Supply-Side policies: market based

Question 1

Supply-side policies (SSPs)

Answer 1

Supply-side policies: policies that focus on increasing the supply of goods and services in
an economy to encourage greater productivity and faster economic growth.

Question 2

Main aims of SSPs

Answer 2

• 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 research and development 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 & non-price competitiveness in global markets
• Improve the trend rate of sustainable growth of real GDP to help support
  improved living standards & better regional economic balance

Question 3

Market-based SSPs

Answer 3

Market-based SSPs remove unnecessary government intervention to free up
markets, competitive forces & incentives to increase the long run trend growth rate
Tax cuts: lowering income, corporate, and capital gains taxes provides individuals and
businesses with more disposable income and greater after-tax profits, thereby
incentivising work, investment, and entrepreneurial activities.
Deregulation/privatisation: reducing regulations/bureaucratic red tape
can lower compliance costs and make it easier for firms to operate, expand, and innovate.
Firms may enter markets to make them more contestable/competitive. Private ownership
may increase competitiveness via the profit-incentive.
Trade liberalisation: reducing trade barriers, such as tariffs and quotas, can stimulate
international trade and stimulate investment in exports; promotes international
competitiveness.
Intellectual Property protection: strong intellectual property rights protection encourages
innovation and entrepreneurship by ensuring that creators and inventors can profit from
their ideas and inventions.
Labour market reform: more flexibility to reduce costs of hiring and firing; opening up to
inward skilled migration; reducing trade union power.

Question 4

Problems with market-based SSPs

Answer 4

Income inequality: tax cuts that may benefit high-income earners and
reductions in social safety nets can lead to a wider wealth/income gap.
Reduced social safety nets: Critics argue these policies can lead to reduced
public services, including healthcare, education, and welfare programmes and
may increase poverty
Underinvestment in public goods: underinvestment in critical public goods like
infrastructure, healthcare, and education may cause slower long-term
economic growth.
Market failures: free markets are not perfect and can lead to market failures,
such as externalities (costs or benefits imposed on third parties) and public
goods problems (goods with non-excludable and non-rivalrous consumption).
Financial instability: deregulation and lack of oversight in financial markets can
contribute to financial instability e.g. prior to GFC.