Discuss supply-side policies the UK government could introduce to stimulate economic growth

Edexcel A-Level Economics Paper 2 June 2024 Extract

Discuss supply-side policies the UK government could introduce to stimulate economic growth. (15 marks)

Paragraph 1

1. One supply-side policy the UK government could use to stimulate economic growth is an increase in spending on infrastructure projects.
2. One example of this is HS2.
3. These projects aim to improve infrastructure and transport links around the UK, which allows firms to benefit from higher productivity.
4. Better transport links would allow businesses to meet more in-person, which means more can be done.
5. This leads to an increase in output per factor of production, which leads to an increase in long-run aggregate supply in the economy.
6. This leads to an increase in potential economic growth and a decrease in the price level, which was important as extract b line 19 mentioned that inflation was increasing due to quantitative easing.
7. Previously we had too much money chasing too few goods, so projects like HS2 in theory should lead to an increase in output, which can reduce inflationary pressure.

Evaluation

1. The downside of implementing policies such as HS2 to achieve economic growth and lower inflation is that there is a huge time lag. HS2 started in around 2012 but is still not complete to date, and the productive potential of the economy would only improve once people can make use of the faster train services.
2. Additionally, projects like HS2 create jobs so they also have an impact on the demand-side of the economy. This creation of jobs leads to an increase in incomes and an increase in consumer spending. As this is a component of aggregate demand, this can cause inflation to worsen, as the economy enters a positive output gap.

Paragraph 2

1. Another example of a supply-side policy which can stimulate economic growth in the UK is lower income taxes, which is a market-based policy.
2. Lower income taxes provide a greater incentive to work, since people keep more of their income.
3. The marginal tax rate for income above £50,270 is around 40%.
4. Extract A also mentions that these bands have been frozen until at least April 2028 despite inflation.
5. If the government reduced income taxes on the higher bands, this would incentivise people to work harder.
6. This could involve more people working overtime, or working harder to achieve a promotion, or an increase in the migration of skilled workers into the UK economy.
7. Overall, it would raise productivity and, therefore, there would be an increase in output.
8. This would shift the long-run aggregate supply (LRAS) to the right and reduce inflation rates in the UK.

Evaluation

1. One downside of implementing policies like lower income taxes is that it leads to an increase in the budget deficit, which is the difference between government spending and tax revenue in a given year.
2. As tax revenue falls, the budget deficit increases, which leads to an increase in the accumulation of national debt.
3. National debt is damaging to the UK economy as it means that the government have to spend more on interest each year, which has an opportunity cost as it takes up room in the budget.
4. In the past few years, around £100bn of the fiscal budget has to be allocated to interest payments alone.

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