Supply-Side Policies

Supply-side policy

Government strategies to improving, long-term, productive potential and economy’s ability to supply goods and services

Market Led approach to Supply-Side policies

Designed to make workers work better and give the private sector more freedom

All types of Supply-Side Policies

• Education + training

• Reducing power in trade unions

• Reducing direct taxes on workers

• Reducing benefits

• Reducing direct taxed on firms

• Privatisation

• Development of infrastructure

Supply side Policy: Education + Training: Benefits

Creates workforces that are more skilled and flexible → leading to productivity → higher supply of g/s.

• Low inflation: higher productivity = more supply = economies of scale = lowered average costs = less pressure on prices

• High employment / Low unemployment: More skills = more job opportunities

• Sustainable economic growth

Supply side Policy: Education + Training: For developing countries

Developing countries tend to lack in consistent economic growth because of a shortage of skilled and educated workers.

→ Less skilled workers = less supply of g/s → less economic growth → gov. has no funds to reinvest into education → workers are less skilled

• Becomes into a cycle

Supply side policy: Reducing power of Trade Unions: What is a trade union?

An organised association of workers formed to protect and further their rights and interests.

→ Gives them confidence, better working conditions, good pay and ability to go on strike.

Supply side policy: Reducing power of Trade Unions: Benefits

Reducing power of trade unions = lowering wages between different workers and regions = makes hiring / firing easier = firm competition = productivity

Supply side policy: Reducing direct taxes on WORKERS: Benefits

Some believe high direct taxes rates = disincentive to engage in productivity (e.g overtime, working for a promotion)

→ This is because even if they earned more, they’d be taxed even more on their earnings.

• Reducing direct taxes can incentivise workers and cause the labour market to work more efficiently.

Supply side policy: Reducing Benefits: Pros

Lowering benefits → encouraging unemployed to take jobs as those on Job Seeker Allowance (JSA) may be forced to take a joke as their current income is likely to fall.

• This however, is rather controversial and may increase relative poverty in the economy.

Supply side policy: Reducing direct taxes on FIRMS

Direct taxes can affect a firms’ incentive to invest. If CT (corporation tax) is high → firms will have less funds = less investment power OR less will to risk investing.

Supply side policy: Reducing direct taxes on FIRMS: Benefits

By lowering CT, multinational firms may be attracted to locations where CT is lower.

→ Such firms would be attracted to set up or expand in the UK, increasing productivity capacity.

Supply side policy: Privatisation

Sale of public sector (government owned) organisations to the private sector (individual people).

Supply side policy: Privatisation: Benefits

• Improved efficiency: Competition to look good to the public

• Lack of political interference: Freedom to make own choices

• Short-term government revenue: Selling off the shares to individuals collects revenue

• Increased competition

Supply side policy: Privatisation: Cons

• Public interest may be lost

• Government loses out on long-term profits

• Problems with regulating private monopolies

Supply side policy: Development of Infrastructure

The basic physical structures and facilities needed for the operation of an economy.

→ E.g. buildings, roads, power supplies, transport networks.

• Vital for the transportation of goods, such as materials, workers and final goods to consumers.

• Without it, there is a major obstacle to economic growth. → Many developing countries struggle with this issue.