Understanding Supply Side Policies in the UK

Dec 10, 2024

Lecture Notes on Supply Side Policies and Their Themes

Introduction

  • Supply side policies are crucial for macroeconomic exams, focusing on themes like UK-specific or general themes.
  • Recommended to watch accompanying videos on UK stats, fiscal policy themes, and monetary policy themes.

Overview of Supply Side Policies

  • Interventionist vs Market-Based Policies: A breakdown is necessary for understanding different approaches.

Boosting Potential Growth in the UK

  • Post-financial crisis, the UK's potential growth rate significantly dropped.
  • Current potential growth is around 1%, lower than pre-crisis levels (~2%).
  • Reasons for low potential growth:
    • Poor productivity
    • Shrinking workforce
    • Poor business investment
    • Underperforming public services
    • Limited infrastructure improvements
  • Goal: Shift the Long Run Aggregate Supply (LRAS) to the right to increase potential growth.

Reducing Economic Inactivity

  • Economic inactivity involves those not willing or able to work or not seeking work.
  • Inactivity rates post-COVID increased to 22.1%, affecting over a million workers.
  • Factors: older workers not returning, rise in long-term sickness (mental health issues).
  • Policies to reduce inactivity:
    • Government spending on education and training
    • Healthcare spending, particularly on mental health
    • Infrastructure spending
    • Childcare affordability improvements
    • Reducing income tax and national insurance
    • Reducing benefits to push individuals back to work

Reducing the Natural Rate of Unemployment

  • UK's natural rate of unemployment is low (~3.5%).
  • Comprises structural, frictional, and seasonal unemployment.
  • Policies to reduce natural unemployment:
    • Education and training for occupational immobility
    • Infrastructure to reduce geographical immobility
    • Tax reductions on income and national insurance
    • Deregulation of hiring and firing practices

Promoting Regional Growth

  • Regional inequality in the UK is significant, with stark differences in weekly earnings between south and other regions.
  • Causes: productivity differences, educational and healthcare inequalities, shifts to service-based economy.
  • Policies for regional growth:
    • Education, healthcare, and infrastructure spending
    • Business incentives like subsidies, tax credits
    • Creation of Enterprise Zones

Boosting Productivity for Export Competitiveness

  • UK's productivity growth has been low post-financial crisis.
  • Poor productivity affects wage growth, production costs, and export competitiveness.
  • Current account deficit average is 4% of GDP.
  • Policies to boost productivity:
    • Education, training, and healthcare investments
    • Infrastructure improvements
    • Business incentives such as subsidies and reduced taxes
    • Relaxing immigration controls
    • Labor market reforms (reducing minimum wage, trade union power)

Evaluation of Policies

  • Consider costs, particularly for interventionist policies.
  • Time lags and uncertainty in outcomes.
  • Negative stakeholder trade-offs.
  • Importance of targeted interventions for desired impacts.

Conclusion

  • Understanding supply side policies and themes prepares for macroeconomic questions.
  • Stay tuned for further fiscal and monetary policy videos.

Reminder: Review other accompanying videos for a comprehensive understanding of macro policy questions.

Full transcript