ECONOMICS

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
? 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.