Types of Supply-side Policies (AQA A Level Economics)

• Reducing income/corporation tax rates incentivises workers to work harder (they keep more money for themselves) and provides firms with extra funds which they can use to invest in new machinery/technology

• Reducing capital gains tax

Taxes decrease → firms and individuals retain more money for themselves → incentives increase → productivity improves → long term growth increases

• Deregulation. Any regulation increases costs of production for firms and deregulation decreases costs which may result in greater supply

• Privatisation. Government firms are usually so big that private enterprise refrains from trying to compete with them. Privatisation encourages new firms to enter the market and compete, thus increasing the aggregate supply in the economy

• Anti-monopoly regulation helps to increase competition in an economy which leads to a more efficient allocation of resources

Regulation on firms decreases → the cost of production for firms falls → firms lower selling prices → international competitiveness improves

State owned firms are privatised → more firms enter the market to compete → competition and efficiency improves

• Decreasing trade union power so wages can be decreased

• Decreasing or abolishing minimum wages to lower costs of production

• Restructuring the unemployment benefits system to incentivise the unemployed to seek work

Wages decrease → the cost of production for firms falls → firms lower selling prices → international competitiveness improves

• Improved resource allocation: increasing the productive capacity of an economy requires more efficient use of its resources, including labour

• No burden on government budget: with an emphasis on freeing up markets and allowing market forces to drive efficiency and resource allocation, there is no requirement for government spending

• Equity issues: E.g. the distribution of income worsens as labour market reforms and wage policies lower worker's wages

• Time lags: there are significant time lags between expenditure and seeing the benefits

• Vested interests: can result in less effective outcomes, e.g. there are many examples of privatisation occurring in such a way that the government's preferred bidders obtained an asset at a knock down price

• Environmental impact: large infrastructure projects almost always have some negative externalities associated with their creation e.g. dam in a gorge to create a hydro electric dam damages the natural environment and eco system

• Increasing government spending on education and retraining raises the quality of the workforce resulting in productivity improvements

Skill level increases → productivity improve → the cost of production for firms falls → firms lower selling prices → international competitiveness improves

• Increasing government spending on healthcare so that productivity improves

Human capital improves → productivity improves → the cost of production for firms falls → firms lower selling prices → international competitiveness improves

• Increased government spending on innovation increases the supply of potential jobs in the economy

A new industry emerges → new infrastructure is developed → more jobs are created → r.GDP increases → increase in long term economic growth

• Increased government spending on infrastructure helps to facilitate the movement of people and goods which increases the aggregate supply

New infrastructure is developed → costs of production decrease → supply increases → firms lower selling prices → international competitiveness improves

• Industrial policies are direct and targeted support to firms or industries in the form of subsidies 

Industries receive subsidies → costs of production decrease → supply increases → firms lower selling prices → international competitiveness improves

Advantages

Disadvantages

• Direct support of sectors important for growth: Subsidies to specific industries increase the rate of growth of an economy

  • Direct support reduces unemployment

  • Direct support can increase the level of exports

• Improvements in living standards: Improvements in Infrastructure can raise the quality of life for all citizens

• Costs: they are expensive to implement and are paid for using tax revenue - or increased government borrowing

• Time lags: due to their long-term nature, changes in government often result in changes to budgets and scope of projects and the end result may be less effective than it could have been

  • The cancellation of the High Speed Rail project in the UK is an example of this