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 innovation, risk and an enterprise culture.
- Privatisation and efficiency, productivity and competitiveness
- De-regulation and the breaking of barriers to entry and restrictive practices, whish freed up markets and made them more contestable.
- Coming from these we saw greater share ownership amongst those who had never previously held equity and the reduction in public sector debt and the crowding out theory.
supply-side policies for the labour market
The following policies are all designed to improve the quality and quantity of the supply of labour available to the economy. An expansion in the UK's total labour supply increases the productive potential of an economy. Increased quality will improve the productivity (efficiency) of labour.
As with the product market policies, successful labour market supply side policies will shift the LRAS curve to the right. The same effect can also be illustrated by an outward shift in an economy's production possibility frontier.
Trade Union Reforms
Some of the legal protections enjoyed by the trade unions have been taken away - including restrictions on their ability to take industrial action and enter into restrictive practices agreements with employers. The result has been an increase in the flexibility of the labour market, a decrease in strike action in virtually every industry and (in the long term) a significant improvement in industrial relations in the United Kingdom.
Increased Spending on Education and Training
Economists disagree about the scale of the economic and social returns from higher spending on education - but few deny that "investment in education" has the potential to raise the total stock of skills within the work force and improve the employment prospects of thousands of unemployed workers.
The economic returns from extra education spending can vary according to the stage of economic development that a country has achieved. In 1999, research from the London School of Economics found that putting more money into education has a direct impact on improving economic performance.
The report from the university's Centre for Economic Performance suggested that developing countries which increase education spending and achieve a higher-qualified workforce can expect "handsome dividends: for workers, firms and the state" Government spending on education and training improves workers' human capital. They become better quality workers. Their productivity improves and so the LRAS curve shifts to the right.
Economies that have invested heavily in education are those that are well set for the future. Most economists agree, with the move away from industries that required manual skills to those that need mental skills, that investment in education, and the retraining of previously manual workers, is absolutely vital.
It should also be noted that improved training, especially for those who lose their job in an old industry should improve the occupational mobility of workers in the economy. This should help to reduce the problem of structural unemployment. A well-educated workforce acts as a magnet for foreign investment in the economy.
The Irish economy is a great example of how supply side reforms designed to increase the qualifications and skills of the labour force, together with favourable tax rates for companies and workers - has encouraged a huge flow of inward investment from overseas (in particular from the United States).
The Chancellor of the Exchequer Gordon Brown announced in his July 2000 Comprehensive Spending Review that the education budget over the next four years would increase by an annual average of 6.6%. This will lead to an increasing share of national income taken up by education spending.
Income Tax and the Incentive to Work
Income tax is paid directly from earned income. Many economists who support supply-side policies believe that lower rates of tax not only provide a short term boost to demand - but they also improve incentives for people to work longer hours or take a new job - because they get to keep a higher percentage of the money they earn.
In the 1980s the Conservative government cut income tax rates across the board - but the greatest tax reductions were handed out to higher income groups. The highest marginal rate of tax was reduced from 80% in 1979 to 60% by 1987 and then 40% in 1988. The top rate of tax has remained at this level since then. The basic rate of tax has come down more gradually from 33% in 1979 to 22% today.
Attention has focused in recent years on lower income households. In the mid 1990s, a lower starting rate of tax of 10% was introduced and the band of income on which this is paid has been widened in recent Budgets. Cutting tax rates for lower paid workers may help to reduce the extent of the unemployment trap - where people calculate that they may be no better off from working than if they stay outside the employed labour force.
Do lower taxes really help to increase the active labour supply in the economy?
It seems obvious that lower taxes should boost the incentive to work because tax cuts increase the reward from a job. But some people may choose to work the same number of hours and simply take a rise in their post-tax income! Millions of other workers have little choice over the hours that they work.
Reform of the Benefits System
Lower taxes and benefit reforms are seen to go hand in hand in a bid to sharpen the incentives to take paid work. In recent years the government has altered the benefit system in several ways:
A reduction in the value of unemployment benefits compared with average wages of people in work
The introduction of the Working Families Tax Credit (WFTC) - a tax credit that is paid through the weekly wage packet to families on low incomes with at least one person in employment
The National Minimum Wage
The introduction of a national minimum wage seeks to boost the incentive for people to actively search for work. Over 2 million people in traditionally low paid jobs have seen their pay levels affected directly since the minimum wage was launched. In March 2001 the Government announced an increase in the adult pay floor from £3.70 per hour to £4.10.
Of course there is an ongoing debate about the supply-side effects of the minimum wage. Although it should improve incentives to find work, in some industries a higher wage bill causes an increase in production costs and may have an adverse effect on output and employment
Welfare to Work
Welfare to Work is the current Labour government's flagship programme for getting people off state benefits and into work. The programme includes the New Deal - a £4 billion + scheme targeted at increasing the employment prospects for the long-term unemployed.
supply-side policies for product markets
All of the policies in the product market are designed to increase competition, and so efficiency. If the productivity of an industry improves, then it will be able to produce more with a given amount of resources, shifting the LRAS curve to the right. All of the following policies are, in some way or another, trying to increase the level of competition in product markets.
Supply-side policies and product markets
Privatisation
Privatisation was the major supply side policy on the product market side of the 1980s and 1990s. It became one of the hallmarks of economic policy under Mrs Thatcher and John Major.
The privatisation of various large former state-run industries (telecommunications, electricity, water, steel, gas, rail etc.) was designed to break up the state monopolies to create more competition.
Many of these privatisations simply turned public sector monopolies into private sector monopolies, but there have been efforts to introduce competition into these industries.
The government also created utility regulators who have imposed strict price controls on many of these industries and who are now over-seeing the move towards competitive markets in areas such as gas and electricity supply and telecommunications.
Deregulation
This is closely linked to privatisation. De-regulation means the opening up of markets to greater competition. The aim of this is to increase market supply (driving prices down) and widen the choice available to consumers. The discipline of increased competition should also lead to greater cost efficiency from producers - who are keen to hold onto their existing market share.
Good examples of deregulation to use include: Urban bus transport, parcel delivery services, mortgage lending, telecommunications, gas and electricity supply.
Commitment to free trade
The UK government has signed up to trade agreements brokered by the World Trade Organization. Trade creates competition and should be a catalyst for improvements in cost and lower prices for consumers. The United Kingdom is also a full-paid up member of the European Single Market - promoting free trade and free movement of goods, services, labour and capital throughout the fifteen member nations of the European Union.
Measures to encourage small business start-ups
Small businesses are the lifeblood of the economy. According to the Department for Trade and Industry, there were an estimated 3.7 million active businesses in the UK at the start of 1999. The business stock is 1.3 million higher than in 1980 (the first year for which comparable figures are available). Most of the growth in the business population between 1998 and 1999 has been in the 1-4 employee category.
In 1999, 63% of all businesses involved the self-employed and a further 26% employed between 1-4 additional employees. Over 5.5 million people are employed in businesses with fewer than five people. Nearly three-quarters of the increase in employment between 1995 and 1999 came from small and medium-sized firms, according to research published by the Small Business Service.
A growing range of government policy initiatives have been launched over the years designed to stimulate new businesses.
Business start-up grants
Loan guarantee schemes
Lower rates of corporation tax for smaller businesses
Investment allowances and regional policy assistance for new business start-ups in some areas
Measures to increase corporate investment spending
Capital investment spending is unusual in that it adds to aggregate demand (C+I+G+(X-M)) but also has an important effect on aggregate supply in the long run.
Supply-side economics was abandoned by North America, Europe and Japan in the 1990s, says economist Alan Reynolds, but it was enthusiastically embraced by the frisky economic tigers of Asia and elsewhere.
All of the most rapidly growing economies, without exception, have one thing in common says Reynolds: they either had very low tax rates to begin with or have moved rapidly in that direction
- In the 1980s more than 50 countries, including the United States, reduced their highest marginal tax rates.
- In the 1990s, the largest economies reversed course, and tax rates were increased in the United States, Canada, Germany and Japan.
- But 13 countries either kept their highest tax rates at 20 to 35 percent throughout the '90s, or continued to move in the direction of reducing punitive tax rates.
- From 1985 to 1993, the economies of countries that reduced tax rates grew at four times the pace of those that did not.
Many of these recent economic miracles were in dire economic straits before the tax rates started coming down. For example,
- The economies of South Korea, Mauritius and Jamaica were falling fast in the early '80s.
- Mauritius is now called "the Hong Kong of Africa" since cutting the top tax rates in half.
- More recent economic basket cases such as Peru and Bolivia have likewise shown dramatic improvement since slashing high tax rates.
Private consumption and investment, a good measure of living standards, has increased at three times the U.S. pace in Hong Kong, Singapore and most other economies that adopted some version of the supply-side tax strategy.