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Evaluating Supply-‐Side PoliciesAS Macroeconomics
Supply-‐Side Economic Policies
They are policies that improve the productive potential / capacity of an economy. Illustrated by an outward shift of LRAS (or the PPF)
• Supply-‐side policies focus on improving the structural long-‐term performance/competitiveness of an economy
• There are different approaches to supply-‐side policy reforms:• Market-‐led policies – designed to make markets work
better and give the private sector more freedom• State / government intervention in markets to overcome
market failures and address inequality issues• 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 but
better to evaluate the effectiveness of policy rather than lags
Examples of Recent UK Supply-‐Side Policy Ideas
1. Relaxation of the Sunday trading laws – trade union opposition – impact on family life / work-‐life balance
2. 24 new regional enterprise zones – aiming to take advantage of external economies of scale
3. Completion of Cross Rail -‐ plans for Cross Rail 2 and HS3 (East-‐West high speed rail in North of England)
4. Tax relief for businesses investing in low carbon technologies – designed to increase I in renewables
5. Increases in the income tax free allowance6. Main rate of corporation tax (a tax on profits) -‐
currently 20% -‐ to fall to 17% by 20207. UK National Infrastructure Plan – range of projects
10 Key Objectives of Supply-‐Side Policies
1. Improve incentives to look for work and invest in people’s skills2. Increase labour and capital productivity3. Improve occupational and geographical mobility of labour to help reduce
unemployment4. Increase investment and research and development spending5. Promote more competition and stimulate a faster pace of invention and
innovation to improve competitiveness6. Provide a platform for sustained non-‐inflationary growth7. Encourage the start-‐up and expansion of new businesses / enterprises
especially those with export potential8. Improve the trend rate of growth of real GDP to help support improved living
standards and regional economic balance9. Improve a country’s competitiveness and trade performance10. Meet challenges of climate change / increase resilience to external shocks
Key concepts to focus on when discussing S-‐SPs are incentives, enterprise, technology, mobility, flexibility and efficiency
Source: ONS
UK Economic Growth and Unemployment
Per cent
-‐2.5
-‐2
-‐1.5
-‐1
-‐0.5
0
0.5
1
1.5
2007 Q1
2007 Q3
2008 Q1
2008 Q3
2009 Q1
2009 Q3
2010 Q1
2010 Q3
2011 Q1
2011 Q3
2012 Q1
2012 Q3
2013 Q1
2013 Q3
2014 Q1
2014 Q3
2015 Q1
2015 Q3
UK GDP growth, quarter on quarter
0
1
2
3
4
5
6
7
8
9
2007 Q1
2007 Q3
2008 Q1
2008 Q3
2009 Q1
2009 Q3
2010 Q1
2010 Q3
2011 Q1
2011 Q3
2012 Q1
2012 Q3
2013 Q1
2013 Q3
2014 Q1
2014 Q3
2015 Q1
2015 Q3
Unemployment rate
Duration of LFS Unemployment in the UK economy
500
1,000
1,500
2,000
2,500
3,000
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Over 24 months
12-‐24 months
6-‐12 months
Less than 6 months
Total unemployment, seasonally adjusted In the last few years there has been a welcome fall in the level of unemployment
One of the big challenges for the UK is to make more progress in reducing long-‐term structural unemployment
Key Aim of Supply-‐Side Policies – Raise Potential GDP
95.0
100.0
105.0
110.0
115.0
120.0
125.0
130.0
2003 Q3
2004 Q3
2005 Q3
2006 Q3
2007 Q3
2008 Q3
2009 Q3
2010 Q3
2011 Q3
2012 Q3
2013 Q3
2014 Q3
2015 Q3
2016
Actual (non-‐oil) GDP and estimated Potential GDP for the UK, Index: 2003=100, Source: ONS and OBR, March 2016
Output (non-‐oil GVA) Potential output
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
18.02015Q4
2016 Q2
Q3
Q4
2017 Q2
Q3
Q4
2018 Q2
Q3
Q4
2019 Q2
Q3
Q4
2020 Q2
Q3
Q4
2021
Population: natural changeParticipation rate: natural changePopulation: net migrationParticipation rate: net migrationUnemployment rateAverage hoursHourly productivity
2015-‐16 Global Competitiveness Index (UK Rankings)
Indicator UK ranking out of 144countries
Overall competitiveness 10th /144
Institutions 12th /144 (legal 6th)
Infrastructure 9th /144 (roads 29th)
Macroeconomic environment
108th /144 (Government debt 123rd )
Labour market efficiency
5th /144(Quality of Maths & Science 43rd)
Technological readiness
3rd /144(Mobile broadband 16th)
Highlighted problems for businesses
• Access to finance for business
• Skills gaps in the workforce
Some Key Supply-‐Side Challenges for the UK Economy
Persistent Productivity Gap with other nations
High rates of long-‐term youth
unemployment
Deep and widening regional economic divide in the UK
Large trade deficit and declining
exports as a share of global GDP
Excessive reliance on consumption as a driver of GDP
Competitive Threat from Emerging Economies
Low capital investment and research & development spending
High rates of persistent relative
poverty
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
100.0106.0 111.0 114.0 115.0 119.0
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
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
Countries with Highest R&D Spending (% of GDP)
Country (% of GDP)2005–2012
South Korea 4.0Israel 3.9Finland 3.5Sweden 3.4Japan 3.4Denmark 3.0Germany 2.9United States 2.8Selected other countriesNetherlands 2.2Singapore 2.1China 2.0United Kingdom 1.7Norway 1.7Brazil 1.2Russian Federation 1.1
Source: HDI report 2015, UNDP
International Patent Filings in 2014
UK Current Account (Balance of Payments)
-‐120000
-‐100000
-‐80000
-‐60000
-‐40000
-‐20000
01986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
BoP Current Account Balance – Annual -‐ £ million
Data on Income Inequality in the United Kingdom
Real Household Disposable Income (£ per year, at constant 2013/14 prices) Source: ONS
Median Disposable Income
MeanBottom Quintile
Mean Top Quintile 80/20 Ratio
Gini Coefficient (DisposableIncome)
£s £s £s Ratio
1979 13,373 6,843 27,142 3.97 27
1989 16,966 7,448 42,156 5.66 34
1999 20,709 8,743 54,036 6.18 36
2008 25,001 10,945 63,444 5.80 34
2009 24,638 11,177 63,237 5.66 34
2010 24,899 11,660 62,767 5.38 33
2011 24,320 11,699 62,958 5.38 34
2012 24,073 11,708 59,147 5.05 32
2013 23,690 11,348 60,451 5.33 33
2014 24,500 11,286 59,505 5.27 32
If Supply Side Policies Work
1. Achieve a sustained improvement in the possible trade-‐off between inflation and unemployment (see Phillips Curve)
2. Better able to absorb external demand and supply-‐side shocks such as rising energy prices or a Chinese slowdown
3. Raise living standards through stronger economic growth and spread the benefits of growth more widely / equitably
4. Reduce unemployment by lowering the natural rate of unemployment (less frictional & structural unemployment)
5. Improve UK 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
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 costsAn increase in
productive potential allows an economy to operate at a
higher level of AD
LAS2
AS2
AD2
Yp2
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 increased trade and investment• Opening up an economy to inward skilled labour migration
Government Spending and Tax Revenue – Since 1980
Source: Office for Budgetary Responsibility, data from 2016 onwards is a forecast
30
32
34
36
38
40
42
44
46
48
1980-‐81
1981-‐82
1982-‐83
1983-‐84
1984-‐85
1985-‐86
1986-‐87
1987-‐88
1988-‐89
1989-‐90
1990-‐91
1991-‐92
1992-‐93
1993-‐94
1994-‐95
1995-‐96
1996-‐97
1997-‐98
1998-‐99
1999-‐00
2000-‐01
2001-‐02
2002-‐03
2003-‐04
2004-‐05
2005-‐06
2006-‐07
2007-‐08
2008-‐09
2009-‐10
2010-‐11
2011-‐12
2012-‐13
2013-‐14
2014-‐15
2015-‐16
2016-‐17
2017-‐18
2018-‐19
2019-‐20
2020-‐21
Government Spending and Tax Revenues in the UK, % of GDP
Current receipts Total managed expenditure
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
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
UK Minimum Wage and Living Wage
6.95 7.10 7.35 7.65 7.907.20
7.608.05
8.509.00
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
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
• Goal of Northern Powerhouse is a more balanced regional 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
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
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 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 externalities such as pollution & congestion 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!
Evaluating Supply-‐Side PoliciesAS Macroeconomics