Supply-side policies

• Supply side policies:

  = Aimed at increasing the productive potential/capacity of the economy
• Diagrams of SSPs:

  
• Main aims of SSPs


  • Improve incentives to work and invest in people's skills (human capital)
  • ↑ labour and capital productivity
  • ↑ occupational + geographical mobility of labour
  • ↑ capital investment and R&D spending
  • Promote contestability and stimulate innovation (dynamic efficiency)
  • Encourage start-ups (especially those with significant export potential)/promote economic diversification
  • Improve price & non-price competitiveness in global markets (↓ BOP deficit)
  • Improve the trend rate of sustainable growth (improved living standards & better regional economic balance & ↓unemployment +↓NRU)
• Market-based SSPs:

  = ↓gov intervention (free market) + ↑private sector incentives

  • Tax cuts (fiscal SSPs) (eval=↑budget deficit+↑inequality) (e.g., for SMEs who engage in R&D)
  • Deregulation(↓red tape ↓costs) (competition policy)/privatisation
  • Trade liberalisation (↓trade barriers) (post-BREXIT trade deals)
  • Intellectual property protection (will ↑innovation +entrepreneurship)
  • Labour market reforms (more flexible to ↓costs of hiring+firing, open econ to inward skilled migration, ↓trade union power)
  • ↓welfare spending (+↓universal credit)
• Problems with market-based SSPs:

  • Tax cuts→↑income inequality
  • ↓public services spending→↑poverty
  • Underinvestment in public goods→slower long-term econ growth
  • Free markets→market failures (e.g., externalities, public goods)
  • Deregulation→↑financial instability
• 🌏Examples of Market-based SSPs:

  • Privatisation: Royal Mail in 2016 (Channel 4 has been proposed)
  • Deregulation of UK retail energy market
  • Creation of 8 free ports+ regional enterprise zones
  • Tax free childcare: £500 every 3 months (up to £2000 a year) for each child
  • Creating 20 institutes of tech, roll-out of T-levels, new National Skills Fund
  • Unemployment: Kickstart scheme for long term unemployed, Apprenticeship Levy on firms
  • Reforms to UK immigration system (moving toward a points-based system)
  • Super-deduction tax incentive for business capital investment (125% tax allowance)
• Interventionist SSPs


  Direct government intervention, will improve LREG (correct market failure)
• Interventionist SSPs


  • Provision of key public+ merit goods (SS fiscal policies) (invest in human capital by providing healthcare + educ/training) (public goods e.g., defence + internet provision →↑investment+FDI)
  • Investment in infrastructure (transport, energy & communication networks, building more social housing)
  • Interventions to ↓poverty
  • Investment in ideas (gov can fund R&D projects)
  • Nationalisation (e.g., water, energy, transport industries)
  • Policies to tackle labour market failure (educ/training, regional policy, set up an immigration system)
• Problems with interventionist SSPs:

  • Bureaucracy and inefficiencies
  • Crowding out private sector
  • Reduced incentives
  • Ineffective redistribution (due to high tax causing capital flight, tax evasion etc)
  • Costly and inefficient state enterprises (as maybe not as cost-efficient or innovative as private firms)
• 🌏 Examples of Interventionist SSPs:

  Educ:

  • £400m school funding 2019
  • subsidies for adult training/apprenticeships
  • T-levels
• 🌏 Examples of Interventionist SSPs: Healthcare:

  • NHS budget ↑by £20.5bn above inflation by 2023
  • use of AI in NHS
  • ↑wages for NHS workers
• �� Examples of Interventionist SSPs: Infrastructure:

  • £28.8bn (2020-25) on National Roads fund
  • Rail infrastructure (cross rail, HS2 (£50bn by 2025 now £100bn by 2030)
  • £16bn on digital infrastructure (e.g., 5G mobile+full fibre) (e.g., UK Gigabit programme and the Shared Rural Network)
  • New UK infrastructure bank
  • Lower Thames Crossing, London Super-Sewer
  • Funding for rollout of EV charging infrastructure
  • Relaxation of planning for renewables (off-shore wind)/UK emissions trading scheme
• EVALUATION of SSPs:

  • Spare capacity (size of output gap)
  • Time lags
  • Very costly to gov (+taxpayers)
  • Income distribution? (Interventionist SSPs will ↓inequality, market based SSPs may ↑inequality)
  • Hard to measure success of SSPs (ceteris paribus)
  • Risk of gov failure + unintended consequences (due to imperfect info)
  • Political feasibility? (SSPs are very expensive+ long-term)
  • Sustainability issues (e.g., neg ext)
  • Other countries also improving
• SSP challenges in UK:

  • persistent prod⋅ gap
  • rise of emerging nations
  • high youth unempl. (16-24) (10%)
  • structural trade deficit (BOP)
  • low real GDP (~0.1%)
  • deep regional econ divide (inequality)
  • low capital investment + research
  • ↑inequality/ relative poverty
• Reasons for UK's productivity issues:

  • Low rate of new capital investment
  • Banking crisis (affected lending to firms)
  • Slowing rates of innovation?
  • Persistent skills shortages in key industries
  • Low market competition
  • Low AD+ high spare capacity
• Research & Development (R&D):

  • 🌏UK R&D <2% of GDP for many years

  Innovation:

  = putting a new idea/approach into action

  Types of innovation:

  • Product innovation
  • Process innovation

  Biggest barriers to innovation:

  • Risk aversion
  • Uncertainty about ability to exploit research+ make profit
  • Lack of high-skilled workers