3.7 Supply-Side policies

• The government can achieve their objectives by changing Aggregate Supply (AS). These are known as ''supply-side'' policies.
• 'Supply-side' policy is defined as ''policy that increases the productive potential, which is the ability of the economy to supply more goods + services''
• ''demand-side'' policy increases output but also higher inflation.

  ''supply-side'' policy increases output and lowers inflation.
• Education + Training is a supply-side policy that can be used to achieve economic objectives. This aims to increase workers skills -> workers become more productive -> aggregate supply rises -> a rise in equilibrium output results -> higher growth and higher employment results. *See diagram in notes* Here, a training course raises worker's productivity leading to increased aggregate supply (AS1 TO AS2). This is because the same number of workers are now able to produce more output in the same time period.
• Lower 'marginal' rates of income tax is a supply-side policy that can be used to achieve economic objectives. The 'marginal' rate of income is the % rate of income tax paid on the final £1 on earnings. If workers now receive more 'take home' pay -> workers have more incentive to work longer hours ->AS rises (so production increases further) -> Economic growth results -> Higher 'derived' demand for labour reduces CYCLICAL unemployment -> May also reduce voluntary unemployment.
• Reducing benefits/ welfare payments is a supply-side policy that can be used to achieve economic objectives. If benefits are cut -> households have lower disposable income -> they have more incentives to find work -> more people are in employment -> helps to achieve objective of low unemployment.
• Policies that promote greater competition are supply-side policies that can be used to achieve economic objectives. A rise in competition between firms -> Firms compete on price and non-price factors -> to lower prices to increase competitiveness, firms have to cut costs (i.e. increasing efficiency) -> Non-price competition means that firms have to use scarce resources to produce EXACTLY what consumers want -> Overall, there is greater economic efficiency -> More efficient use of scarce resources leads to a rise in AS.
• 'Tax-breaks' on investment by firms is a supply-side policy that can be used to achieve economic objectives. If corporation tax on profits is high, firms will be left will less funds to invest in order to expand. If less profits are made, firms may not want to take the risk of investment if it isn't worth it. -> So, cuts in corporation tax help provide firms with more funds to invest, and increase the incentive to invest -> Increase in purchase of capital goods -> rise in productivity -> more is produced from the same number scarce resources -> rise in AS.
• 'Privatisation' is a supply-side policy that can be used to achieve economic objectives. This refers to the movement of businesses or industries from the public sector (i.e. govt. owned) to the PRIVATE sector (i.e. privately owned by shareholders). A rise in competition between firms arises as more private sector firms compete to provide services -> this increases economic efficiency -> more is now produced from the same number of scarce resources. -> Aggregate supply rises.
• Higher economic growth is achieved with supply-side policies, because of the rise in the equilibrium level of output.
• Lower unemployment is achieved with supply-side policies because: with a higher level of output being produced, more workers will be employed in order to ensure more is produced. Additionally, workers who are structurally unemployed can be given the skills required to apply for existing job vacancies.
• 'Price Stability' (and lower inflation) is achieved with supply-side policies because with increased production, there will be reduced levels of demand-pull inflation (see diagram) in the economy.
• A benefit of supply-side policies is that the govt. can increase economic growth, lower unemployment AND lower inflation at the same time, if these policies are successful. A supply-side policy will mean that higher AD will not result in demand-pull inflation because the supply-side of the economy will be able to produce more in response to higher demand.
• A benefit of supply-side policies is that they can be used to target specific markets. For example, if there is a low labour productivity or a skills shortage amongst workers in the labour market then a supply-side policy such as a greater spending on education + training could be used to tackle this.
• A benefit of supply-side policies is that by lowering inflationary pressures, a successful supply-side policy will help to increase the UK's international competitiveness. This should, in theory, mean that we'll sell more exports... and improve the UK's trade balance (as measure by the ''balance of payments'').
• A disadvantage of supply-side policies is cost. These policies can be very expensive and therefore incur significant opportunity costs. E.g. the cost of education + training policies. Also, infrastructure projects such as building a new railway line are very expensive.
• A disadvantage of supply-side policies is that they are long-term effective. A policy aimed at changing AS can take a very long time to have an effect, e.g. better education can take many years to have an effect.
• A disadvantage of supply-side policies is that some policies may be resisted. Trade unions will oppose limits to their powers, and reducing benefits will be opposed by those who believe this hurts the most vulnerable in society.
• A disadvantage of supply-side policies is that some policies (e.g. cutting benefits) will potentially lead to increased income inequality.