2.6.3 Supply-side policies

• Define Supply side policies

  Supply-side policies are a set of economic measures and strategies that aim to improve the long-run productive capacity and efficiency of an economy.

  
  

  The principal goal is to:

  -stimulate long-term economic growth

  -increases productivity

  -create a more favourable environment for businesses to operate
• Main aims of supply-side policies

  - Improve incentives to work and invest in people's skills (human capital)

  
  

  - Increase labour and capital productivity

  
  

  - Increase occupational and geographical mobility of labour

  
  

  - Increase capital investment and research and development spending
• Main aims of supply-side policies - 2

  - Promote contestability and stimulate innovation (dynamic efficiency)

  
  

  - Encourage start-ups and expansion of new businesses especially those with significant export potential / promote economic diversification

  
  

  - Improve price & non-price competitiveness in global markets

  
  

  - Improve the trend rate of sustainable growth of real GDP to help support improved living standards & better regional economic balance
• Main UK supply-side weaknesses

  - Low research & development spending

  - Low investment

  - Skills shortages

  - Economic activity

  - Low labour mobility

  - Ageing infrastructure

  - Regional economic imbalances

  - Productivity gap
• Main UK supply-side strengths

  Encourages Increased Competition: More competition can lead to better quality of goods and services.

  Higher Potential Output: By improving an economy's productive capacity, these policies can result in higher potential GDP.

  Reduced Inflationary Pressures: By increasing the efficiency of production, they can reduce costs and thus diminishing inflationary pressures.
• Free market supply side policies

  - they aim to ↑ efficiency by removing things which interfere with the free market

  
  

  - they include:

  tax cuts, privatisation, deregulation and policies to ↑ labour market flexibility
• Interventionist supply side policies

  - they are usually aimed at correcting market failure

  
  

  - they include:

  gov't spending on education, subsidies for research & development, funding for improvements in infrastructure, industrial policy (developing a particular industry/sector)
• How market-based and interventionist policies increase the efficiency of the product market

  - create incentives:

  . offer firms tax breaks (reduction of tax) if they invest profits back into the business instead of paying dividends to shareholders

  
  

  . trade liberalisation, removing/reducing trade barriers, allowing goods/capital to flow more freely between countries

  
  

  - encourage competition:

  . deregulation can lead to improved efficiency in a market

  . privatisation may be affective if nationalised industries are inefficient

  . contact services out, gov't asks private firms to bid to carry out services on its behalf (gov't retains responsibility for the service)

  . provide extra support for new & small firms or make it easier to set up a new company
• How market-based and interventionist policies increase the efficiency of the capital market

  - deregulation of financial markets: the 'Big Bang' of 1986, removal of a lot of traditional 'restrictive practices' as they were making the market inefficient
• How market-based and interventionist policies increase the efficiency of the labour market- reduce unemployment benefits:

  
  

  - improving education/training: apprenticeships allow people to learn practical skills & gain relevant qualifications, allow employees to be more productive, greater occupational mobility

  
  

  - improve labour market flexibility: trade union reforms, making it easier for firms to make workers redundant when times are rough

  
  

  - reduce regulation on firms: reduces firms' non-wage costs, encourage them to employ more workers
• weaknesses of supply-side policies

  - time lags: it can take a long time to see the results & can't be used to fix the economy quickly

  
  

  - unintended consequences: deregulation can lead to excessive risk-taking in financial markets

  
  

  - they can be unpopular & concerns about whether some are inequitable (unfair)

  e.g benefit cuts can lead the poorest people worrying about their ability to cope financially

  & greater flexibility in the labour market and trade union reforms could lead to less job security

  
  

  - difficult to introduce in the SR
• strengthens of supply-side policies

  - they ↑ the economy's trend growth rate, making it easier for gov't to achieve objectives

  
  

  - unemployment should ↓ as the economy grows & output expands

  
  

  - cost-push inflation should ↓, as greater efficiencies (and lower costs) are achieved

  
  

  - the current account of the B.O.P should improve because of ↑ international competitiveness
• Demand-side policies are needed alongside supply-side policies

  - supply-side policies aim to make an economy more able to supply products, but there needs to be a demand

  
  

  - supply-side policies create long-term growth

  
  

  - demand-side policies stabilise the economy in the SR
• How market-based and interventionist policies increase the efficiency of the labour market(2)


  • reduce unemployment benefits: create incentives for people to take a job, rather than live on benefits, making it easier for people to find out about what jobs are available
  • reduce (or reform) income tax: reducing progressive taxation with the aim of creating more incentives for people to work (laffer curve)