Supply-side policies are policies that are developed to increase the aggregate supply, a shift from left to right. These policies are aimed at enhancing the productive capacity of an economy and at the same time improve the quality and quantity of the factors of production. These policies lead to lowering of the unemployment rate in the country and contribute to long-term economic growth without causing the rate of inflation to rise (Fernández-Villaverde et al, 2014). Some of the supply side policies include lowering wages to free up labor market to make a lower paid job more attractive, creating money for banks to lend to investors and enhancing competitiveness and efficiency. The impact of the successful supply-side policy is a shift in aggregate supply. This research paper evaluates the extent to which the requirement by the Organisation for Economic Co-operative and Development (OECD) to its member states to employ the supply side policy by spending more on infrastructure project would boost weak economic growth. The United Kingdom is a the country under consideration
Supply Side Policies
Various factors affect economic growth; according to Pettinger (2017) economic growth refer to an increase in real GDP. He splits the factors affecting economic growth to the demand-side factors and supply-side factors. The economic growth of the United Kingdom has been fluctuating over the years. Pettinger (2017a) suggested that to increase the rate of economic growth, aggregate supply on aspects such as investment in infrastructure should be considered. This is because it increases productivity and reduces congestion. The policies that are aimed at making market and industries operate more efficiently and contribute to the faster underlying rate of growth of the OECD member states have been proposed (Green, and Denniss, 2018). The United Kingdom national infrastructural plan includes projects such as nuclear power station situated at Hinkley Point in Somerset. Investing in full fiber fats broadband would increase the rate of accessing the internet and working off some key infrastructure. It would also lead to innovation and invention. Figure 1 show that in the long run, the economic growth is determined by factors that influence growth of long run aggregate supply. Therefore, an increase in long run aggregate supply would lead to an inflationary rise in aggregate demand.
The OECD states that adequate infrastructure is necessary for sustainable economic and social development. The OECD Investment Policy review offers an overview of trends and policies in countries reviewed. The OECD (2015) report identified access to land, contract negotiation and legal and regulatory coherence as factors that underpin infrastructure development. The country should obtain money for infrastructural investment. Economic stimulation leads to the employment of people, this, in turn, may lead them to acquire education necessary for them to work on the established industry. The key policies of the OECD in regard to infrastructure development indicate that investment and infrastructure should be given the first priority. It is further required that the project is carefully evaluated to identify risks and allocate them appropriately. It is also required that sources of finance for infrastructure project be varied as possible.
Improving Infrastructure in the United Kingdom
There has been underinvestment in the infrastructure in the United Kingdom thus necessitating the establishment of a sound institutional framework to improve a long-term infrastructure strategy. Some of the infrastructure challenges include congestion in the road sector, bottlenecks experienced in the air transport sector and need to improve the digital infrastructure. There has been a call to maintain high competitive pressure and adoption of climate change in the sea and water transport. According to Agenor and Moreno-Dodson (2006) infrastructure contributes to productivity and economic activity as well as the well-being of the people in different ways. It can raise the productivity of private and public sector input. This, in turn, leads to an increase in return on private investment and increased durability of private capital. Multinational companies consider the infrastructure of the country before investing in those countries. Ahrend et al, (2014) observed that there is a great disparity between the South East, including London and the rest of the country in the terms of regional productivity and activation level. However, with the integration of physical transport infrastructure plan with land-use policies the country would reduce commuting time and lead to economic growth (OECD, 2014).The government of the United Kingdom has been spending less in infrastructure as compared to its peers in the OECD block
According to Crozet (2013), the government of the United Kingdom should ensure that it funds the extension of high-speed network and improve the second high-speed line (HS2). Compared to other member states of OECD, United Kingdom has a small high-speed rail system. Improving the HS2 rail line would stimulate economic growth in that it would cause productivity of the producers. Some of the reforms undertaken to ensure there is economic growth include the electricity market reform that is intended to replace the older power station. It is intended to get the best of existing generation in order to provide an uninterrupted supply of low-carbon energy generation technologies.
The government has taken an initiative aimed ensuring a continued maturity of technology and movement of technology. According to a report by DECC (2014), technologies should be enhanced to ensure that carbon price is high and sustainable enough to allow all generators of electricity to generate power without intervention. It also envisaged a situation where electricity power generated is sufficient and reliable to meet demand. When there is enough and reliable power, the producers tend to produce adequate products that would earn them profit (Alpert, Powell, and Pacula, 2017). Reduced cost of power would make an investor to consider investing in a country, however, if the cost of power is high, it would increase the cost of production thereby scaring away investors. Stern (2013) argue that the United Kingdom Network sector has less restrictive product market regulation with the energy sector receiving the highest competition followed by telecommunication and road sector. In the year 2010, the National Infrastructure Plan was launched aiming at providing a broader vision of infrastructure investment that is necessary for the United Kingdom (HTM, 2014)
Alternative Policies
Apart from the infrastructural sector, monetary and fiscal policies can be used by the government of the United Kingdom to improve economic growth. The fiscal and monetary policies plays a major role in stabilizing the economy cycle and initiate economic growth. Fiscal policy is a government decision in regard to spending and taxation. To stimulate economic growth, the government encourages an increased spending for good and services. When the government levies low tax, the consumer has a higher amount of money to spend. This leads to a higher demand of products; this consequently leads the production to go up. With an increased demand of the product, the companies would require more employees and would expand their factories or services. The unemployed people, who gain employment, gain some money that they can spend to buy goods and services. This in turn leads to economic growth. Government spending is the other factor that leads to economic growth; this is because when the government spends, it increases the money in circulation. On the other hand, monetary policies that affect how economy performs include the interest rate, cost of borrowing and mortgages. According to Pettinger (2018), monetary policy involves influencing the demand and supply of money through the interest rate. Raising an interest affects the exchange rate of exchange; this in effect affects the exporter and favors the importer. The supply-side effect of fiscal policy is the higher income or corporation tax reduces the incentive to work or invest. This in turn led to slow economic growth. These policies are used to lower the rate of inflation and ensure there is a balance of payment. Figure 2 shows the method of reducing inflation by use of the fiscal and monetary policy. Reducing inflation by use of fiscal policy involve increasing taxes to lower spending. While Figure 3 shows an expansionary fiscal policy that employed to boost economic growth. This policy directly creates job and economic activity by injecting demand into the economy. It enables unused savings to be utilized and idle resources to be put into work. This way, it encourages investment.
Comparison and conclusion
The application of monetary and fiscal policies to stimulate economic growth is a short-term objective that cannot be sustained in the long-run. The cost incurred in the development of infrastructure is high in the short-run; however, its benefits would be felt in many years. Development of railway lines, power station and road transport in the United Kingdom would attract the investors who in turn employ the people and invest in the key sectors of the country. This way, the economy of the country grows. This would lead to lowering of the unemployment rate and increase the income distribution. Therefore, employing the OECD policies that encourage infrastructure development net would lead to the growth of the economy.
References
Agénor, P.R. and Moreno-Dodson, B., 2006. Public infrastructure and growth: New channels and policy implications (Vol. 4064). World Bank Publications.
Ahrend, R., Farchy, E., Kaplanis, I. and Lembcke, A.C., 2014. What makes cities more productive? Evidence on the role of urban governance from five OECD countries. OECD Regional Development Working Papers, 2014(5), p.0_1.
Alpert, A., Powell, D. and Pacula, R.L., 2017. Supply-side drug policy in the presence of substitutes: Evidence from the introduction of abuse-deterrent opioids (No. w23031). National Bureau of Economic Research.
Crozet, Y. (2013), “High Speed Rail Performance in France: From Appraisal Methodologies to Ex-Post Evaluation”, ITF Discussion paper, No. 2013 -26, International Transport Forum.
DECC (2013), Implementing Electricity Market Reform, Department of Energy and Climate Change.
Fernández-Villaverde, J., Guerrón-Quintana, P. and Rubio-Ramírez, J.F., 2014. Supply-side policies and the zero lower bound. IMF Economic Review, 62(2), pp.248-260.
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, pp.1-15.
OECD (2014), Private Financing and Government Support to Promote Long-Term Investments in Infrastructure, OECD Publishing.
Pettinger, T (2017), Factors affecting economic growth Retrieved on June 11th , 2018 from https://www.economicshelp.org/blog/2671/economics/factors-affecting-economic-growth/
Pettinger, T (2017a), How to increase economic growthRetrieved on June 11th , 2018 from https://www.economicshelp.org/blog/4493/economics/how-to-increase-economic-growth/
Pettinger, T (2018), Monetary Policy vs Fiscal Policy Retrieved on June 11th , 2018 from https://www.economicshelp.org/blog/2253/economics/monetary-policy-vs-fiscal-policy/
Figure 1
Source: https://www.economicshelp.org/blog/2671/economics/factors-affecting-economic-growth/
Figure 2: Reducing inflation
Source: https://www.economicshelp.org/blog/2253/economics/monetary-policy-vs-fiscal-policy/
Figure 3: Expansionary fiscal policy
Source: https://www.economicshelp.org/blog/2253/economics/monetary-policy-vs-fiscal-policy/
