Supply side policies aim to change the underlying structure of the economy
Policies include tax changes which are designed to change personal incentives, increase potential output and improve the underlyin trend rate of growth
If successful, such policies also have a macroeconomic effect of shifting the LRAS out to the right
1 of 3
Supply side fiscal policy
Supply side economists believe that income tax cuts create incentivs to work harder, be more entrepreneurial and take financial risks, i.e. saving and investing in new capital equipment. Policies include:
Reducing welfare benefits - to create incentives for people to choose low paid employment rather than unemployment, thereby increase the employment rate
Greanting special tax privileges for savings - to encourage investment for firms
Reducing public spending, budget deficits and govt borrowing - to free resources for the private sector and prevent 'crowding out'.
Industrial policy - privatisation (movement of industries from public sector to private sector), marketisation (shifting of economic activity from non-market provision financed by tax to market provision), deregulation (rremoval of previously imposed regulations to promote competition)
Improving the training of labour
Encourage saving by selling government owned shared
Deregulating financial markets to create greater competition and lower borrowing costs
2 of 3
Impact of supply side policies on the economy
Between 1992 and 2008 the Uk economy benefitted from continuous economic growth
Continuous economic growth occured after periods of high unemployment once the appropriate supply side conditions kicked in
However other conditions may have also improved economic performances such as the success of monetary policy in managing AD
Supply side policies have widened income inequalities although most of the growing inequality may result more from the adverse effects of globalisation that from supply side policies.
Supply side policy cannot deliver unless the private sector does its job in improving labour productivity, innovation and ihnvestment
Comments
Report