction
industry. In L. Ruddock (Ed.), Economics for the modern built environment (pp 113-
129). London, England: Taylor & Francis.