Supply side policy

What are supply side policies

Policies designed to increase the productive capacity of the economy (LRAS shift to the right)

If successful all main macro objectives improve

What are the different types of supply side policies

Interventionist supply side - Encourage more of a role for the government

Market based supply side -

Interventionist supply side policies

Government spending on education/ training

Government spending on infrastructure (Transport infrastructure)

Subsidies to firm to promote investment

Market based supply side policies

Tax reform - Lower income tax, lower corporation tax

Labour market reform - Reduction in benefits (Encourages a bigger workforce) , reduction in trade union power and min wags (Both reduce LRAC which leads to more productively efficient economy)

Competition policy

Cons of supply side policies

No guarantee of success

Huge cost - Opportunity cost?

Time lags - Takes a while for many policies to take effect especially government spending on infrastructure/ education

Negative stakeholder impact - removal of regulation of environmental waste caps for example will harm stakeholders

Output gap - Growth may not be achieved if there is a negative output gap or if there is a recession as it will just increase the size of the output gap

Supply side policies must be targeted - ie a tax cut isn’t going to directly improve infrastructure if infrastructure needs improvement. Instead government spending on infrastructure should be used