Economics, 3rd Edition

Supply-Side Policies in an Economic Slowdown

The economic problems facing many countries in the wake of the financial crisis have presented 

new challenges to policymakers. After several years of attempting to reverse economic decline 

through fiscal and monetary policy, attention is once again turning to the supply-side option.

Time to Look at the  

Supply-side Again?

Consider the scenario facing gov-

ernments in a number of European 

countries in 2013. Economic growth is 

barely above zero, inflation remains at 

levels above target, unemployment in 

some countries is extremely high but 

in others, whilst having risen, has not 

reached the sort of levels predicted 

or implied by the sluggish GDP growth 

rates. Interest rates are at historically 

low levels but concerns over the size 

of government debt mean that aus-

terity measures have to be pursued 

if confidence in the financial markets 

in the government and its policies is 

to be maintained. This means that the 

fiscal options open to governments 

are very limited; if anything, taxes 

have to be increased and government 

spending cut back further if targets to 

reduce debt are to be realized. With 

the further options for monetary and 

fiscal policy  

looking exhausted do 

supply-side options offer any hope? 

Why would  supply-side policies fare 

any better? One suggestion is that the 

problems facing the UK  government 

in 2013 is that there are major struc-

tural deficiencies in the economy. 

The fact that inflation in the UK had 

been way above target (an aver-

age of 3.2 per cent for the five-year 

period prior to 2013 compared to a 

target level of 2.0  per  cent) would 

suggest that demand deficiency is 

not the problem. The fact that unem-

ployment had not risen to the sort of 

levels predicted after the financial 

crisis, accompanied by increases 

in employment rates, further hint at 

the problems facing the UK not being 

with a lack of demand.

The stagnant economic growth in 

the UK and a number of other European 

countries would suggest that solu-

tions lie with further monetary policy 

options such as more quantitative 

easing and/or, as had been advocated 

by the UK Labour party in opposition, 

that it was pertinent to borrow in the 

short-term to stimulate growth by 

spending on projects to kick-start the 

economy. In an interview with the 

Asahi Shimbun, a Japanese news 

service in March 2013, the outgoing 

Governor of the Bank of England, 

Mervyn King, said: ‘I think govern-

ments in the industrialized world do 

need to understand the importance of 

supply-side policies, such as deregu-

lation, in order to ensure that demand 

will recover, not just in order to make 

the economy more efficient, but as a 

mechanism for supporting current 

demand.’ Around  the same time, 

the  New Statesman magazine pub-

lished a list of 20 recommendations 

for the Spring 2013 Budget for the UK 

Chancellor. Part of the recommend-

ations included some supply-side 

reforms such as a Small Business 

Incentive Scheme which included 

exemptions from regulations for small 

businesses, such as not having to pay 

the minimum wage for those under 21,  

abolishing national pay bargaining 

in the public sector, simplifying plan-

ning legislation and encouraging local 

councils to cooperate in identifying 

sites for new Garden Cities. Such calls 

for a renewed focus on supply-side 

policies might suggest that the fiscal 

and monetary options are indeed 

exhausted and that the solution to the 

problems of sluggish growth in many 

European countries and in the UK, lie 

in the longer-term restructuring of the 

 economy to improve capacity.