Supply Side Policies are policies aiming to influence aggregate supply( total output of the economy) hence the long run aggregate supply curve shifting to the right. Additionally these policies would encourage growth without a rise in the price level. They are largely microeconomic and fiscal in nature.
Supply side policies can be split into both Labour and Product Market measures
Labour Market Measures:
1) Lower Rates of Income Tax- so there would be greater incentives to work such as people have more disposable income, therefore they would try to maximise this.
Supply Side Economists use the Laffer Curve to show that high income tax rates and high burden due to tax cause disincentives to work.
Structured by supply side economist Arthur Laffer it shows the relationship between tax rates and tax revenues. Tax revenues is 0% at both when tax rate is 0 and 100%. Tax revenue is of course 0 when tax rate is 0%. However why at 100%? This is because att a 100% it means all income is tax therefore there is incentive to work at all so the government would not get any tax revenue at first. Tax Revenue is said to be at its peak at 50% however after that it was simply decrease as it be no incentive for the firm to work.
2) Reducing Welfare Benefits and the benefits to work- If benefits are harder to claim it may give people an incentive to find a job( mostly low paid) rather than claiming these benefits. This woudl include employment programmes such as Welfare to Work.
3) Education and Training- Increasing educational attainment and training have effect on productivity of labour in this nation and therefore help to enlarge the supply capacity. There are many training agencies and City Technology Colleges that would help to develop vocational and technical education.
4) Trade Union Reforms
Product Market Measures
These measures would help to increase competition and efficiency of certain industries as if productivity increases overall this would mean more can be produced with the given amount of resources. Therefore a shift in the long run AS curve.
Measures would include :
- Deregulation of markets where there is less barriers of entry encouraging more competition
- Privatisation of some firms
- Tough competition policy
- Measures to encourage entrepreneurship and capital spending such as guarantees for start ups
- less corporation tax for businesses
- tax relief on capital spending
- regional policy assistance in depressed areas.
The benefits of Supply Side Policies
- Sustained Growth
- Decrease in prices
- Improvement in Balance of Payments
- Job Creation
Evaluating Supply Side Policies
- Supply Side Policies would contain long time lags; these problems regarding unemployment have been around a long time has there already been policies to tackle but not taken any effect?
- So could there be a need for both demand and supply side policies. Whereas demand side is used to stimulate growth while supply side is used to sustain growth
- Distribution? Some policies like the reduction of income tax can widen the gap between the richest and the poorest ? The supply side policies may be narrowly aiming at certain firms i.e. small firms and therefore overall might not make much affect while money could have gone to projects that have a bigger effect
- It says it improves gdp without increasing price, supply side might have demand side effects – in future cause inflation? LONG TERM consequences aswell?
- Supply side policies may not be enough to make signifcant progress to macroeconomic objectives so more than one policy may have to be used with a mutually reinforcing effect such as supply side policies to help increase innovation but also policies to help cut down carbon emissions.