Supply Side Policy

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  • Created by: Clodagh
  • Created on: 04-05-14 09:33
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  • Supply Side Policy
    • The role of supply side policy is to promote the long term health of the economy, boosting the trend growth rate
      • They aim to...
        • Increase productivity
        • Improve incentives
        • Improve the efficiency of resource allocation
      • A distinctive feature of supply side policy is that they usually involve reducing the role of the government in the economy
        • They are market orientated policies that reflect a belief that the private sector of the economy uses resources more efficiently than the public sector
    • Labour Market Policies
      • Supply side policies in the labour market aim to improve the skills of the labour force (human capital), promote labour mobility, remove barriers that prevent wages reaching equilibrium levels and encourage flexible working prcatices
      • Income tax cuts to improve incentives to work
      • Cuts in benefit payments to make voluntary unemployment less affordable
      • Tax relief on income earned from renting out accommodation
      • Removal of the national minimum wage so that the labour market can reach equilibrium
      • Measures to reduce the power of trade unions
      • Reduced government regulation of labour markets to lower the non-wage costs of taking on workers
      • Financial help for firms that invest in the training of workers
      • Changes to the education system to broaden access to further and higher education and to promote vocational training
    • Product Market Policies
      • These aim to offer encouragement to private sector firms and to promote competition
      • Privatisation (the sale of state owned firms to private shareholders)
      • Deregulation of markets to open them up to new competition
      • Tax relief on profits retained by firms for investment purposes
    • Policies in Financial Markets
      • It is important that firms have access to finance in order to invest and innovate
        • Supply side policies in this area focus on making finance more readily available
    • Policies to Encourage Enterprise
      • Low corporation tax, to increase the profit incentive and stimulate investment
      • Reduced regulation of business
        • The rules imposed on business by government are sometimes known as 'red tape' and the aim of supply side policies would be to reduce these bureaucratic requirements
      • Patents to allow those who innovate to exploit the commercial potential of their ideas free from competition for an initial period of time
    • Potential Benefits
      • By boosting the trend rate growth, supply side policies have the potential to improve simultaneously all the four main macroeconomic objectives
      • The increased capacity of the economy allows a higher GDP to be generated. This will boost economic growth
        • Unemployment will fall, as higher output in the economy will generate an increased demand for labour
      • Higher capacity and improved efficiency will lower costs and dampen cost push inflationary pressure
      • It helps improve price competitiveness, while some of the new capacity can be used to serve the export market
        • This improves the current account balance of payments
    • Potential Costs
      • They do not act quickly; demand side policies are more appropriate for stabilising the economy when a rapid response is needed
      • It is a matter of opinion if they are equitable
        • For example, flexible working practices benefit some people but leave others exposed to insecurity


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