What this lesson teaches
I can define supply-side policy.
Syllabus K343, 4.4.1. Definition of supply-side policy
I can describe supply-side measures such as education, infrastructure, labour reforms, lower taxes and deregulation.
Syllabus K343, 4.4.2. Supply-side policy measures: education and training; infrastructure spending; labour market reforms; lower direct taxes; deregulation; improving incentives to work and invest; privatisation
Make a guess
The government subsidises training courses so workers learn new skills. Which kind of policy is this?
- Supply-side policy, because it raises the quality of labour.
- Fiscal policy and not supply-side, because it uses tax money.
- Monetary policy, because the government spends money.
Show the answer
Supply-side policy, because it raises the quality of labour.
Better-skilled workers produce more, so the economy's capacity grows. It works through supply, not total demand.
Supply-side policies raise the economy's productive capacity by improving the quantity and quality of resources and incentives.
Supply-side policy aims to raise how much the economy is able to produce. It works on the amount and quality of resources, and on the rewards for work and risk. It does not work through total demand.
Education and training give workers more skills, so each worker makes more. Spending on roads, ports and fast internet cuts firms' costs, so they can make more for less.
Labour market reforms make it easier for firms to hire and for workers to change jobs. Lower income tax and company tax let people keep more of what they earn, so they have more reason to work and invest. Changing benefits so that work pays more than not working also helps.
Deregulation removes rules that are not needed. Costs fall and new firms can start more easily. Privatisation sells state firms to private owners, who have a profit reason to cut costs.
Sort these
Sort each measure by the kind of policy it is.
Groups: Fiscal policy, Monetary policy, Supply-side policy.
- Rules that slow down new businesses are removed.
- The government cuts personal income tax.
- The central bank raises interest rates.
- MAS lets the Singapore dollar rise faster.
- The government builds more public hospitals.
- Adults get credits to retrain in data skills.
Show the answer
Fiscal policy
- The government cuts personal income tax. Changing taxes is a fiscal tool, decided by the government in the Budget.
- The government builds more public hospitals. Government spending is a fiscal tool that adds directly to total demand.
Monetary policy
- The central bank raises interest rates. Changing the cost of borrowing is a monetary tool used by the central bank.
- MAS lets the Singapore dollar rise faster. Managing the exchange rate is Singapore's main monetary tool.
Supply-side policy
- Rules that slow down new businesses are removed. Deregulation cuts costs and lets new firms start, raising capacity.
- Adults get credits to retrain in data skills. Better skills raise the quality of labour and so the economy's capacity.
- Supply-side policy
- Policies that increase productive capacity.
- Measures
- Education and training, infrastructure, labour market reforms, lower direct taxes, deregulation, incentives, privatisation.
Worked example: Supply-side policy in Singapore
Singapore uses many supply-side measures.
- Education and training: SkillsFuture credits help adults learn new skills.
- Infrastructure: the new Tuas mega port and rail lines raise productivity.
- Incentives to invest: a competitive company tax rate attracts foreign firms.
- Help for firms to adopt technology and automate, lifting output per worker.
Watch out for this
Supply-side policy means increasing the supply of money.
Supply-side policy is about the economy's ability to produce: workers' skills, infrastructure and incentives. Changing the money supply is monetary policy.
Check your understanding
Which measure works mainly on the economy's productive capacity rather than on total demand?
- Cutting red tape so new firms can start up faster
- Giving households one-off vouchers to spend at local shops
- Cutting interest rates to encourage households and firms to borrow
Show the answer
Cutting red tape so new firms can start up faster
Right. Easier start-ups bring more firms and competition, which raises capacity over time.
Check your understanding
Which is a supply-side policy measure?
- Letting the currency fall to help exporters
- Raising government spending on cash handouts
- Cutting interest rates to boost spending
- Subsidising courses that retrain workers
Show the answer
Subsidising courses that retrain workers
Right. Training raises the quality of labour, which raises the economy's capacity to produce.