Discuss supply‑side policies the German government could use ‘to improve its economic performance

Edexcel A-Level Economics Paper 2 June 2025 Extract

Discuss supply‑side policies the German government could use ‘to improve its economic performance’ (Extract A, line 6). (15 marks)

Paragraph 1

1. supply-side policies such as lower income taxes can be used to improve Germany's trend rate of economic growth
2. supply-side policies are policies that are used to increase a country's productive potential
3. lower income taxes can increase the incentives for people to work
4. this can encourage people to work longer hours, work harder to achieve promotions, or postpone retirement
5. additionally, it can encourage skilled workers to migrate into Germany
6. extract a line 16 says that there is a lack of skilled workers in Germany
7. as there is an increase in the supply of skilled labour, businesses would be able to increase productivity
8. this can lead to a right shift in the long-run aggregate supply curve, which causes real gdp to increase from y1 to y2.

Evaluation

1. however, one issue with many supply-side policies including this one is its opportunity cost.
2. this is the value of the next best alternative that was foregone
3. a decrease in income taxes would increase the budget deficit unless the government raised other taxes or cut spending on other services
4. the extract also mentioned other infrastructure projects, which would take up a lot of the government's fiscal budget.
5. if they did cut spending on other areas, this could actually worsen economic growth.
6. therefore, there would be a trade-off between increased levels of national debt or an increase in the growth rate

Paragraph 2

1. another supply-side policy that Germany could use is lower corporation taxes
2. this can also lead to an improvement in Germany's trend rate of growth but also an improvement in their current account
3. supply-side policies such as lower corporation taxes would mean that firms can retain more of their profits
4. not only does this encourage more businesses to set up in Germany, it also allows firms to increase levels of investment.
5. as firms spend more on capital goods, productivity and productive capacity also increases, since machinery is often faster than workers.
6. this can lead to a right shift in both short-run and long-run aggregate supply, which leads to a fall in the price level.
7. this makes German exports more internationally competitive and can lead to exports increasing, which leads to an improvement in the current account
8. exports are an injection into the economy as (X-M) is a component of aggregate demand, so this can cause further economic growth

Evaluation

1. the effectiveness of lower corporation taxes depends on other factors such as deregulation.
2. if firms do not have sufficient competition, firms could keep profits and use them to pay shareholders
3. if investment does not increase sufficiently, then productivity would not increase, so lower corporation taxes would worsen the budget deficit without improving macroeconomic performance

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