Supply-Side Policies Flashcards
(13 cards)
What are supply side policies? (SSP’s)
policies that focus on increasing the supply of goods and services in
an economy to encourage greater productivity and faster economic growth.
What are the main aims of SSP’s?
• 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
What are some problems with market based SSP’s?
• 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
What are tax cuts? (Market-based SSP’s)
• Tax cuts (fiscal SSPs)
- 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
What is deregulation/privatisation? (Market-based SSP’s)
-
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
What is trade liberalisation? (Market-based SSP’s)
-
Reducing trade barriers, such as tariffs and quotas, can stimulate
international trade and stimulate investment in exports; promotes international competitiveness
What is Intellectual Property protection? (Market-based SSPs)
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.
What is labour market reform? (Market-based SSP’s)
more flexibility to reduce costs of hiring and firing
- opens up inward skilled migration; reducing trade union power
What are Interventionist SSP’s?
Interventionists believe the government can directly intervene to improve the long-term supply-side of the economy.
What are the types of Interventionist SSP’s?
• Investment in infrastructure
- Government investment in capital such as the transport, energy & communication networks in the economy
• Interventions to reduce poverty
- Enables those on very low incomes to find work and contribute to the economy more fully
• Provision of key public and merit goods
- Government can invest in human capital by providing healthcare and education/training
• Investment in ideas
- the government can help fund R&D projects that lead to more innovation
• State ownership of key businesses
- nationalisation of, for example, water, energy & transport industries can help an economy develop
• Policies to tackle labour market failure
- the government can provide more education/training to increase occupational mobility
What are some problems with Interventionist SSP’s?
• Bureaucracy and inefficiency
- Government intervention can lead to bureaucratic inefficiencies, which may slow down economic processes and result in the misallocation of resources.
• Crowding out private sector
- Interventions, e.g., those involving public ownership/control of industries, may crowd out private investment and entrepreneurship.
• Reduced incentives
- High taxation and extensive regulation can reduce individuals’ and businesses’ incentives to work, invest, and innovate.
• Ineffective redistribution
- High levels of taxation can lead to capital flight and tax evasion, undermining the intended redistribution.
• Costly and inefficient state enterprises
- State-owned enterprises can become inefficient and financially burdensome, as they may not operate with the same degree of cost-efficiency and innovation as private companies.
Ideas for evaluations on market-based & interventionist SSP’s?
• Time lags
- there is often a significant short-term cost (opportunity cost) while the benefits come through in the long term, especially for interventionist SSPs
• Income distribution
- interventionist SSPs often reduce inequality, while market-based
SSPs may increase it; there may be winners and losers depending on which economic agents’ perspectives are being considered
• Potential for government failure
- unintended consequences as government lacks perfect information
Examples of market-based & interventionist SSP’s?
• Privatisation – Royal Mail in 2016 (Channel 4 has been proposed)
• Deregulation of the UK retail energy market
• Creation of new 8 Free Ports and Regional Enterprise Zones
• Tax free childcare: £500 every 3 months (up to £2,000 a year) for each child
