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
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
3 of 3