The Impact of Infrastructure Spending on Economic Growth
The OECD (Organization for Economic Co-operation and Development) proposes an increment of funding on projects of infrastructure to enable a boost for the weak economic growth. The purpose of this paper is to evaluate to what extent such policies, for example spending more on infrastructure may boost economic growth. The core purpose of supply-side policies is to increase the Aggregate Supply (AS). The policies mainly increase funding for various public projects such as the development of infrastructure. They improve the quality of labor, land, capital, and entrepreneurship, which are the four factors of production. Supply-side policies may be time-consuming and hard to implement, but once they are successful, they may contribute to economic growth for a long period without altering the inflation rate.
The Impact of Improved Infrastructure on Economic Growth
Supply-side policies boost the economy of a country because one of their impacts is to shift the Aggregate Supply to the right. Spending more on infrastructure means there is a general improvement on social amenities such as roads. This improves the transport system of a country. When the government spends on improvement of the transport system, it is likely to reduce congestion and pollution, overcoming the market failure (Green and Denniss, 2018, p.3). Improved infrastructure means a reduction in the cost of transport, encouraging organizations to invest in that region. A country such as the UK is so crowded, that transport has been stated as one of the obstacles to its economic growth. In this case, it is a wrap of the road, rail, and air transport. Much as it may take time and plenty of resources to increase the transport capacity in major cities such as London, the cause is worthy of investment. Sourcing funds for infrastructural development will not alter the inflation rate, yet it is one of the long-term solutions to constant economic growth. This not only applies in the UK but is also applicable in other countries across the globe (Fernández-Villaverde, Guerrón-Quintana and Rubio-Ramírez 2014, p.250).
The Role of Infrastructure Development in Labor Movements
Development of infrastructural projects in the transport sector encourages immigration, which in turn encourages the movement of labor, a solution to labor shortages. This is both for the skilled and non-skilled job markets. A good transport system encourages people to move in and out of a country in search of jobs and places of settlement. Fields that have labor shortages such as engineering and medicine will have enough skilled labor to fill the shortages. Also, development of infrastructure alone as a project provides employment opportunities for people in engineering and construction. This boosts the economy of a country significantly over time.
The Impact of Education and Training on Economic Growth
Allocating more funds to infrastructure helps to improve the quality of education and training. With better education, labor productivity is improved thus increasing the Aggregate Supply. A free market normally has under-provision of education, thus leading to market failure. Increased education and training are one of the supply-side policies that have the potential to boost the economy of a country (Fernández-Villaverde, Guerrón-Quintana and Rubio-Ramírez 2014, p. 52). However, the involvement of the government to increase the quality of education and training may increase the taxes paid by citizens altering the inflation rate. This may also take a lot of time to implement, and therefore is not the best infrastructural development for boosting the economy. However, if the framework of the implementation is laid out properly and funds utilized well, it is a potential sector to boost the economic growth for a long period (Garfinkle 2005, p. 427).
The Impact of Healthcare on Economic Growth
Another supply-side policy is improved healthcare. A country’s economy goes hand in hand with the kind of healthcare offered to its citizens. This can be noted by comparing two countries with contradicting healthcare. A country whose people have a good healthcare system with a reliable insurance program that helps to fund their healthcare needs is likely to be at the front row compared to one where a great percentage of people cannot gain access to proper healthcare. Improved healthcare boosts labor productivity which in turn boosts the economy. Improved healthcare can be implemented by the renovation of health facilities and facilitation of educational programs that discourage people from unhealthy eating habits. Ill-health causes substantial costs on businesses. The supply-side policy can either be directly or indirectly implemented. For instance, improvement of health facilities is a direct influence on the economy on the country. On the other hand, policies such as increasing tax on alcohol works is an indirect policy to boost the economy (Garfinkle 2005, p.432). This reduces the morbidity and mortality rate thus reducing healthcare costs. When the government expenditure is reduced, the revenue can be used in other sectors that significantly boost the economy such as power stations in the UK.
The Impact of Power Stations on Economic Growth
Research shows that development of power stations in the UK has helped to boost the economy. Comparing the statistics through the years, the power stations boost the economy significantly. For instance, building more power stations ensure that there is a 24-hour economy and since most businesses are supported by power, they will flourish. Development of a power station also ensures that remote areas also get sufficient supply of the power, encouraging them to start businesses which develop the remote areas. This causes urbanization, which is a potential boost to the economy. Development of affordable homes affects the GDP of a country positively because it allows workers are working inexpensive places to reside there comfortably. This reduces immobility filling the labor shortages in areas that are considered expensive to reside in (Green and Denniss 2018, p.2).
The Limitations of Supply-Side Policies
Much as supply-side policies have their share of advantages which if they are successful, boost the economy of a country, they also have various limitations. For instance, the obvious effect of flexible labor markets is that they are likely to reduce costs for businesses. However, there is a likelihood that they may also cause job insecurity stagnating productivity. Therefore, this dismisses the guarantee that for supply-side policies being effective in sustainable economic growth.
The Importance of Other Factors in Economic Growth
Besides the supply-side policies, economic growth depends on other many factors as well such as trends in technological innovation and private enterprises. The government plays a major role in the growth of the economy, but it does not solely depend on it. This means there is a limit to which the government can influence economic growth. Supply-Side policies can only influence the Aggregate Supply, but they cannot affect the Aggregate Demand. Also, they may take a long time to affect the economic growth. For instance, things such as the improvement in education may not have any noticeable change in the economy for at least 30 years (Green and Denniss 2018, p.3). To conclude, supply-side policies are some of the influential factors of economic growth. They have an immense impact on the economy, regardless of whether it is short-term or long-term. However, they cannot solely be depended on.
References
Fernández-Villaverde, J., Guerrón-Quintana, P. and Rubio-Ramírez, J. (2014). Supply-Side Policies and the Zero Lower Bound. IMF Economic Review, 62(2), pp.248-260.
Garfinkle, N. (2005). Supply‐side vs. demand‐side tax cuts and U.S. economic growth, 1951–2004. Critical Review, 17(3-4), pp.427-448.
Green, F. and Denniss, R. (2018). Cutting with both arms of the scissors: the economic and political case for restrictive supply-side climate policies. Climatic Change.
