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Supply-side policies are long-term strategies aimed at increasing the productive capacity of the economy by using policies to improve the quality and/or quantity of factors of production.

Cutting corporation tax

A cut in corporation tax (the tax on business profits) will increase after-tax profits. This will leave more funds for ploughing back into investment. Also, the higher after-tax return on investment will encourage more investment to take place. More investment will increase both aggregate demand and aggregate supply.

Cutting income tax

Cuts in the marginal rate of income tax are claimed to have five beneficial effects: people work longer hours; more people wish to work; people work more enthusiastically; employment rises; unemployment falls. It may also persuade some workers to stay in the labour force for longer and persuade others to enter the labour force.

Reducing welfare payments

A reduction in welfare payments may encourage some of the unemployed to put more effort into searching for a job.

Increasing spending on education and training

Increasing spending on education and training may raise the quality of education and training. If this does occur, workers’ skills and productivity may increase as well as their flexibility and mobility.

Increasing spending on infrastructure

Increasing spending on infrastructure can reduce firms’ transport costs.

Trade union reform

Trade union reform may also increase workers’ flexibility and mobility and cut down on the number of days lost through strikes.


Privatisation can lead to increased efficiency, more consumer choice and lower prices.


Deregulation refers to the removal of barriers to entry, thereby making markets more competitive.

Provision of government subsidies

Government subsidies are widely used. These, in effect, lower fi rms’ costs of production and are designed to increase firms’ output. The government may sponsor research and development in certain industries (e.g. aerospace) or in specific fields (e.g. microprocessors).

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Supply-side policy

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