ECO17Supply-side Policies

• Supply-side policies: government policies that aim to increase the economy’s ability to supply goods and services.
• They work on the factors of production: more and better-skilled labour, more capital, more enterprise, and markets that work more efficiently.
• Aims: higher productivity (output per worker per hour), more productive capacity (the most the economy can produce), more efficient and competitive firms, and stronger incentives to work, invest and start businesses.
• Demand-side policies (fiscal and monetary) change how much people and firms spend. Supply-side policies change how much the economy can produce.
• Most supply-side policies take years to work.
• AQA names five: investment in education and training; lower direct taxes; lower taxes on business profits; trade union reform; privatisation and deregulation.

The five supply-side policies in AQA’s specification

Demand-side and supply-side policies compared

Supply-side policies

Government policies that aim to increase the economy’s ability to supply goods and services.

Productivity

Output per worker (or per worker per hour).

Productive capacity

The most an economy can produce with its resources.

Demand-side policies

Fiscal and monetary policies that change total spending in the economy.

• What: government spending on schools, colleges, universities, apprenticeships and retraining for adults.
• Skills raise productivity: skilled workers produce more per hour, so costs per unit fall and firms can pay higher wages.
• Occupational mobility: retraining helps workers move from declining industries to growing ones, which cuts structural unemployment.
• Apprenticeships combine paid work with training, so firms get the skills they are short of.
• Better information, such as careers advice and job centres, also cuts frictional unemployment by helping people find jobs faster.
• Drawbacks: expensive (an opportunity cost for government); slow, as skills take years to build; courses may not match the skills firms need; trained workers may move away.

How training can raise productivity and help several objectives

Apprenticeship

A job that combines paid work with training towards a qualification.

Occupational mobility

How easily workers can move between different jobs or industries.

Structural unemployment

Unemployment caused by changes in the economy, so workers’ skills are no longer in demand.

• Direct taxes are taxes on income and profits, such as income tax and National Insurance.
• The idea: lower income tax means people keep more of each pound they earn. This gives a stronger incentive to work, work more hours, train for promotion, or start a business, so the supply of labour and enterprise rises.
• Ways to do it: lower tax rates, or a higher tax-free Personal Allowance, which helps lower earners most.
• Dated example: in 2026–27, in England, Wales and Northern Ireland, the Personal Allowance is £12,570, with income tax at 20% (basic rate), 40% and 45% above it. Budget 2026 kept these thresholds frozen until April 2031. Last checked: 7 November 2026.
• Supporters argue lower taxes reward effort, keep skilled people in the country and encourage enterprise.
• Critics argue some people may work fewer hours, as they can earn the same take-home pay in less time; cuts to higher rates mostly help high earners and can widen inequality; and less tax revenue means less to spend on services such as education.

Direct tax

A tax on income or profits, such as income tax, National Insurance or corporation tax.

Incentive

Something that encourages people or firms to act in a certain way.

Personal Allowance

The income a person can earn before paying income tax.

• Corporation tax: a tax on companies’ profits.
• Dated example: in November 2026, the main rate was 25% (for profits over £250,000), with a small profits rate of 19% (for profits of £50,000 or less), as it has been since 1 April 2023.
• The idea: a lower rate lets firms keep more profit, so they have more to invest in machinery, technology, research and training. This raises productivity.
• It may also attract multinational companies to set up in the UK, bringing jobs and investment.
• Governments can also give tax relief on spending on new machinery or research, which targets investment directly.
• Critics argue firms may pay the extra profit to shareholders rather than invest; the government loses revenue; and skills, demand and stability may matter more to firms than the tax rate.

Corporation tax

A tax on the profits of companies.

Retained profit

Profit kept in the business rather than paid to its owners.

• Trade union: an organised group of workers formed to protect and further their rights and welfare, for example by negotiating pay and conditions.
• Trade union reform, as a supply-side policy, means laws that limit union power: for example, rules on strike ballots, notice before strikes, or limits on picketing.
• Supporters argue fewer strikes mean less lost output; firms can change working practices and bring in new technology more easily; and wages set closer to the market rate can mean more jobs.
• Critics argue weaker unions mean less bargaining power for workers, so lower pay and worse conditions and more inequality; and unions can help productivity by supporting training and good relations.
• UK governments have changed union law in both directions over the years. It is a political debate, so present both sides.

Trade union

An organised association of workers formed to protect and further their rights and welfare.

Trade union reform

Laws that limit the power of trade unions, such as rules on strikes.

Labour market flexibility

How easily firms can change the number, hours and tasks of their workers.

• Privatisation: transferring organisations from the public sector (owned by the state) to the private sector, for example by selling shares.
• Example: in the 1980s and 1990s, UK governments sold state-owned telephone, gas, electricity and rail businesses.
• Supporters argue the profit motive pushes firms to cut costs and innovate; competition gives consumers lower prices and better service; and the sale raises money for the government.
• Critics argue a private monopoly may raise prices or cut service to boost profit; jobs may be lost; and regulators are still needed to protect consumers.
• Deregulation: removing rules or restrictions on a business or industry, so it costs less to operate and new firms can enter.
• Example: allowing more firms to run bus or airline routes, or cutting paperwork (“red tape”) for small firms.
• Critics of deregulation worry about less protection for consumers, workers, safety and the environment.

Privatisation

Transferring organisations from the public sector to the private sector.

Deregulation

Removing regulations or restrictions on a business or industry.

Public sector

The part of the economy owned or run by the state.

Private sector

The part of the economy owned by individuals and companies.

AQA’s mark schemes also credit these as supply-side measures.

• Infrastructure: roads, railways, broadband and energy networks. Better infrastructure cuts firms’ transport and communication costs.
• Incentives to invest in new technology: grants or tax relief for research and new machinery.
• Benefit reforms to encourage work: for example, letting people keep more of their benefits as they start earning. These are contested, as tighter benefit rules can increase hardship.
• Help with moving for work, such as better information about jobs elsewhere, improves geographical mobility.
• Optional terms: economists sometimes call tax cuts, deregulation and privatisation market-based policies, and government spending on training and infrastructure interventionist policies. You don’t need these terms, but they help when comparing.

Infrastructure

The basic networks an economy needs, such as transport, communications and energy.

Geographical mobility

How easily workers can move to a different area for work.

• Fewer conflicts: boosting demand can raise inflation, but raising the economy’s capacity can bring growth and jobs without it. AQA’s mark schemes have credited the point that supply-side policies don’t conflict with many other objectives.
• But they don’t help much in a sudden recession, when the problem is too little spending: that needs demand-side policies.

Economic growth

An increase in real GDP over time.

Competitiveness

How well a country’s firms can sell against foreign rivals on price and quality.

• Weighing up: it depends on which policy, how big it is, how long you can wait, and the state of the economy (in a recession, demand-side help may be needed first).
• Many supply-side choices are political: people disagree about tax cuts, union laws and ownership. In a judgement question, say what your view depends on, and accept the other side has a case.

Opportunity cost

The next best alternative given up when a choice is made.

Time lag

The delay before a policy has its full effect.