Importance of supply side policies

13 Jan, 2023 - 00:01 0 Views
Importance of supply side policies

eBusiness Weekly

Blessing Nyatanga

Supply side policies refers to measures taken by the Government to increase the availability or affordability of goods and services along with generous tax reforms, which entails tax cuts and changes in laws that may encourage productive behaviour.

This article will attempt to elucidate the importance of these measures.

Reduction of Unemployment

Supply side policies are of great importance in reducing the natural rate of unemployment.

The reduction is ultimately likely to lead to an increase in the levels of production in the economy and subsequently an increase in the gross domestic product and National Income.

The aim of promoting full employment especially in the long run can be caused by a lack of spending and by “natural” causes.

In the long term, aggregate supply policies (such as spending on education and training, welfare and tax reforms, and labour market reforms) can help reduce the rate of natural unemployment.

This can be done by focusing on improved flexibility and efficiency in the use of labour resources, creating incentives that reward effort and work, and ensuring workers have appropriate skills and training so they are more employable.

Aggregate supply-side policies can help cut production costs. This should eventually help to reduce structural unemployment and create more jobs and ultimately help improve productivity levels and bolster national income.

Balance of Payments

Increased productivity can also help the balance of payments. If firms become more competitive, then goods will be in greater demand, increasing exports and improving the current account deficit.

Supply side policies which are important for exporters will be the quality of transport.

Roads and rail-links are quasi-public goods and require Government investment. Reducing congestion and supply bottlenecks can help reduce the cost for business.

Reducing Inflation

Supply side policies can help reduce costs and increase productivity. For example, privatisation and deregulation can help reduce costs.

Policies to reduce the power of trade unions will reduce wage-push inflation and keep inflation lower.

The most significant factor is the use of monetary policy and controlling Aggregate Demand (AD) through interest rates.

Inflation rises quickly when there is a demand and cost pressure on prices. Many aggregate supply policies (such as market deregulation, infrastructure investment, labour market reforms, and immigration) aim to improve productivity and efficiency, thereby slowing the production costs for firms.

Tax and infrastructure Adjustments

The rate of economic growth is limited to the speed at which our productive capacity (the absolute maximum level of production that a country can obtain from the available resources at a point in time) can expand.

An important aim of aggregate supply policies (such as immigration policies, investment in infrastructure welfare and tax reforms) is to increase the economy’s speed limit by reducing the constraints limiting efficiency that could deter a country’s sustainable growth in production.

Appropriate policies will pave way for   GDP to grow and ultimately national income increase. Clearly, faster GDP growth should lead to higher real incomes and material living standards.


Blessing Nyatanga holds a Bachelors in banking and investment at National University of Science and technology/0784909184/[email protected]


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