This is a revision presentation on supply-side policies with a particular focus on the UK economy

1. Supply-Side Policies

2. Supply-Side Economic Policies
They are policies that improve productive potential / capacity of an
economy. Illustrated by an outward shift of LRAS (or of the PPF)
• Supply-side policies focus on improving the structural long-
term performance of an economy
• There are different approaches to supply-side reforms
• Market-led policies – designed to make markets work
better and give the private sector more freedom
• State / government intervention in markets to overcome
different types of market failure
• Supply-side reforms can affect both short-run and long-run
aggregate supply – but the focus is usually on LRAS
• Time lags involved with supply-side reforms can be long

3. Some Key Supply-Side Challenges for the UK Economy
Persistent
Productivity Gap
High rates of youth
unemployment
Deep and widening
regional economic
divide in the UK
Large trade deficit
and declining
exports as a share
of UK GDP
Excessive reliance
on consumption as
a driver of GDP
Competitive Threat
from Emerging
Economies
Low capital
investment &
research &
development
Rising inequality /
relative poverty

4. Recent UK Government Supply-Side Policies
Privatisation of
the Royal Mail
Patent Box Tax
Incentive
Modern
Apprenticeships
including the
Youth Contract
Welfare Caps /
and other
Welfare
Reforms
Shale Gas Tax
Cut Incentives
Large Fall in
Corporation Tax
Launch of UK
National
Infrastructure
Plan
Launch of Green
Investment
Bank

5. Main Objectives of Supply-Side Policies
1. Improve incentives to look for work and invest in people’s skills
2. Increase labour and capital productivity
3. Increase occupational and geographical mobility of labour to
help reduce the rate of unemployment
4. Increase investment and research and development spending
5. Promote more competition and stimulate a faster pace of
invention and innovation to improve competitiveness
6. Provide a strong platform for sustained non-inflationary growth
7. Encourage the start-up and expansion of new businesses /
enterprises especially those with export potential
8. Improve the trend rate of growth of real GDP to help support
improved living standards and regional economic balance
Key concepts to focus on when discussing S-SPs are incentives,
enterprise, technology, mobility, flexibility and efficiency

6. Forecast Contributions to Potential GDP in the UK
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0 2015Q4
2016
Q2
Q3
Q4
2017
Q2
Q3
Q4
2018
Q2
Q3
Q4
2019
Q2
Q3
Q4
2020
Q2
Q3
Q4
2021
Population: natural change
Participation rate: natural change
Population: net migration
Participation rate: net migration
Unemployment rate
Average hours
Hourly productivity

7. Countries with Highest R&D Spending (% of GDP)
Country
(% of GDP)
2005–2012
South Korea 4.0
Israel 3.9
Finland 3.5
Sweden 3.4
Japan 3.4
Denmark 3.0
Germany 2.9
United States 2.8
Selected other countries
Netherlands 2.2
Singapore 2.1
China 2.0
United Kingdom 1.7
Norway 1.7
Brazil 1.2
Russian Federation 1.1
Source: HDI report 2015, UNDP

8. Difference between Production & Productivity
There is a clear distinction between production and productivity
• Production
• Value of output of goods and services e.g. measured by
GDP or an index of production in specific industry
• Productivity
• A measure of the efficiency of factors of production
• Measured by output per person employed
• Or output per person hour
• An increase in production DOES NOT automatically mean an
increase in productivity - it depends on how many factors of
production have been utilised to supply the extra output

9. Competitiveness Issue for UK: The Productivity Gap
Labour productivity can be measured by GDP per hour worked and per worker, and growth
in GDP per hour worked. This chart shows GDP per worker for G7 countries in 2015
86.0
100.0
106.0
111.0 114.0 115.0 119.0
138.0
0.0
20.0
40.0
60.0
80.0
100.0
120.0
140.0
160.0
Japan UK(=100) Canada Germany Italy France G7 exc. UK US
GDP per worker employed

10. UK Productivity Growth has disappointed since 2007
Real output per person employed in the UK and G7 (excluding the UK)
80.0
85.0
90.0
95.0
100.0
105.0
110.0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Index of Constant price GDP per hour worked, 2007 = 100
UK G7 exc UK

11. Why does the UK economy lag on productivity?
Low rate of new capital
investment in the UK
Banking crisis affecting
lending to businesses
Possible slowing rates of
process innovation
Persistent and deep skills
shortages in key
industries
Relatively low levels of
market competition
Low aggregate demand
& high spare capacity –
under-utilizing resources

12. Economic Advantages of Higher Productivity
1. Lower unit costs: Cost savings for businesses can bring lower
prices, encouraging higher demand, more output and an
increase in employment
2. Improved competitiveness and trade performance (BoP)
3. Higher profits: Efficiency gains are a source of larger profits for
companies which might be re-invested
4. Higher wages: Businesses can afford higher wages when their
workers are more efficient
5. Economic growth: If an economy can raise productivity then the
trend growth of national output can pick up
6. Productivity improvements mean that labour can be released
from one industry and be made available for another

13. If Supply Side Policies Work
1. Achieve a sustained improvement in the possible trade-off
between inflation and unemployment (see Phillips Curve)
2. Be more flexible in response to external demand and
supply-side shocks such as rising energy prices
3. Raise living standards through stronger long term economic
growth / an increase in underlying trend rate of growth
4. Reduce unemployment by lowering the natural rate of
unemployment (less frictional & structural unemployment)
5. Improve competitiveness in global markets and achieve a
stronger balance of trade in goods and services
In general, a stronger supply-side performance allows a
government to meet more of the key macro objectives

14. Showing Long Run Economic Growth using AD-AS
General
Price Level
Real GDP
GPL1
AS1
Y1
AD1
Yp1
LAS1
An increase in a
country’s
productive
potential causes an
outward shift of
LAS. Short run
supply increases
because of lower
unit costs
An increase in
productive potential
allows an economy
to operate at a
higher level of AD
LAS2
AS2
AD2
Yp2Y2

15. Pro-Market (Private Sector) Supply-Side Policies
These policies focus on reducing the size of the state and in
extending the role of market forces in allocating scarce resources
• Cutting government spending (including welfare) and borrowing
• Lower business taxes to stimulate capital investment spending
• Lower income tax rates to improve work incentives
• Reducing red-tape to cut the costs of doing business
• Improving the flexibility of the labour market including reforming
employment laws and encouraging more part time work
• Competition policies i.e. deregulation & tough anti-cartel laws
• Privatisation of state assets – i.e. transferred to private sector
• Opening up an economy to overseas trade and investment
• Opening up an economy to inward skilled labour migration

16. The Rise of Zero Hours Contracts in the UK Economy
0.0
0.5
1.0
1.5
2.0
2.5
3.0
0
100
200
300
400
500
600
700
800
900
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Zero Hours Contracts do not guarantee a minimum number of
working hours each week
In employment on a zero hours contract (thousands)
Percentage of people in employment on a zero hours contract
• People on “zero-hours contracts” are more
likely to be young, part time, women, or in
full-time education when compared with
other people in employment.
• On average, someone on a “zero-hours
contract” usually works 26 hours a week
Total
(thousands)
% of people
in work

17. State (Government) Driven Supply-Side Policies
Supporters argue that an interventionist state can have a powerful
and positive long-term effect on supply-side performance
• State investment in public services and critical infrastructure
• A commitment to a minimum wage and/or living wage to
improve work incentives & productivity in the labour market
• Higher taxes on the wealthy to fund public and merit goods
• An active regional policy to inject extra demand into under-
performing areas / regions of persistently high unemployment /
low per capita income – e.g. the Northern Powerhouse Project
• Selective import controls to allow domestic industries to expand
• Management of the exchange rate to improve competitiveness
• Nationalisation of and/or tougher regulation of key industries

18. UK Minimum Wage and Living Wage
6.95 7.10
7.35
7.65
7.90
7.20
7.60
8.05
8.50
9.00
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
9.00
10.00
2016 2017 2018 2019 2020
£ per hour
National Minimum Wage (NMW) National Living Wage (NLW)
Source: OBR, March 2016

19. Regional Policy – The Northern Powerhouse Project
The UK government wants to achieve a greater degree of regional
balance in the economy to help supply-side potential growth
• Main goal of the Northern Powerhouse idea is to have a more balanced
regional economic recovery
• The North of the UK has a relatively higher concentration of public
sector and manufacturing jobs and has grown less quickly since the end
of the recession, living standards are below the national average
• Key aim is to increase long-term growth in the major cities of the North
including Liverpool, Manchester, Leeds and Hull
• Policy options include:
• Investment to improve transport connections
• Supporting science and innovation including the universities
• Backing specialist clusters of businesses including high tech sectors
such as life sciences and marine engineering

20. Research and Development (R&D)
R&D is focussed on the creation and improvement of products and
processes, based on scientific research – applied to market needs
• R&D expenditure in the UK in 2014 represented 1.67% of GDP
• The biggest barriers to innovation are
• Risk aversion – research is expensive, rewards are uncertain
• Uncertainty about firms’ ability to exploit research profitably
• A lack of high-skilled workers in key research industries
• Top EU companies: Nokia, Volkswagen, Bosch and Siemens
• The top UK firms are GlaxoSmithKline and AstraZeneca
• The level of research spending is not necessarily a guide to the
pace and success of innovation. Many businesses do not patent all
of their most innovative ideas but keep them as trade secrets

21. What is Innovation?
Innovation is putting a new idea or approach into action. Innovation
is 'the commercially successful exploitation of ideas'
• Product innovation
• Small-scale, frequent subtle
changes to the characteristics
and performance of a good or
a service
• Process innovation
• Changes to the way in which
production takes place or is
organised
• Innovation has demand and
supply-side effects in markets and
the economy as a whole
Austrian
economist Joseph
Schumpeter
coined the term
creative
destruction.
This is a term that
refers to the
complete upheaval
of the established
order in the
pursuit of
innovation.

22. What is Human Capital?
Human capital is a measure of individuals’ skills, knowledge,
abilities, social attributes, personalities and health attributes.
These factors enable individuals to work, and therefore produce
something of economic value.
• Human capital in the UK economy can be improved by:
1. Sustained gains in average educational attainment – in the
academic year ending 2015, 53.8% of pupils that left school in
England achieved 5 or more GCSE A* to C grades, including
Maths and English
2. Expanded access to and quality of in-work training and
opportunities for life-long learning
3. Higher real incomes that allow people to consume more
knowledge products including online courses
4. Inflow of migrants with above average skills & qualifications

23. International Patent Filings in 2014

24. International (External) Competitiveness
External competitiveness is the ability to sell goods and services at
competitive prices in a foreign country
• Cost competitiveness – differences in unit costs between
producers – reflected in prices
• Non-price competitiveness – product quality, design,
reliability and performance, choice, after-sales services,
marketing, branding and the availability and cost of
replacement parts
• Non-wage costs:
• Costs of meeting environmental / health regulations
• Environmental taxes e.g. carbon taxes and waste taxes
• Employment protection laws and health and safety laws
• Requirements to provide pensions for employees

25. Policies to Improve International Competitiveness
Improving functioning of Labour Markets
• Investment in all levels of education and training
• Encouraging inward migration of skilled workers
• Improvements in management quality
Critical (Core) Infrastructure Investment
• Better motorways, ports, hi-speed rail, new sewers
• The Northern Powerhouse project
• Communications e.g. super-fast broadband, 4G networks
Supporting Enterprise / Entrepreneurship
• Improved access to business finance e.g. for start-ups
• Incentives for business innovation and invention
• Reductions in business red tape
Macroeconomic Stability
• Maintaining low inflation / price stability to help confidence
• A sustainable and more competitive banking system
• A competitive exchange rate v major trading partners

26. Evaluating the Effectiveness of Supply-Side Policies
1. Supply-side policies can have long time lags but this depends on
the type of policy and also the country involved
2. The level and growth of aggregate demand is also important in
making business investment and innovation viable – this is a
valid Keynesian issue – demand helps to utilise extra supply
3. Some supply-side policies (e.g. cutting higher-rate income taxes)
might lead to greater inequalities of income & wealth – again it
depends on which taxes are changed and by how much
4. State intervention to “pick winners” in different
industries/sectors may be ineffective – i.e. are risks of
government failure
5. Sustainability issues arise if policies raise a country’s long term
growth rate – leading to increased externalities such as pollution
– although some supply policies directly address this!
6. Supply-side policies look to achieve relative improvements e.g.
In productivity – but other countries will be making gains too!

27. Supply-Side Policies