Supply-side Policies

Question 1

What are supply-side policies?

Answer 1

Policies aimed at improving the productive capacity of the economy by improving the quantity, quality and/ or mobility of the factors of production

Question 2

What are free market supply side policies?

Answer 2

• free market economists believe allocative efficiency is best when the free market is left to its own devices
• e.g. deregulation, tax/ benefit reform, corporation tax reform, privatisation

Question 3

What are interventionist supply side policies?

Answer 3

• interventionists argue that the government in some cases has to intervene in the economy as a whole and individual markets
• e.g. education and training (government spending), redefine labour markets (change legislation)

Question 4

Deregulation explanation

Answer 4

• labour markets are highly regulated with things such as maternity pay
• ^free market economists argue this reduces productivity, makes it more difficult and expensive to find labour and drives firms away from the country
• a deregulated labour market will increase the quantity of labour and enterprise (more firms incentivised to set up and hire workers)
• also environmental regulations increase costs for firms/ barriers to entry

Question 5

Deregulation evaluation

Answer 5

• deregulation increases inequality (owners of the firm will have more profit but workers have lower and insecure incomes)
• insecure incomes will decrease MPC which reduces aggregate demand
• likely fall in tax revenue if deregulated labour markets are scaled up as they are less formal

Question 6

Tax/ benefit reform explanation

Answer 6

• reduced income tax at the lower end incentivises people to join the labour force, especially true if out of work benefits are also reduced or made harder to claim
• the voluntarily unemployed will join the labour force which increases the quantity of labour
• reduced income tax at the top end will incentivise the most talented workers to stay in the country and improve their performance
• ^this increases quality of labour and a ‘trickle down effect’ as high income individuals spend more creating a multiplier effect

Question 7

Tax/ benefit reform evaluation

Answer 7

• government receives less tax revenue and so will either cut public services or run a larger deficit
• ^free market economists would counter this by saying it’s true in the short run but in the long run more employment and lower benefits will improve the budget position
• this assumes there are jobs available/ there isn’t geographical and occupational immobility
• if benefits are cut and people do not become employed then nothing is gained and poor people are made poorer

Question 8

Corporation tax reform explanation

Answer 8

• cuts to corporation tax would mean firms have more retained profits for investment
• lower corporation tax incentivises firms to stay in the country and invest in human/ physical capital
• low corporate tax incentivises nee firms to set up and attracts foreign investment
• more investment by firms increases the quality of labour and capital/ more firms joining the economy increases quantity of enterprise

Question 9

Corporation tax reform evaluation

Answer 9

• the Laffer curve predicts lower tax rate may increase tax revenue as fewer firms are incentivised to use ‘creative accounting’ to pay the full amount
• increased retained profit may not lead to more investment, firms could just pay higher dividends to shareholders
• firms may choose to invest in operations outside of the UK
• if the Laffer curve theory is incorrect, like most economists believe, then all that will happen is a tax revenue loss and increased budget deficit

Question 10

The Laffer Curve

Answer 10

• the curve shows that as tax rates increase, tax revenue increases until a certain point
• after this certain point (at the peak of the curve) the revenue will decrease despite rates increasing
• this is because high rates will disincentivise firms from investing
• it also disincentivises workers from working harder for a pay rise
• it incentivises tax avoidance and emigration of skilled labour and firms outsourcing production
• the figure for the peak of the curve is arbitrary

Question 11

Privatisation explanation

Answer 11

• some industries are state-owned enterprises, typically in strategic infrastructure sectors with high start- up costs such as transport
• the production costs are financed by the state and profits are reinvested or used to support government spending (state monopoly)
• free market economists argue nationalised enterprises are inefficient, no competition means they lack market discipline and no incentive to be more productive
• turning these into private markets will reintroduce competition and productive efficiency increasing quality of enterprise

Question 12

Privatisation evaluation

Answer 12

• due to the sectors of nationalised industries having high barriers to entry/ start-up costs, only large firms are attracted
• most state monopolies then become private oligopolies with a lack of market disciplined, higher prices and poor service
• in order to maintain a surplus on the financial account the UK has to sell assets meaning many of these industries are run by foreign firms, e.g. Tata Steel