Supply-Side Policies 2.6.3

What are supply side policies?

A set of economic measures and strategies that aim to improve the long run productive capacity and efficiency of an economy.

What are the primary goals of supply side policies?

• Stimulate long term economic growth

• Increase productivity

• Create more favourable environment for businesses to operate

What are the main aims of supply side policies?

1. Improve incentives to work and invest in people’s skills

2. Increase labour and capital productivity

3. Increase occupational and geographical mobility of labour

4. Increase capital investment and research and development spending

5. Promote contestability and stimulate innovation

6. Encourage start ups and expansion of new businesses

7. Improve price and non price competitiveness in global markets

8. Improve the trend rate of sustainable growth of real GDP to help support improved living standards and better regional economic balance

What are the main UK supply-side weaknesses?

• Low R&D spending

• Low investment

• Skills shortages

• Economic inactivity

• Low labour mobility

• Ageing infrastructure

• Regional economic imbalances

• Productivity gap

What is trend growth?

The long term non-inflationary increase in GDP caused by an increase in a countries productive capacity.

What are three reasons for slow long term economic growth in the UK?

1. Persistent productivity gap- low growth of output per person

2. Investment gap- Low capital investment and R&D as a share of GDP

3. Trade weakness- has a structural trade deficit and falling export-to-GDP ratio

What are some market-based supply-side policies?

• Tax cuts

• Cutting red tape (reduce regulations)

• Prrivatisation and liberalisation

• Free trade and capital mobility across boarders

• Flexible labour markets

• Deregulation of markets

What are supply-side policies to improve incentives?

• Tax cuts- gives individuals and businesses more disposable income, incentivising work and investment

• Deregulation- lower compliance costs and makes it easier for firms to cooperate, expand and innovate. More firms may enter, so competition increases

• Trade liberalisation- can stimulate international trade and stimulate investment in exports

• Intellectual property protection- encourages innovation and entrepreneurship by ensuring that creators and investors can profit from their ideas and inventions

What are some supply-side policies to improve competition?

• Competition policy: break up monopolies or prevent mergers that might create dominant market players

• Deregulation: removing unnecessary regulations can lower barriers to entry for new competitors

• Market access: policies that facilitate access to markets including licensing reforms and reduced market entry costs, can enhance competition

• Open data and interoperability standards: encourage competition by enabling different companies to build products or services that can seamlessly work together, promoting innovation.

What are supply-side policies to reform labour markets?

• Labour market deregulation: make it easier for employers to hire and fire workers, adjust wages based on productivity, and adapt to changing economic conditions.

• Reducing trade union power: lead to more flexible labour negotiations and potentially lower labour costs for employers

• Immigration reforms: creating a more flexible immigration system that attracts high skilled workers can help increase a country’s productive capacity.

• Gender and diversity inclusion: Encouraging gender and diversity inclusion in the labour force can expand the talent pool and improve competitiveness by harnessing a broader range of skills and perspectives.

What are some economic costs of unemployment and economic inactivity?

• Lost output and productivity: those not working aren’t producing, which reduces the overall output of the economy

• Reduced consumer spending: have less money

• Lower tax revenue: not earning= no income tax

• Increased government spending on welfare benefits