supply-side policies

• supply-side policies increase productive potential - the ability of the economy to supply more goods and services (they affect agregate supply)
• a rise in demand with no change in supply does not affect GDP and causes demand-pull inflation

  • supply-side policies prevent this and increase GDP
• supply-side policies:

  • education and training
  • reducing power of trade unions
  • reducing direct taxes on workers
  • reducing benefits
  • reducing direct taxes on firms
  • policies to encourage competition in product markets
  • privatisation
  • development of infrastructure
• education and training:

  • improving the quantity and quality of the workforce
  • developing countries have a shortage of skilled workers creating an unproductive workforce
• reducing the power of trade unions:

  • means fewer working days are lost
• reducing direct taxes (and NICs) on workers:

  • provides a higher incentive to work (the unemployed join the workforce and existing workers work harder)
  • reduces chance of unemployment trap
  • reduces chance of poverty trap
  • low tax on lower incomes increases mobility of labour
• how reduced taxes reduce chance of unemployment trap:

  • makes the difference between income and benefits greater
• how reduced taxes reduce chance of poverty trap:

  • when disposable income rises little with promotion
  • benefits may also be lost with promotions
  • therefore labour is stuck in low-paying jobs
• reducing benefits:

  • links into unemployment and poverty trap
  • generous benefits acts as discincentives to work
• reducing direct taxes on firms:

  • increases incentive to invest
  • if corporation tax is high, firms are left with less profit to invest (the risk also increases and expansion may not be worth it as less profit is gained)
  • multinational firms set up where taxes are lower (increases country's productive capacity)
• policies to encourage competition in product markets:

  • reduce monopoly power (prohibit mergers and force them to sell part of operations)
• privatisation:

  • transfer of assets from public to private sector
  • if used with competition policies, productivity and efficiency are likely to increase
• development of infrastructure:

  • some is reliant on government spending
  • infrastructure is the basic physical and organisational structures and facilities needed for the operation of an economy
• costs of supply-side policies:

  • time lags
  • cost
  • equity issues
  • resistance to policies
  • unintended effects
• time lags:

  • e.g. infrastructure takes years to develop (and plan) and training and deregulation (firms must become established to see the benefits)
  • conditions in the economy may change, making the policy less relevant
• cost:

  • e.g. infrastructure and training (labour-intensive increases wage cost)
  • always an opportunity cost involved
• equity issues:

  • policies may have negative effects on distribution of income (in the short-term)
  • e.g. cut in benefits impacts the lower-income groups most
• benefits of supply-side policies:

  • target specific markets
  • combats inflation
  • increases employment
  • increases economic growth
  • improves balance of payments
• target specific markets:

  • helps improves efficiency
  • e.g. training encouraged to improve skill
• combats inflation:

  • due to productivity and efficiency increasing
  • as aggregate demand rises, supply can too
• increases employment:

  • as productivity for labour rises, there may be a rise in real wages
• increases economic growth:

  • increases standard of living and economic welfare
• improves balance of payments:

  • makes UK firms more competitive in price and quantity