Supply side policy.

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Supply side policy

Supply-side policies are designed to make aggregate supply (AS) more responsive to changes in national income. When combined with other macro policies they will deliver a competitive economy. They are normally focused on:

  • Removing market imperfections - barriers to the proper operation of markets
  • Removing restrictive practices - rules that do not allow the free movement of factors within an economy
  • Making work more attractive and workers more efficient

Supply-side policies include; incentives to enter work and work harder, such as lower direct taxation, which widens the gap between earnings and benefits. The reform of the trade union movement and a reduction in their power, so removing obstacles to a freer movement of labour. Removing the unemployment trap, where some people earned more on benefits than from working and so found it economic sense to stay out of work and draw benefit. The unemployment trap meant that the extra income coming from work was insufficient to encourage people to seek a job. Paying benefits to those in work, but drawing low wages. The shadow economy of those working unofficially whilst still claiming benefits has been made less easy to be a part of.

Another major part of the supply-side revolution was education and training. This focused on both expanding and deepening the skills base of the labour force. Extra opportunities were offered to all age groups to enter training and personal development. These changes were designed to promote greater flexibility within the workforce and so make the economy more efficient. Job Clubs, access courses, after school clubs etc. were introduced to allow more involvement in education, especially amongst those who had not received very much formal education when young.

Trade union reform was a large area of the supply-side revolution and the focus of policy was on reducing the power of organised labour. Closed shops were abolished and so was secondary picketing. Secret ballots were introduced for votes on possible industrial action and the election of union officials. Cooling-off periods were introduced before industrial action became legal. All of these were designed to make the workforce more flexible and mobile.

Privatisation was the selling of state or public owned assets to the private sector. By doing this it was felt that the firms would become more efficient, competitive and better able to provide a consistent service of high quality. Such privatised industries would no longer be a drain on the public purse. Companies like British Airways, British Telecom, British Gas, the electricity and water companies, National Air Traffic Services (NATS) have all been privatised since the mid 1980s. Once again these polices should shift the AS to the right.

Deregulation

These policies concentrated on removing barriers to entry to various markets and forcing participants to be more competitive. The markets had to be more contestable and react to changes, especially global changes more quickly than they had once done. Once again the AS curve was supposed to shift to the right, so expanding the economy by removing bottlenecks and gaps within its capacity to react to changes in national income.

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Exchange rate determination

This was used to keep the pound at a competitive rate, so forcing domestic industry to keep their costs under control. Export potential should be boosted and both price and non-price factors would become important in how UK firms traded

  • Making labour more flexible via trade union reform, or a greater emphasis on training and educational opportunities, or improving geographical and occupational mobility
  • Reform of direct taxation and the switch to indirect forms. So, allowing people more money to spend and then accepting that purchases included larger tax contributions. It was also supposed to promote ...

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