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Session 5Supply side policies and policy conflicts 42In this session we are going to focus on the instruments of supply-side policy, how they have been used in the UK and their implications. We will also consider how different policies may have caused conflicting outcomes for the Governments Economic objectives.

A Level Economics Year 1 (AS) Revision WorkshopWhat are supply-side policies?42Measures to make labour, product and capital markets more efficient to boost the level of productive capacity, moving the aggregate supply curve rightwards.

A Level Economics Year 1 (AS) Revision WorkshopSome examples42

Designed to make labour markets more flexible and boost labour supply, e.g. cuts in income tax and social security benefitsDesigned to boost investment and add to the capital stock, e.g. tax credits for R&D, a Green investment bank, cuts in Corporation TaxDesigned to boost competition and efficiency in the market for goods and services, e.g. privatisation (such as Royal Mail), changes to Sunday Trading Laws

A Level Economics Year 1 (AS) Revision WorkshopChanges to Sunday Trading LawsProposed legislation to relax trading laws for Sundays.The Government wants to allow local councils to decide if retail outlets in their region should be allowed to trade for longer (opening earlier and closing later).Opposition comes from those who believe that there are cultural and religious reasons for limiting trade and from Trade Unions who are concerned for the impact on their members

A Level Economics Year 1 (AS) Revision WorkshopThe impact of supply-side policies on the macro economy43

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A Level Economics Year 1 (AS) Revision WorkshopThe impact of supply side policies on the Keynesian aggregate supply curve43

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A Level Economics Year 1 (AS) Revision WorkshopKey supply-side challenges for the UK economy:43

UK has one of worst productivity levels in the G7 that has not improved after the financial crash12.5% of 18 25 year olds are currently unemployed.Economic growth has occurred but is lower then expected (continuing Output gap)Lower income households are becoming relatively poorer in comparison to higher earning households.Investment levels are low, particularly outside of South East of England

A Level Economics Year 1 (AS) Revision WorkshopThe Productivity Puzzle44

Chart illustrates the so-called productivity puzzle that impacts on the UK Economy

Shows the real productivity index (output per hour, 2007=0) in red and level of productivity that may have occurred if improvements in productivity had continued on their pre-crisis trend.

A Level Economics Year 1 (AS) Revision Workshop

The Productivity PuzzleThis lack of continually improving productivity is a major concern.

Compounded by the fact that productivity levels in the UK are worse than all of the other G7 economies except for Japan.44Without improved productivity the economy will struggle to continually grow

One possible cause of the puzzle could be a policy conflict the push to create more jobs may have meant in order to fill the vacancies employers have had to employ less effective workers.

A Level Economics Year 1 (AS) Revision WorkshopEvaluation: To what extent is the UK Governments policy to reduce unemployment levels a direct cause of low productivity in the economy?45

Encouragement of employment policies such as Zero Hours contracts. Employers such as McDonalds and Sports Direct use themAlthough workers on Zero hours contracts are not unemployed, they do not have guarantee paid work in any given week and this can lower employee motivation. ONS statistics suggest that nearly 750,000 people are on zero hours contracts in UK (September 2015) However, many workers on zero hours contracts are satisfied with their arrangement and are happy that they have some employment. Survey by ONS suggests that 65% do not want to work more hoursEncouragement of employment practices such as zero hours contracts has helped reduce unemployment but may not have improved motivation and productivity.

A Level Economics Year 1 (AS) Revision WorkshopZero Hours contracts at McDonalds

A Level Economics Year 1 (AS) Revision WorkshopEvaluation: To what extent is the UK Governments policy to reduce unemployment levels a direct cause of low productivity in the economy?45

Low productivity may have been caused by other factors not related to government policies on employment

Businesses have been able to lower other costs, and as a result have been able to keep prices low and remain in business, in spite of lower productivityLow interest rates have meant that some firms that are less productive have managed to stay afloat when they would have folded during other recessions Skills that have been maintained by over employment may support future levels of productivityLow levels of productivity exist but are not directly caused by government employment policies

A Level Economics Year 1 (AS) Revision Workshop

Research and DevelopmentAlthough recent years have seen an increase in spending on research and development in the UK it continues to lag behind many of our competitors.

The amount of money being put into R&D by UK business hit 19.9bn in 2014, up from 19.1bn in 2013 at constant prices. This amounted to 1.1% of GDP.45However, South Korea spent 4.1% of GDP on developing new technology and products, Japan 3.4%, Germany 2.9%, the US 2.7% and France 2.2%. The EU average was 1.9pc.

A Level Economics Year 1 (AS) Revision WorkshopWhat are the key dangers from a lack of investment in research and development?45

Economy will struggle to grow unless businesses find ways of improving productivityCan lead to lower levels of productivity as employees fail to get adequate training in new technologiesReduces the UKs international competitiveness

A Level Economics Year 1 (AS) Revision WorkshopUK Enterprise ZonesEnterprise zones have been set up in 24 regions within the UK.

The concept is to create regionalised hubs for promoting growth and job creation in areas that may have traditionally suffered from higher unemployment.46In each zone, the organisation specialises in a particular set of industries that have the potential for success in that area (e.g. Advanced Manufacturing/Engineering in Birmingham, Aerospace in Manchester).

The Government attempts to attract businesses to the area by promising advantages such as a streamlined planning process, enhanced capital allowances or improved transport links.

A Level Economics Year 1 (AS) Revision WorkshopWhat are the key advantages of developing Enterprise Zones?46

An attempt to spread growth throughout regions that are most in need Allows for Government to target infrastructure funding (which needs sufficient time to reap benefits)Take advantage of the external economies of scale by having specialisms in each hub (e.g. Leeds specialises in Pharmaceuticals)

A Level Economics Year 1 (AS) Revision WorkshopExamples of possible policy conflicts46

A Level Economics Year 1 (AS) Revision WorkshopConflict between unemployment and inflation47Economists will often talk about the conflict between unemployment and inflation (see the Phillips Curve). Traditionally, the concern was that any monetary or fiscal policy put in place to reduce prices often required contracting aggregate demand.

So, increasing interest rates will reduce AD but as demand falls so will employment as firms start to lay-off employees who are no longer needed.

A Level Economics Year 1 (AS) Revision WorkshopHow has this conflict been reflected in the statistics?47

--3%-0.5%2%-0.6%1%-1.51%-0.4Analysis: Statistics here show an apparent conflict. However, inflation rate remains very low and is not accelerated by the change in unemployment. Conflict not apparent in last 5 years.

A Level Economics Year 1 (AS) Revision WorkshopUK Economic Growth and the Balance of Payments Current Account47

Economists suggest that there is a trade-off between economic growth and the balance of payments current account. A positive economic growth suggests that people have higher incomes in the UK as people earn more money they will tend to purchase more imported goods. Thus, economic growth may lead to a larger deficit on the BoP Current Account.

A Level Economics Year 1 (AS) Revision WorkshopPolicies aimed at improving growth and trade balance 47

Govts Export Hub series of roadshows giving advice to exporting businessesThe Exchange Rate!By keeping interest rates low, less demand for GBPIs there demand in the importing economies?Intercity Express Programme (to replace old inter-city rolling stock)Price of petrol (as car use is a substitute)

A Level Economics Year 1 (AS) Revision Workshop

Paris Climate Summit 2015All of the major economies of the world met and discussed the issue of climate change in Paris in November 2015.

At the end, each government agreed to new targets to reduce carbon emissions and attempt to limit the rise in average world temperatures to less than 2 degrees. 48The EU bloc of nations produces 9% of the worlds greenhouse emissions with only China and the USA polluting more.

The UK will start to formulate new policies to meet the agreed targets but these will include further measures of taxes on polluting firms/products, incentives for firms using or developing greener technology and greater regulation on polluting firms/consumers.

A Level Economics Year 1 (AS) Revision Workshop

A Level Economics Year 1 (AS) Revision WorkshopSuggest 2 new policies that the government could introduce to reduce greenhouse emissions in the UK:48

Building Data Exchange a Government information portal giving data to construction industry to help them build more environmentally sound homes and offices.Contracts for Difference offering more contracts to energy firms who are investing in carbon reducing methods and technology.

A Level Economics Year 1 (AS) Revision WorkshopEvaluate the view that further measures by the UK Government aimed at reducing greenhouse emissions will always lead to lower economic growth. 48

Carbon releasing fuels are the most cost effectiveRenewable energy (e.g. solar energy) tends to be more expensive than carbon releasing fuels, leading to an increase in production costs for businesses which switch to the green fuels. As a result they will be less competitiveThe US Dept of Energy produced figures in 2015 which show that wind and solar energy can be twice as expensive per kilowatt/hour as coal and natural gas. Carbon fuels remain the primary method of generating electricity in the UK (47% generated) However, as investment made in generation of renewable energy increases, the cost of producing those fuels should full Therefore the change in costs may not have any affect on economic growth in the long run.

A Level Economics Year 1 (AS) Revision WorkshopEvaluate the view that further measures by the UK Government aimed at reducing greenhouse emissions will always lead to lower economic growth. 48

Cost of using fossil fuels does not fully take into account the cost of their externalities Fossil fuels give out greenhouse emissions causing global warming and externalities such as increased flooding IMF suggest that as many as 1.6mn people die per year in the world from premature deaths caused by polluted air However, the cost of supporting the development of cleaner energy may be very high in the short term A concentration of policies to reduce greenhouse emissions may support sustainable economic growth in the long run as there will be fewer costs in terms of externalities

A Level Economics Year 1 (AS) Revision WorkshopExtension activities

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A Level Economics Year 1 (AS) Revision WorkshopTop Tips

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A Level Economics Year 1 (AS) Revision WorkshopMicro and Macro Glossary

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A Level Economics Year 1 (AS) Revision WorkshopHave a safe journey home!Good luck with your exams from everyone at tutor2uwww.tutor2u.net/asecon2016.pdf

A Level Economics Year 1 (AS) Revision Workshop