Supply side policies

Supply side policies: policies that aim to increase the quality/quantity of the economy’s FoPs.

INTERVENTIONIST SUPPLY SIDE POLICY

Definition - policies that aim to increase the quality/quantity of the economy’s FoPs by increasing government intervention.

OBJECTIVES - economic growth, decrease unemployment and decrease inflation.

POLICIES - increase government spending on: education (increase quality of labour), healthcare/medical research (increase quality of labour), infrastructure (increase quality of capital), technology (increase quality of capital).

RWE: UK

MARKET BASED SUPPLY SIDE POLICY

Definition - policies that aim to increase the quality/quantity of the economy’s FoPs by decreasing government intervention.

OBJECTIVES: decrease govt debt, economic growth, decrease unemployment, decrease inflation - by increasing efficiency.

Efficiency: decrease wasted resources by…

1. … getting more people into work

2. … reallocating unproductive workers to more productive jobs.

POLICIES:

1. Policies to encourage competition:

More competition between firms

• They must be as efficient as possible to make profit

• Reallocate workers from unproductive to productive tasks (increase quality of FoPs) *

• Or they lose their jobs… and find more productive jobs in new industries.

a) Privatisation

• The sale of govt owned assets to private investors.

• RWE: BT, Royal Mail, British Gas, British coal have been privatised in the UK since the 1980’s. Margret Thatcher did most of this as prime minister.

• Private firms must make profit, and compete with other firms → incentive to be more efficient → *

b) Deregulation

• Removing rules that firms must follow.

• RWE: banks are significantly less regulated than they were in the 1980s in the UK. Thatcher

• Firms become more efficient as new firms will join markets (increase competition) and no longer use workers for regulated tasks → *

c) Anti-monopoly policies (more competition)

d) Trade liberalisation - allowing more imports. (More competition)

2. Labour market reforms

   Charging the way the labour market works to get more people into work (increase quantity of labour) *

a) Reduce unemployment benefits

• RWE: Theresa May reformed the UK’s “universal credit” by system making it more difficult to claim unemployment benefits.

• Incentivise job seeking → increase quantity of labour

b) Reduce income tax

• RWE: UK’s income tax system has a £12 500 personal allowance (0% income tax)

• Incentivise job seeking → increase quantity of labour

c) Reduce minimum wage

• Enable more hiring →increase quantity of labour as wages fall

d) Reduce trade union power (same as above)

3. Tax cuts

a) decrease income tax → incentive to work → increase quantity of labour

b) decrease corporation tax → incentive to invest → increase quantity of capital