Supply-side policies are those which improve jobs, low inflation and economic growth by improving the productive potential of the economy. Supply-side policies try to improve productivity and competition in domestic and international markets. There are various supply-side policies that a government can use.
1. Reducing tax burden
Income tax is a requirement. However, high tax rates on incomes may make workers less inclined to work hard and achieve higher levels of productivity. Also, high tax rates on profits may reduce incentive of firms to invest in new products and production methods if any additional profits they make are simply swallowed up by tax.
Therefore, governments recognize that cutting tax on incomes and profits can have a direct effect on efforts of workers and firms to produce more and output and be competitive.
2. Trade Union Reforms
Many of the traditional legal protections enjoyed by the trade unions have been taken away – including restrictions on their ability to take industrial action. The result has been a decrease in strike action in virtually every industry and a significant improvement in industrial relations.
Improved partnerships between trade unions and employers can make a big contribution to raising productivity and improving the flexibility of workers in their jobs
This was the major supply side policy on the product market side of the 1980s. The privatisation of various large industries (telecommunications, electricity, gas, etc.) was designed to break up the state monopolies to create more competition. Of course, many of these privatisations simply turned public sector monopolies into private sector monopolies, but there have been efforts to introduce competition into these industries. You may have seen the numerous TV adverts by lots of companies selling gas and electricity. Some large companies were also privatised, so that they would be exposed to the rigours of the market. British Airways is an example.
4. Education and training.
Some would say that this is the most important of all supply side policies. Government spending on education and training improves workers’ human capital. They become better quality workers. Their productivity improves and so the LRAS curve shifts to the right. Economies that have invested heavily in education are those that are well set for the future. Most economists agree, with the move away from industries that required manual skills to those that need mental skills, that investment in education, and the retraining of previously manual workers, is absolutely vital. It should also be noted that improved training, especially for those who lose their job in an old industry, will improve the occupational mobility of workers in the economy.
Deregulation involves removing old and unnecessary rules and regulations on business. The removal of these regulations should reduce business costs and help to increase output and lower prices.
6. Encouraging new research and development
The government can provide funds to help firms to invest in new research and development of better products and production methods. It can also encourage firms to invest in R&D by giving them tax relief on the money they spend on it.
– Supply-side policies can help reduce inflationary pressure in the long term because of efficiency and productivity gains in the product and labour markets.
– They can also help create real jobs and sustainable growth through their positive effect on labour productivity and competitiveness. Increases in competitiveness will also help improve the balance of payments.
– Finally, supply-side policy is less likely to create conflicts between the main objectives of stable prices, sustainable growth, full employment and a balance of payments. This partly explains the popularity of supply-side policies over the last 25 years.
– However, supply-side policy can take a long time to work its way through the economy. For example, improving the quality of human capital, through education and training, is unlikely to yield quick results. The benefits of deregulation can only be seen after new firms have entered the market, and this may also take a long time.
– In addition, supply-side policy is very costly to implement. For example, the provision of education and training is highly labour intensive and extremely costly, certainly in comparison with changes in interest rates.
– Furthermore, some specific types of supply-side policy may be strongly resisted as they may reduce the power of various interest groups. For example, in product markets, profits may suffer as a result of competition policy, and in labour markets the interests of trade unions may be threatened by labour market reforms.
– Finally, there is the issue of equity. Many supply-side measures have a negative effect on the distribution of income, at least in the short-term. For example, lower taxes rates, reduced union power, and privatisation have all contributed to a widening of the gap between rich and poor.