Supply side policies on national income

Blessing Nyatanga

Market-based policies focus on the power of the free market and allow the forces of supply and demand to curtail equilibrium imbalances.

These policies entail privatisation, deregulation free trade and immigration. The role of the Government in market-based policies is limited since it tends to interfere with the market mechanism.

Conversely, interventionist policies focus on the need for the government to intervene in markets to achieve the objectives of the macroeconomic environment. Interventionist policies include industrial policies and infrastructure improvements.

Interventionist supply side policies

i. Increased education and training

Better education can improve labour productivity and increase Aggregate Supply. In most cases there is under-provision of education in a free market, leading to market failure. Therefore the government may need to subsidise suitable education and training schemes. Government intervention is fund intensive.

ii. Improving transport and infrastructure

With transport, there is usually a degree of market failure congestion and pollution. Government spending on improved transport links can help reduce congestion and overcome this market failure.

Improved transport provision helps reduce the cost of transport and will encourage firms to invest.

Transport bottlenecks on the road, rail and air are often cited as a major stumbling block in economic progress.

iii. Construct more affordable homes

Building affordable council homes in expensive areas can make it easier for workers to move and find jobs in expensive areas, reducing geographical immobility. Firms can suffer from labour shortages in areas that have become very expensive to live in.

iv. Improved healthcare

Business can face substantial costs from time lost to ill-health. Health care spending which improves a nation’s health can improve labour productivity. Improved health can also come from discouraging unhealthy habits. For example, tax on cigarettes, alcohol and sugar can reduce health care costs associated with drunkenness, obesity and polluted environments.

v. Investment in human capital

Governments might invest in education and training of people. Improve the level of schools or make education free. Also, provide various training schemes. In the short run, such policies increase aggregate demand, but importantly — shift the LRAS curve to the right. This happens because people’s skills improve. Hence, productivity increases.

vi. Investment in new technology

Governments could invest in research and development of new technologies. Again, that would increase aggregate demand in the short run, however, in the long run LRAS would increase. That happens because new technology can increase productivity: e.g. 3D printers made modelling or even production of various products quicker than ever.

vii. Investment in infrastructure

Government expenditure might go towards infrastructure. Improving logistics could decrease transfer times and costs in turn increasing productivity and shifting the Long Run Aggregate Supply to the right.

viii. Industrial policies

Governments might target specific economic areas through tax cuts, tax allowances and subsidised borrowing which would promote growth of those areas. A typical example is useful startups which could improve the efficiency of other areas of the economy.

Market based supply side policies

i. Privatisation

This involves selling state-owned assets to the private sector. It is argued that the private sector is more efficient in running businesses because they have a profit motive to reduce costs and develop better services.

ii. Deregulation

This involves reducing barriers to entry to allow new firms to enter the market. This will make the market more competitive. Competition tends to lead to lower prices and better quality of goods and services.

iii. Reducing income tax rates

A cut in corporation tax gives firms more retained profit they can use for investment. Lower taxes harness the power to increase work incentives.

iv. Reducing unemployment benefits.

Lower benefits may encourage the unemployed to take jobs. Lower means-tested benefits for those in work may increase the incentive to work longer hours.

v. Deregulate financial markets.

Deregulating the financial markets has the potential to pave way for economic progress. For example, building societies were allowed to become for profit-making banks. Deregulation should allow more competition and, in theory, lead to lower borrowing costs for consumers and firms.

vi. Increase free-trade

Lower tariff barriers this will increase trade and provide an incentive for export firms to invest.

Increasingly important are non-tariff barriers.

vii. Encourage immigration

Free-movement of labour can enable firms to fill labour shortages whether they are skilled jobs, in construction and engineering or low-skilled jobs such as fruit picking. Liberal immigration policies make labour markets more flexible and in boom times help firms keep up with growing demand.

The effect of supply side policies on National Income

Reducing Unemployment

Supply side policies are of great importance in reducing the natural rate of unemployment includes supply side unemployment such as structural and frictional unemployment.

The reduction in ultimately is 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 Unemployment 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 our 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 and make.

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. In the control of inflation, the most significant factor is the use of monetary policy and controlling Aggregate Demand (AD) through interest.

The aim of promoting low inflation by cutting production costs. 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 Bachelor’s degree in banking and investment management from NUST.0784909184/[email protected]