4.5 – Supply-side Policy

Supply side policies are microeconomic policies aimed at increasing supply and productivity in the economy, to enable long-term economic growth. Some of these policies include:

• Public sector investments: investments in infrastructure such as transport and communication can greatly help the economy by making the flow of resources quick and easy, and facilitate faster growth.
• Improving education and vocational training: the government can invest in education and skills training to improve the quality and quantity of labour to increase productivity.
• Spending on health: accessible, affordable and good quality health services will improve the health of the population, helping reduce the hours lost to illnesses and increasing productivity.
• Investment on housing: as more housing spaces are built, the geographical mobility of the population will increase, helping increase output.
• Privatization: transferring some public corporations to private ownership will increase efficiency and increase output, as the private sector has a profit-motive absent in public sector.
• Income tax cuts: reducing income tax will increase people’s willingness to work more and earn more, helping increase the supply in the economy.
• Subsidies are financial grants made to industries that need it. More subsidies mean more money for producers to produce more, thereby increasing supply.
• Deregulation: removing or easing the laws and regulations required to start and run businesses so they can operate and produce more output with reduced costs and hassle, encouraging investments.
• Removing trade barriers: the govt. can reduce or withdraw import duties, quotas etc. on imports so that more resources, goods and services may be imported to increase productivity and efficiency in the domestic economy. It can also reduce export duties to increase export of resources, goods and services to other nations, thereby encouraging domestic firms to increase production.
• Labour market reforms: making laws that would reduce trade union powers would reduce business costs and increase output. Minimum wages could be reduced or done away with to allow more jobs to be created. Welfare payments like unemployment benefits could be reduced so that more people would be motivated to look for jobs rather than rely on the benefits alone to live. These will not only increase the incentive to work but also increase the incentive to invest.

For example, India, in the early 1990’s undertook massive privatisation, liberalisation and deregulation measures; abolishing its heavy licensing and red tape policies, allowing private firms to easily enter the market and operate, and opening up its economy to foreign trade by reducing the excessive trade tariffs and regulations. This led to a period of high economic growth and helped India become the emerging economy it is today.

Supply-side policies have the direct effect of increasing economic growth as the productive capacity of the economy is realised. In doing so, it can also create more job opportunities and help reduce unemployment. Trade reforms will also enable to it to improve its balance of payments.

However, the reliance on public expenditure and tax cuts mean that the government may run large budget deficits. Deregulation and privatisation will also reduce government intervention in the economy, which may prompt market failure.

Notes submitted by Lintha

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