2.6.3 supply-side policies

What are supply-side policies?

Government policies aimed at increasing the productive potential (LRAS) of the economy.

What is the main aim of supply-side policies?

To shift LRAS to the right, increasing output and reducing inflationary pressure.

What are market-based supply-side policies?

Policies that reduce government intervention to improve efficiency of markets.

Examples of market-based policies

• Privatisation
• Deregulation
• Reducing taxes
• Reducing trade union power

What are interventionist supply-side policies?

Policies where the government actively intervenes to improve productivity.

Examples of interventionist policies

• Education and training
• Infrastructure spending
• Subsidies
• Industrial policy

How do supply-side policies increase incentives?

Lower taxes or benefits → higher reward for working and investing → more labour and enterprise.

How do supply-side policies promote competition?

Deregulation and privatisation → more firms enter the market → increased efficiency and lower prices.

How do supply-side policies reform the labour market?

• Reduce union power
• Increase flexibility (e.g. zero-hour contracts)
→ easier hiring and firing → lower unemployment.

How do supply-side policies improve skills and labour quality?

Education and training → more skilled workers → higher productivity → higher output.

How do supply-side policies improve infrastructure?

Investment in transport, energy and technology → lower costs → greater efficiency → higher output.

Chain: Improving education

Education increases → skills rise → productivity rises → costs fall → output rises → LRAS shifts right.

Chain: Lower income tax

Income tax falls → incentive to work rises → labour supply increases → output rises → LRAS shifts right.

Chain: Deregulation

Deregulation → barriers to entry fall → more competition → firms become more efficient → costs fall → output rises.

Chain: Infrastructure investment

Infrastructure improves → transport costs fall → firms operate more efficiently → output increases → LRAS shifts right.

How are supply-side policies shown on AD/AS diagrams?

They cause a rightward shift of LRAS (and sometimes SRAS), leading to higher output and lower price level.

Strengths of supply-side policies

• Increase long-term growth
• Reduce inflation
• Improve competitiveness
• Improve balance of payments

Time lag problem

Policies like education and training take years to have an effect.

Cost to government

High spending on policies like infrastructure or education may lead to a budget deficit.

Inequality issue

Market-based policies such as tax cuts may increase income inequality.

Uncertain effectiveness

Not all policies successfully increase productivity; depends on implementation.

Conflict with AD

Some policies (e.g. benefit cuts) reduce AD, slowing short-run growth.

Why might supply-side policies not work in the short run?

If demand is weak (Keynesian view), increasing supply alone will not increase output.

Key evaluation point (LRAS link)

If LRAS is elastic (Keynesian), supply-side policies have limited impact without an increase in AD.