Macroeconomics: Supply-side policy Flashcards
What is the definition of supply-side policies?
A set of economic measures and strategies that aim to improve long-run productive capacity and efficiency of an economy.
What are the aims of supply-side policies?
Improve incentives to work and invest in people’s skills (human capital)
Increase labour and capital productivity
Increase occupational and geographical mobility of labour
Increase capital investment and R+D spending
Promote contestability and stimulate innovation (dynamic efficiency)
Encourage start-ups and expansion of new businesses especially those with significant export potential/promote economic diversification.
Improve price and non-price competition in global markets
Improve the trend rate of sustainable growth of real GDP to help support improved living standards and better regional economic balance.
What is trend growth?
Long term non-inflationary increase in GDP caused by an increase in a country’s productive capacity.
What are examples of market-based supply-side policies?
Tax cuts
Cutting red tape
Privatisation and Liberalisation
Free trade and capital mobility across borders
Flexible labour markets
Deregulation of markets
What are examples of recent UK supply-side policies?
Deregulation of the UK retail energy market.
Tax free childcare- £500 every 3 months (up to £2,000 a year) for each child.
Creating 20 institutes of technology, roll-out of T levels, new national skills fund.
Unemployment- Kickstart scheme for long term unemployed, Apprenticeship Levy on firms .
What are examples of supply-side policies to improve incentives?
Tax cuts- lowering income, corporate, and capital gains taxes can provide individuals and businesses with more disposable income and greater after-tax profits, thereby incentivising work, investment, and entrepreneurial activities.
Reducing government regulations can lower compliance costs and make it easier for firms to operate, expand, and innovate. It can lead more firms to enter markets, making them more contestable and competitive.
Trade liberalisation- reducing trade barriers, such as tariffs and quotas, can stimulate international trade and export investment.
Strong intellectual property rights protection encourages innovation and entrepreneurship by ensuring creators and inventors can profit from their ideas and inventions.
What is the free-market approach to the supply-side policies?
Emphasises minimal government intervention and regulation while promoting individual initiative, entrepreneurship, and competition.
What are examples of free-market supply-side policies?
Tax cuts
Deregulation of markets
Labour market flexibility- advocates often support labour market reforms that reduce restrictions on hiring and firing.
Privatisation- transferring state-owned assets and services to the private sector is a way to inject market competition and efficiency.
Trade liberalisation
What are examples of supply-side policies to improve competition?
Competitive policy- authorities can break up monopolies or prevent mergers that might create dominant market players.
Removing unnecessary regulations makes it easier for smaller firms to enter markets dominated by large corporations. This can stimulate competition and innovation.
Market access e.g. licensing reforms and reduced market entry costs, can enhance competition.
Open data and interoperability standards- mandating open data and interoperability standards can encourage competition by enabling different companies to build products or services that can work together, promoting innovation.
What are examples of supply-side policies to reform labour markets?
Reducing labour market regulations makes it easier for employers to hire and fire workers, adjust wages based on productivity, and adapt to changing economic conditions.
Reducing trade union power makes it easier for workers to opt out of union memberships and can 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 can expand the talent pool and improve competitiveness by harnessing a broader range of skills and perspectives.
What are criticisms of market-based supply-side policies?
Income inequality- tax cuts that primarily benefit high-income earners can lead to a wider wealth gap, as those at the top benefit disproportionately.
Reducing social safety nets- reduced public services. Weaker social safety nets can leave vulnerable populations essential support.
Underinvestment in public goods.
Financial instability- deregulation and lack of oversight in financial markets can contribute to financial instability.
What are interventionist supply-side policies?
Interventions to reduce poverty
Provision of key public and merit goods
Funding for early-stage research
State ownership of key businesses
Policies to tackle labour market failure
Building more social housing
What are examples of interventionist supply-side policies?
State investment in key public services and infrastructure.
A commitment to a minimum wage to improve incentives and productivity.
Higher taxes on the wealthy to fund public and merit goods.
An active regional policy to inject demand into areas of persistently high unemployment/ lower per capita income.
Selective import controls to allow domestic industries to expand.
Management of the exchange rate to improve export competitiveness.
Nationalism of and together regulation of key industries/utilities.
What are criticisms of interventionist supply-side policies?
Bureaucracy and Inefficiency: Critics argue that government intervention can lead to bureaucratic inefficiencies, which may slow down economic processes and result in the misallocation of resources.
Crowding Out Private Sector: Interventions, particularly those involving public ownership or control of industries, may crowd out private investment and entrepreneurship.
Reduced Incentives: Critics claim that high taxation and extensive regulation can reduce individuals’ and businesses’ incentives to work, invest, and innovate.
Ineffective Redistribution: High levels of taxation can lead to capital flight and tax evasion, undermining the intended redistribution.
Costly and Inefficient State Enterprises: State-owned enterprises can become inefficient and financially burdensome, as they may not operate with the same degree of cost-efficiency and
innovation as private companies.
What are microeconomic supply-side policies?
Deregulation / liberalisation of markets such as energy
supply, banking and insurance
Industry privatisation such as Royal Mail
Work visas for occupations such as vets, engineers, data
scientists and senior care / health professionals
Industry regulations such as environmental laws affecting
waste and recycling, carbon pricing
Fiscal supply-side policies such as early-year childcare
subsidies / reforms to the rented housing sector
Tax incentives for specific sectors such as life sciences
