Business confidence has retreated amid rising interest rates and a stalling economy. ICAEW’s quarterly survey of small businesses shows that confidence is weakened by rising prices and interest rates, and slowing demand.

However, empirical studies of determinants of business confidence remain scarce. Existing studies mainly focus on macroeconomic and political factors.

Uncertainty about the U.S. government’s fiscal policy

The federal government’s fiscal policy consists of spending and tax policies that influence economic conditions. The federal government may lower taxes or increase spending in an effort to spur demand and boost growth. It can also raise taxes or cut spending to combat inflation and slow economic activity.

Some critics argue that expansionary fiscal policy crowds out private investment. However, research suggests that if a stimulus is targeted at areas where businesses are underinvesting, it can actually be beneficial.

The development of fiscal policy involves an elaborate process. First, lawmakers approve the overall budget for the coming year. Then they divide the budget into categories, such as national defense or transportation. After that, lawmakers write individual appropriation bills spelling out how the money will be spent. The president must then sign the bill into law before it takes effect. Monetary and fiscal policies are designed to achieve macroeconomic policy objectives, such as maximum employment and price stability.

Uncertainty about the U.K. government’s fiscal policy

In Britain, the country is facing its most severe squeeze on household incomes since records began in the 1950s. As a result, businesses are hesitant to invest.

The country’s new chancellor, Kwasi Kwarteng, is trying to ease the squeeze through a looser fiscal policy. But the scale of his plans to cut corporation tax has raised concerns about future deficits and triggered tremors in the bond market, which pushes up the cost of government borrowing.

The new chancellor’s policies have also created doubts about how well the Office of Budget Responsibility can be trusted to keep public debt in check. The OBR’s forecasts are often over-optimistic and prone to revision. They may also contain veiled promises of unspecified spending cuts, which could trigger tremors in the bond market and push up interest rates on mortgages. This would harm business confidence and reduce economic growth. It’s no wonder that businesses in construction and property are the least confident sectors.

Uncertainty about the U.S. government’s interest rate policy

The Federal Reserve’s path toward “normalizing” monetary policy has increased interest rates, including for businesses that borrow to invest. These higher interest costs are creating a headwind for the economy and could slow economic growth.

The Fed’s short-term interest rate, the federal funds rate, has risen by 1.5 percentage points this year. This rate influences other short-term rates and the cost of long-term borrowing for households and businesses.

But rising interest rates also increase the government’s borrowing costs. The Congressional Budget Office (CBO) projects that the government’s net interest spending will rise over the next 30 years. This will have a significant effect on the federal budget deficit.

This will put a strain on future generations’ quality of life.

Uncertainty about the U.K. government’s exchange rate policy

The demand for pounds in financial markets, and hence the pound’s strength against other currencies, is affected by many factors. One important factor is the Bank of England’s interest rate policy. When the Bank raises its key interest rate, it usually causes investors to demand more pounds.

The pound plunged to a new low against the dollar and bond yields soared, raising government borrowing costs.

It would have been irresponsible for the Bank of England to remain silent as the pound plunged. Then it should reassure markets that the Bank of England will not allow the pound to spiral downwards. That will help to restore market confidence and bolster business investment needs read more hear.