Supply Side Policies

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What are supply side policies?

  • 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
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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
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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
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Talks about Fiscal Policy being a Supply Side Policy, which I'm sure isn't the case

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