Evaluating Supply-Side Policies

Evaluating Supply-Side Policies

• 1.
  Evaluating Supply-Side Policies AS Macroeconomics
• 2.
  Supply-Side Economic Policies Theyare 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
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  Examples of RecentUK 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 allowance 6. Main rate of corporation tax (a tax on profits) - currently 20% - to fall to 17% by 2020 7. UK National Infrastructure Plan – range of projects
• 4.
  10 Key Objectivesof Supply-Side Policies 1. Improve incentives to look for work and invest in people’s skills 2. Increase labour and capital productivity 3. Improve occupational and geographical mobility of labour to help reduce 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 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 9. Improve a country’s competitiveness and trade performance 10. 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
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  Source: ONS UK EconomicGrowth and Unemployment Per cent -2.5 -2 -1.5 -1 -0.5 0 0.5 1 1.5 2007Q1 2007Q3 2008Q1 2008Q3 2009Q1 2009Q3 2010Q1 2010Q3 2011Q1 2011Q3 2012Q1 2012Q3 2013Q1 2013Q3 2014Q1 2014Q3 2015Q1 2015Q3 UK GDP growth, quarter on quarter 0 1 2 3 4 5 6 7 8 9 2007Q1 2007Q3 2008Q1 2008Q3 2009Q1 2009Q3 2010Q1 2010Q3 2011Q1 2011Q3 2012Q1 2012Q3 2013Q1 2013Q3 2014Q1 2014Q3 2015Q1 2015Q3 Unemployment rate
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  Duration of LFSUnemployment 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
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  Key Aim ofSupply-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
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  Forecast Contributions toPotential 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
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  2015-16 Global CompetitivenessIndex (UK Rankings) Indicator UK ranking out of 144 countries 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
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  Some Key Supply-SideChallenges 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
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  Competitiveness Issue forUK: 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
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  Why does theUK 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
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  Countries with HighestR&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
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  International Patent Filingsin 2014
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  UK Current Account(Balance of Payments) -120000 -100000 -80000 -60000 -40000 -20000 0 1986 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
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  Data on IncomeInequality in the United Kingdom Real Household Disposable Income (£ per year, at constant 2013/14 prices) Source: ONS Median Disposable Income Mean Bottom Quintile Mean Top Quintile 80/20 Ratio Gini Coefficient (Disposable Income) £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
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  If Supply SidePolicies 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
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  Showing Long RunEconomic 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 Yp2
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  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
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  Government Spending andTax 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
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  The Rise ofZero 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
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  State (Government) DrivenSupply-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
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  UK Minimum Wageand 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
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  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
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  What is HumanCapital? 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
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  Evaluating the Effectivenessof 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!
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  Evaluating Supply-Side Policies AS Macroeconomics