Supply-side policies
AQA also says:
Spec content: The meaning of supply-side policy; Types of supply-side policy; How supply-side policies improve economic performance.
Students should be able to understand: the meaning of supply-side policy; the different types; how they can improve economic performance.
What is Supply-Side Policy?
Supply-side policies aim to increase the productive capacity of the economy — shifting the long-run aggregate supply curve to the right. Unlike demand-management policies (fiscal and monetary), supply-side policies focus on improving the efficiency, flexibility, and output potential of markets and the workforce rather than stimulating spending.
By expanding productive capacity, supply-side policies aim to achieve economic growth without generating inflation — more output is produced without prices being bid up, because supply grows in line with or ahead of demand.
Types of Supply-Side Policy
Labour market policies:
- Education and training — raising the skills and qualifications of the workforce increases human capital and labour productivity. Government investment in schools, vocational training, apprenticeships, and universities.
- Reducing unemployment benefits / welfare reform — reducing the generosity or duration of benefits (or imposing work requirements) can increase labour supply by making work more attractive relative to unemployment. Controversial: may cause hardship if jobs are unavailable.
- Immigration policy — allowing skilled workers from abroad to fill labour shortages increases productive capacity.
Business environment policies:
- Deregulation — removing unnecessary regulations reduces business costs, increases competition, and encourages entrepreneurship and new firm formation.
- Privatisation — transferring state-owned enterprises to private ownership, with the aim of introducing competition and profit incentives that improve efficiency.
- Tax cuts for businesses — lower corporation tax and capital allowances encourage investment in new machinery and technology, raising productive capacity.
- Research and development (R&D) incentives — subsidies and tax credits for R&D encourage technological innovation, raising long-run productivity.
Infrastructure investment:
- Government investment in transport (roads, rail, broadband), energy networks, and housing increases the economy's productive capacity and reduces business costs.
Key Takeaways
- Supply-side policy: improving the economy's productive capacity and efficiency (shifting LRAS right).
- Unlike demand management, aims for non-inflationary growth.
- Types: education/training, deregulation, privatisation, business tax cuts, R&D incentives, infrastructure investment.
- Effects are slow — supply-side policies typically take years to produce results.