Mark Bonello Ghio 1

Discuss how demand side policies and supply side policies may be
used to increase short and long term economic growth.

Demand side policies are policies that are made by the govt in order to stimulate
any or all of the components of aggregate demand. This refers to the deliberate changes in
govt expenditure and income so as to achieve desired economic objectives such as economic
growth and the reduction of unemployment. Also, supply side policies are policies that the
government imply as to increase the productivity of a country and shift the aggregate supply
curve outwards.
One way of increasing the component of consumption expenditure by the govt is by
reducing direct and indirect taxation. When the govt reduces taxes such as income tax, it
directly increases consumers disposable income. The govt may also increase welfare benefits
such as childrens allowance, unemployment benefits or pensions, which would have a similar
affect. The reduction of indirect taxes, such as surcharges on utility bills or possibly other taxes
linked to products/services of inelastic demand, could also have a positive effect. A problem
that may arise in this case would be that consumers would save rather than spend the money.
The use of fiscal policy in stimulating investment may take many forms. Reducing direct
taxes like corporation tax, and indirect taxes on raw materials and power provision, also helps
to increase retained profits and stimulate new investment and employment. Govt may also
increase its expenditure in terms of direct or indirect assistance to firms (example upgrading of
industrial estates, promotion in foreign markets, fiscal incentives for investing in alternative
sources of energy, educational grants and training schemes etc.)
A third and direct component of AD is govt expenditure. A govt in order to increase
employment and stimulate economic growth may opt for an expansionary fiscal policy and
what is called a cyclical deficit, which occurs when the govt purposely lowers tax revenue and
raises its expenditure. This can be done in a number of ways; either by helping directly
businesses or/and investing in the social infrastructure such as roads, schools, airports, IT, port
facilities, public areas in order to both increase local investment as well as to attract foreign
one.
On the other hand, governments may also use supply side policies. These policies are
aimed at improving an economys productive potential and its ability to produce. Hence, it
contributes to the economic growth that it is aiming for. We can divide these policies into two
categories, which are market based policies and interventionist policies.
Mark Bonello Ghio 2

Interventionist supply side policies are those in which the government has a
fundamental role in encouraging economic growth. It may do this in several ways, such as:
Investment in human capita one major way the government may do this is through
the investment in education. This way, the govt is creating more skilled workers,
and is increasing the availability of the labour force, thus decreasing the rate of
unemployment. With better education and training also comes improved skills,
flexibility and mobility. This is essentially used for the improvement of labour
productivity. Therefore, with more investment in this comes more efficiency, which
leads to more production. This all creates a multiplier effect. The real income of
employees will improve, thus giving them more purchasing power.
Research and development one way of increasing a companys output is through
research and development. A company must constantly be aware of the changes and
improvements in technology in order to be up to date and to be able to produce its
maximal output levels and methods of production. The way in which the govt may
encourage this type of research is through the reduction on taxes. If the profits are
made due to the research, then the govt will reduce the taxes on this profit made.
This will push more companies into researching for better and faster equipment to be
used, and hence the potential for the economys output. The main definition for this
is a tax credit. When a company manages to increase the output, then the govt can
grant patents and copyrights to their goods and services, thus further increasing the
companys abnormal profits and mark-up.
Direct support for business policies the govt may use some policies to improve the
competition in some markets through anti-monopoly laws and by helping small and
medium size firms to grow through financial means. This also acts as an incentive for
more entrepreneurs to start up their own business. This all contributes to the increase
in the national output.

Secondly there is the market based supply side policies. These are the policies which focus on
the markets to operate more smoothly with as little govt intervention. These policies affect the
structures, institutions and rules that govern economic stakeholders. These may be:
Tax using this system will provide incentives to help stimulate output. This may come in
different ways, such as a reduction in tax rates in income and corporation taxes. A lower
income tax may act as an incentive for unemployed people to enter the labour force
or else for current employees to work more. Also, a lower corporation tax means that
owners are encouraged to start more business and hence increase national output.
Mark Bonello Ghio 3

Lowering or eliminating minimum wage due to the minimum wage, companies must
pay their employees a certain wage. But if this is reduced or eliminated, the costs of
production will decrease, and therefore the company will be able to invest the amount
saved into machinery and other assets that will affect the total output. But there is a
disadvantage to this. If minimum wages are decreased, employees have the right to
go to their respected trade unions, and after meetings have been conducted and no
agreement is settled, employees may strike, leaving the company with totally no output.
Reduction of trade union power if the trade unions are not allowed the amount of power
that they have today, they cannot increase the wages of their employees to a level
greater than if there were no trade unions. With this, comes a lower labour cost and
production cost, which then can lead to investment in other assets.
Reduction in unemployment benefits the govt pays people a certain amount for not
working. If this amount is reduced, then the unemployed will be seeking a new job as
they will be better off if they actually worked. Even though the time lost cannot be
made up for through the production that they are about to do now, it still contributes to
the potential economic output, and also to economic growth.
And finally, privatisation this means that the govt sells a publicly owned firm (owned
by the govt) to a private company. The main goal for a private company is to create
abnormal profits. Therefore, the factors of production in the new owners will
be working much more efficiently and harder to be able to cut down on costs of
production and also to produce more goods or services. Government owned firms have
different goals to those of privately owned ones. These goals consist of decreasing the
unemployment rate, or providing a service to an isolated market.





(1,200 words)