Supply Side Policies

Understanding Supply Side Policies

  • Supply Side Policies are government actions designed to increase the productivity and efficiency in the economy, thereby boosting its potential output.
  • These policies target the production side of the economy rather than the demand side.
  • Supply side policies focus on improving the flexibility and efficiency of labour markets, competition, and market efficiency.

Types of Supply Side Policies

  • Education and Training: Policies to improve the skills, flexibility and mobility of the labour force.
  • Investment in Infrastructure: Projects that improve transport and communication networks that can reduce costs and increase business efficiency.
  • Deregulation and Reducing Barriers to Entry: Policies to foster competition and reduce monopoly power, leading to lower prices and improved quality of goods and services.
  • Tax Incentives: Lowering corporate taxes can encourage firms to invest, innovate and to take more risks.

Impact of Supply Side Policies

  • Increased Economic Growth: By boosting the productive capacity of the economy, long term economic growth can be achieved.
  • Reduced Inflationary Pressure: Improved efficiency and productivity lower costs of production, which can reduce inflation.
  • Increased Employment: As the economy grows there can be a rise in job opportunities leading to reductions in unemployment.
  • Improved Trade Balance: Increased competitiveness can lead to higher exports and a better trade balance.

Criticisms of Supply Side Policies

  • Takes Time to Work: Supply side policies often require a considerable amount of time before they begin to work.
  • Unequal Benefits: Supply side policies like tax cuts may disproportionately benefit the rich.
  • Possible Negative Effects: Some policies like deregulation may lead to a lack of control over industries and negative effects like pollution.

Importance of Balanced Economic Policy

  • Relying solely on supply side policies may not be enough, it’s important for policies to strike a balance between demand and supply for optimal economic performance.
  • Governments need to implement a mix of macroeconomic policies - both demand side (fiscal and monetary) and supply side policies to ensure economic stability and growth.