Supply-Side Policies 2.6 Flashcards
Supply-Side policies def.
Boost productive potential of the economy (LRAS Right Shift)
2 Types of Supply-side policies
Market-based policies - Appeal to free-market economists who believe in little gov. intervention
Interventionist policies - Require government action to correct market failure (failure to allocate resources effectively)
Interventionist Policies + examples 3
Boost productivity
EDUCATIONAL REFORMS - Improve general skill level of the workforce, include things such as - £400m in 2019 for schools, encourage more students to go into Maths & Computer Science A-Levels to boost future productivity - Apprenticeship Levy - Tax on larger companies to pay for apprenticeship training T-Levels
INFRASTRUCTURE INVESTMENT - HS2 will increase geographical mobility of labour, thus improve productivity. £28.2bn committed between 2020-25 to improve roads to remove congestion
ENCOURAGING BUSINESS STARTUPS - New businesses are often innovative and increase competition in markets. Ways to do this include: Guaranteeing bank loans to startups, exemptions form some costly business regulations
Market-based Supply-side policies 6
PRIVATISATION AND CONTRACTING-OUT PUBLIC SERVICES - Driven by the idea that the profit motive encourages more efficient use of resources. Since the 1980s many have been sold off, e.g. BT, Rolls Royce. Some argue that this leads to excessive costs at the hands of the public, especially when the service is essential e.g. electricity, water. Contracting-out, e.g. G4S running prisons, also says that private companies are more efficient, but critics say quality may be lower as they try to cut costs for max profit
DEREGULATION & COMPETITION POLICY - Reducing barriers to entry. e,g, uber vs black cab drivers. This encourages increased efficiency to compete. Can be criticised as new entries may ‘cherry pick’ e.g. bus companies only taking most profitable routes. Income Tax Cuts - Tax free allowance is £12,500, was £6,500 in 2010 Investment Incentives - Investment been low in UK since 2008, £1m Investment Tax Free Allowance, Tax Relief for SMEs investing in R&D
REDUCING TAXES - Lower corp. tax means more money to reinvest in the business. This worked in Ireland as their low 12.5% corp. tax has been a part of their drastically improved GDP per capita
REDUCING GOVERNMENT SPENDING - Argued by free-market economists that gov.spending ‘crowds out’ the private sector and discourages investment as it increases interest rates
MIGRATION POLICY - Wider labour supply and avoid skill shortages e.g. Construction industry relies heavily on workers from Eastern Europe. NHS relies heavily on immigrants.
Supply-side policy Pros 3
Improvements in efficiency and productivity reduce costs, thus reduce inflation Improvement in international competitiveness may improve the balance of payments
Fewer conflicts of policy objectives than Demand-side - Can pursue growth, low inflation, low unemployment & improved balance of payments at the same time
Supply-side policies Cons 4
Time lags - HS2 not complete until at least 2032 Some interventionist policies e.g. infrastructure investment, cost a lot of money, thus conflict with the idea to reduce government borrowing
Controversial policies - Privatisation and contracting out often leads to lower pay for employees and worse conditions. Also, when a private firm files bankruptcy some of the cost falls on the taxpayer to ensure essential services continue e.g. Carrilion in 2018
Some tax changes widen inequality - Tax cuts have benefitted those on high wages more than low, and cuts to benefits to boost employment incentives increase poverty
Supply Side Diagram
Acronym for Supply-Side Policies
LIFE made EPIC
L - Labour Market (infrastructure, education, income tax cuts)
I - Investing (Reduce corp. tax, Subsidies for R&D)
F - Free Market (Privatisation, Deregulation)
E - Efficiency
P - Productivity
I - Incentive
C - Competition
