Fiscal Policy and Economic Growth The government can introduce a lower starting rate of income tax for

lower income earners. This is designed to provide an incentive for people to work extra hours and keep more of what they earn. Government financial subsidy to producers has the effect of reducing their costs of production, lowering the market price and encouraging an expansion of demand. Lower rates of corporation tax and other business taxes can stimulate an increase in business fixed capital investment spending. If planned investment increases, the nations capital stock can rise and the capital stock per worker employed can rise. The government might also use tax allowances to stimulate increases in research and development and encourage more business start-ups. A favourable tax regime could also be attractive to inflows of foreign direct investment a stimulus to the economy that might benefit both aggregate demand and supply.