Supply Side Policy Themes - Paper 2 Hot Topic!

Summary

This video delves into supply-side policies and their impact on macroeconomic themes, particularly in the UK. It discusses how these policies can enhance potential growth, reduce economic inactivity, lower the natural rate of unemployment, stimulate regional growth, and boost productivity. The script outlines various interventions, including government spending on education, healthcare, infrastructure, and tax reforms, emphasizing the need for targeted approaches to achieve desired economic outcomes.

Takeaways

• 📈 Supply side policies are crucial for macroeconomic exams and are often linked to broader economic themes, including UK-specific and general issues.
• 📉 The UK's potential growth rate has significantly declined post-financial crisis, dropping from around 2.2% to approximately 1% currently.
• 🚨 Factors contributing to the UK's poor potential growth include low productivity, a shrinking workforce due to economic inactivity, poor business investment, inadequate infrastructure, and underperforming public services.
• 💼 Supply side policies aimed at boosting potential growth can involve interventions that shift the long-run supply (LRS) curve to the right, theoretically increasing potential growth.
• 🏥 Government spending on education, training, healthcare, and infrastructure are key supply side policies to reduce economic inactivity and encourage workforce participation.
• 👶 Affordable childcare and reduced income tax or National Insurance can motivate inactive individuals to rejoin the workforce, particularly parents and those with health issues.
• 🏢 Supply side policies can also target the reduction of the natural rate of unemployment by addressing structural, frictional, and seasonal unemployment through various interventions.
• 🌐 Regional growth can be promoted through policies that boost productivity and attract business locations to areas with lower average earnings and opportunities.
• 💹 Productivity is a significant concern in the UK, with current levels 25% below the pre-financial crisis trend, impacting exports, wage growth, and the current account deficit.
• 🌟 Policies to enhance productivity and export competitiveness include investments in education, training, healthcare, and infrastructure, as well as business subsidies, tax incentives, and labor market reforms.

Q & A

What are the two main categories of supply side policies discussed in the script?

The script discusses two main categories of supply side policies: interventionist supply side policies and market-based supply side policies.

How has the UK's annual potential growth rate changed since the financial crisis?

Prior to the financial crisis, the UK's annual potential growth rate was around 2-2.5%, but it fell to around 1.5% from the financial crisis up to COVID times, and currently, it's around 1%.

What factors have contributed to the decline in the UK's potential growth rate?

Factors contributing to the decline in the UK's potential growth rate include poor productivity, a shrinking workforce due to rising economic inactivity, poor business investment, inadequate infrastructure improvements, and underperforming public services.

What is economic inactivity and how has it changed since COVID times?

Economic inactivity consists of people of working age who are not willing, able, or actively seeking work. Since COVID times, the inactivity rate has risen from around 20% to 22.1%, representing around 1 million workers who are not in the workforce.

How can supply side policies be used to reduce economic inactivity?

Supply side policies to reduce economic inactivity include government spending on education and training, healthcare, infrastructure, child care, and tax reforms such as reducing income tax and National Insurance, as well as reducing benefits to motivate the inactive to seek work.

What is the current natural rate of unemployment in the UK and what types of unemployment does it include?

The current natural rate of unemployment in the UK is around 3.5%, which includes structural, frictional, and seasonal unemployment.

How can supply side policies address the issue of regional growth inequality in the UK?

Supply side policies to address regional growth inequality include government spending on education, training, and healthcare to boost productivity, infrastructure spending to improve connectivity and attract businesses, subsidies and tax incentives for business relocation, and the creation of Enterprise zones.

What is the current state of productivity in the UK, and how does it affect the current account deficit?

Productivity in the UK has been low since the financial crisis, with the current productivity being 25% below its pre-crisis trend. This has resulted in uncompetitive exports and a high current account deficit, averaging 4% of GDP over the last 15 years.

What supply side policies can be implemented to improve productivity and competitiveness of UK exports?

Policies to improve productivity and competitiveness include spending on education, training, and healthcare, infrastructure investment, providing subsidies or grants to firms, lowering corporation tax, relaxing immigration controls, labor market reforms, and creating Enterprise zones.

What are the potential challenges in evaluating the effectiveness of supply side policies?

Challenges in evaluating supply side policies include the cost of interventionist policies, time lags before effects are seen, the need for targeted policy interventions, and potential negative stakeholder trade-offs of certain market-based policies.