Supply side policies

Question 1

Supply side policies

Answer 1

• Privatisation, sell state owned assets to private sector and improve incentives
• Deregulation, allow new firms to enter the market
• Income tax cuts, incentives to work longer hours
• Remove regulations, make it easier to build new factories and housing
• Felexible labour markets, redcue trade union power min wages and regulation
• Reduce welfare payments, increase incentives
• Encourage immigration

Question 2

Limitations

Answer 2

Productivity growth depends largely on private enterprise and trends in technological innovation. There is a limit to which the government can accelerate the growth of technological change and improvements in working practices.

Supply-side policies can be counter-productive. For example, flexible labour markets may reduce costs for business – but if they cause job-insecurity, workers may become demotivated and labour productivity stagnates. Since 2009, the UK has seen a fall in structural unemployment due to more flexible labour markets – but productivity growth is almost stagnant.

In a recession, supply-side policies cannot tackle the fundamental problem which is lack of aggregate demand.

Time. All supply-side policies take a long time to have an effect. Some policies, such as education spending may not influence the economy for 20-30 years.