chapter 9.3 - supply side policies

supply side policies

aim to improve the national economic performance by creating competitive and more efficient markets, + through interventionist policies, such as government finance of retraining schemes

supply side economics

a branch of free-market economics arguing that government policy should be used to improve the competitiveness and efficiency of markets and, through this, the performance of the economy

the central idea of supply side economics

a tax cut should be used, not to stimulate AD Keynesian-style, but to create incentives by altering prices, in favour of work, saving and investment, and entrepreneurship, + against the voluntary choice of unemployment

interventionist policies

occur when the government intervenes in, and sometimes replaces, free markets

interventionist supply side policies

generally increase the role of the state and limit the role of markets

non-interventionist supply side policies

free up markets, promote competition and greater efficiency, and reduce the economic role of the state

examples of interventionist supply side policies

increased spending on transport and infrastructure, training and education and research and development

examples of non-interventionist supply side policies

tax cutes to create incentives to work, save and invest; cuts in welfare benefits to reduce incentive to choose unemployment over a low-paid work alternative; privatisation; marketisation; deregulation

privitisation

involves shifting ownership of state-owned assets to the private sector

marketisation

involves shifting provision of goods or services from the non-market sector to the market sector aka commercialisation

deregulation

the removal of some government controls over a market - involves removing previously imposed regulations

supply side improvement

reforms undertaken by the private sector to reduce costs to enable firms to become more productively efficient and competitive - often results from more investment and innovation, often undertaken by firms without prompting from the government

the view of supply side economists demonstrated by Laffer curve

high rates of income tax and the overall tax burden creates disincentives, which, by reducing national income as taxation increases, also reduces the governments total tax revenue

the Laffer curve

shows tax revenue must be zero when the tax rate is 0% or 100%, and shows tax revenue rising and then falling as the average rate of taxation increases from 0-100% - tax revenue is maximised at highest point on Laffer curve = on average 50%

the trickle down effect

the working poor also benefit from a supply side tax cut, because the rich respond to the tax cut by employing more e.g. servants, nannies, + gardeners, although generally on lower wages

effect of taxation on labour market incentives, when supply curve is assumed to be upwards sloping

implies that workers respond to cuts in the marginal rate of income tax by working harder - reduction in income tax creates incentive for workers to supply more labour

effect of taxation on labour market incentives, when supply curve is assumed to be backwards bending

above the hourly wage rate, any further wage rate increase, or income tax decrease, causes workers to supply les rather than more labour

examples of industrial policy measures (supply side policies)

privatisation; marketisation; deregulation; introduction internal markets

introduction of internal markets

can provide a form of commercial discipline and improve efficiency - in an internal market, the taxpayer continues to finance hospitals and schools, but hospitals and schools earn the money according to how many patients and pupils they attract

examples of labour market measures (supply side policies)

lower rates of income tax; reducing state welfare benefits relative to average earnings; changing employment law to reduce power of trade unions; limiting employers freedom to employ; more flexible pension arrangements; improving training of labour

financial and capital market measures (supply side policies)

deregulation financial markets; encouraging saving; promoting entrepreneurship; reducing public spending and public sector borrowing

deregulating financial markets

creates greater competition among banks and building societies, + opens up UK financial markets to overseas banks and financial institutions = increase supply of funds + reduce cost of borrowing for UK firms

financial deregulation + removal of foreign exchange controls

encourage 'inward' investment by overseas firms, e.g. Samsung, Nissan