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Topic 3.7
Supply-Side Policy
In this topic, you will learn about how supply-side policies can be used to increase the productive capacity of an economy and create long-term growth.
What are supply-side policies?
A supply-side policy is a government policy aimed at increasing the quality and quantity of factors of production to increase the productive capacity of an economy.
Some supply-side policies can also count as fiscal policy. If a policy is mainly designed to affect long-run aggregate supply (LRAS), it is a supply-side policy; if its main purpose is to influence aggregate demand (AD), it is a demand-side fiscal policy.
the main goals of supply-side policies
Increase long-term growth
Increased competition
Increased labour market flexibility
Improved quality and quantity of factors of production
Enhance international competitiveness
Examples of supply-side policy
Education & Training
Investing in vocational training and higher education to improve human capital and labour productivity.
Deregulation
Removing barriers to entry in markets to encourage competition and increase efficiency across industries.
Tax Reforms
Reducing corporation tax to incentivise investment in new technologies and physical capital.
Privatisation
Selling state-owned assets to the private sector to promote profit incentives and better management.
Infrastructure Spending
Funding transport and communication networks to reduce business costs and improve geographical mobility.
Labour Market Flexibility
Reducing trade union power or minimum wages to make it easier for firms to hire and adjust to market changes.
Research & Development
Providing subsidies for innovation to boost the long-term vertical growth of the economy.
Lowering benefits and taxes
Incentivises those on benefits to find employment and increase the quantity of labour
Evaluating the use of supply-side policies
Points
Evaluations
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Creates long-term growth by increasing human capital and productive capacity, through increasing quantity and quality of factors of production
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LRAS shifts right, so there is deflation (less inflationary pressure)
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Creates economic growth
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Reduces unemployment
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Some policies cause inflation in the short-run (but the long-run deflation cancels it out)
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Time lags - takes a long time for an effect to actually be seen
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Infrastructure development can cause crowding out effect if using borrowed money and can also have negative externalities on the environment
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Budget deficit if using borrowed money -> intergenerational inequality.
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Opportunity costs - if money is spent on infrastructure, then the opportunity cost is the improvement in education and training or the reduction in budget deficit (for example)
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Can have equity issues - reducing benefits can create more income inequality (only short-term though)
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Can have unintended effects - e.g. reduced taxes might lead to workers working less because they will now make the same disposable income while working less due to less income getting taxed