Proposal

Economics Alternative Assessment

Done by: Darren Foo, Shawn Lim, Tow Ying Xiang

Role: Government

Audience: Firms

Form: Blog

Topic: Supply-side policies

Definition and Theory

Supply side policies refer to policies which are aimed at increasing aggregate supply. The main goal of supply side policy includes any policy that improves an economy’s productive potential and its ability to produce. It is based on the General Theory that lowering restrictions on supply is the best way to grow the economy. The goal of supply side policies is to incentivise work by reducing restrictions such as taxes and heavy regulation to stimulate supply. This is based on the belief that when tax rates are lowered, employment would increase causing income to increase and revenue to increase  which would then offset the drop in revenue from a lower tax rate. This can be seen from the Laffer Curve as presented below, where at a certain tax rate between 0% and 100% (not necessarily 50%), tax revenue is maximised. Thus too high a tax rate may actually result in low growth and high employment- i.e. a situation of stagflation.

Benefits

Supply-side policies can help reduce inflationary pressure in the long term because of efficiency and productivity gains in the product and labour markets as people are motivated to work more and firms become more efficient. This means that through their positive effect on labour productivity and efficiency, demand push inflation is mitigated because the vertical range of the AS curve is shifted to the right. As producers become more competitive, Balance of Payment also will also tend to have surplus as the goods produced are of competitive value so they can be exported, resulting in the aforementioned surplus. In addition, Supply-side policy is less likely to create conflicts between the main objectives of stable prices, sustainable growth ,full employment and balance of payments equilibrium because it relies on This partly explains the popularity of supply-side policies over the last 25 years.

Disadvantages

Disadvantages of supply side policies include the long time period it takes for the effect to be felt by these policies. This is because it for such policies to work, the mindset of the workers need to be changed as they need to be willing to undergo skills upgrading and becoming an entrepreneur etc. In a stable economy like Singapore’s this takes a large amount of time as workers tend to favour a stable job in an MNC. Another disadvantage is the large income inequality it tends to create. Supply-side policies tend to support lowering income and capital-gain tax and the largest beneficiaries are usually high income individuals. Justification for this includes the trickle-down theory. However, this theory that wealth would naturally trickle down to all groups in society is somewhat flawed. The trickle down theory is based on the belief that when tax rates are lowered, the wealthy would spend more through purchase and investment. However, in many aspects, these expenditure would not benefit many parts of society.

How Supply Side Policies Aid Countries

Government can choose to help to improve supply-side performance by helping firms by encouraging them to use new machinery, and new,ingenious ways to work , in other words, to stimulate factor output rather than to alter demand.( Supply Side Policies are focused on supply). Another measure taken by the government can be the deregulation of product markets to decrease the difficulty for firms to enter markets, encouraging fresh and interesting market entrants, and boost supply-side performance. Economies become more competitive and increasingly efficient, via the entrance of competition.Another method the government can use is the privatisation of state industries. This action boosts number of entrepreneurs in the long run. Governments must also  promote competition  to ensure efficiency gains for the firms, and productivity gains for the employees.The last thing the government can do is to ensure that there is a constant supply of new firms. Small firms are often creative  and fluid, and can be helped by the government in ways such as providing start-up loans and tax breaks.

References

http://www.economicsonline.co.uk/Global_economics/Supply-side_policies.html

Principles of Economics/ Karl E. Case, Ray C. Fair - 3rd ed.  ISBN 0-13-095886-7