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Supply side policy.

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Introduction

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. ...read more.

Middle

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. ...read more.

Conclusion

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. ...read more.

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