3.7 Supply-side policies

Supply-side policies aim to raise productive capacity, productivity, employment, competition or flexibility, shifting LRAS or improving efficiency.

They can support growth and lower inflation but may take time and affect distribution.

State the structural problem and the capacity channel.

Training raises worker productivity, while competition reform may lower costs and increase innovation.

A policy called supply-side is not automatically effective or equitable.

Market-based policies use incentives and prices, such as lower income/corporate taxes, deregulation, privatisation or labour-market reform.

They may improve incentives and competition but can reduce revenue, worker security or service access.

Identify the incentive change and the condition needed for firms or workers to respond.

Lower payroll tax may encourage hiring if demand for labour is not the binding constraint.

Incentives do not guarantee investment when confidence is weak.

Interventionist policies use public spending, regulation or direct provision for education, infrastructure, healthcare, R&D and competition.

They can address coordination or equity problems but require funding, implementation capacity and good targeting.

Match the public action to the market failure or capability gap.

Public broadband can raise productivity where private providers will not cover remote areas.

Government action can fail through waste or capture.

Demand-side policy changes spending; supply-side policy changes capacity or costs. Together they affect output, prices, employment and the fiscal position.

Stimulus may raise output when spare capacity exists, while supply reform determines whether expansion is inflationary or sustainable.

Trace both curves and the time horizon before attributing an outcome.

Infrastructure spending raises AD now and can shift LRAS right later if it improves logistics.

Do not assume long-run supply gains appear immediately.

Effectiveness depends on time, design, incentives, finance, political feasibility, implementation and complementary demand conditions.

Some reforms raise potential output but worsen inequality or take years; evaluation needs counterfactual evidence.

State objective, lag, constraint and metric before judging.

A training programme improves employment only if vacancies exist and participants can access it.

A policy announcement is not an outcome.