Purpose of Supply-Side Policies: Aim to improve government's macroeconomic objectives:
Higher actual and potential growth
Reduction in unemployment
Reduction in inflation
Improvement in trade position
Mechanism: Stimulate both aggregate demand and aggregate supply
Often start with increased government spending (e.g., improving education and training)
Can also involve tax reductions
Leads to short-term economic growth and increased aggregate demand
Sustainability: Considered sustainable and non-inflationary compared to demand-side policies
Benefits of Supply-Side Policies
Higher Growth: Both short-term (actual growth) and long-term (potential growth)
Lower Unemployment: Creation of jobs through improved skills and training
Lower Inflation: Non-inflationary nature makes them sustainable
Improved Trade Position: Positive impact on export competitiveness
Drawbacks of Supply-Side Policies
High Cost: Very expensive to implement (billions of pounds)
Opportunity Cost: Resources could be used for other needs (e.g., healthcare, police services)
Funding Concerns: Borrowing may burden future generations; reallocation may affect other services
Time-Consuming: Long time to see effects (e.g., 15 years for education reform to show productivity gains)
Uncertain Effectiveness: Unclear if policies will work as intended
E.g., Cutting corporation taxes doesn't guarantee business investment
Firms receiving subsidies might not reinvest in R&D but might distribute dividends instead
Ineffectiveness in High Spare Capacity:
If economy has a lot of spare capacity, increasing aggregate supply won't boost actual growth
Need for increased demand in such scenarios
Key Points for Evaluation
Economic Context: Effectiveness depends on the level of economic activity
Policies more effective when economy is near full employment
In recessions, demand-side policies might be more appropriate
Important to assess whether the economy needs increased actual output vs. potential output
Conclusion
Supply-side policies are crucial for long-term economic health but come with significant costs and uncertain outcomes. Their effectiveness is often context-dependent, making it essential to evaluate the current economic situation when implementing these policies.