Government and the Macroeconomy · 1 question type
Past paper frequency (2018 to 2024)
This topic accounts for approximately 5% of your exam marks.
New emphasis in the 2027 syllabus; supply-side policy is now examined as a distinct policy alongside fiscal and monetary policy. Guidance based on specimen materials.
The syllabus names a set of supply-side measures. They fall into two broad groups: those that improve the quantity and quality of resources, and those that change the rules and incentives firms and workers face.
Spending on education and training raises the skills, knowledge and productivity of the workforce.
Better-educated and better-trained workers produce more output per hour and can move more easily between jobs and industries (greater occupational mobility). This raises the quality of the labour force, lifts productivity, and helps reduce structural unemployment because workers' skills match the jobs available. The effect is slow: the children educated today only enter the workforce years later.
is government investment in roads, railways, ports, airports, energy networks and broadband.
Good infrastructure lowers firms' costs of production: goods move faster and more cheaply, and workers can travel further to find work (greater geographical mobility). Better transport and communications connect firms to larger markets and make the whole economy more efficient, which raises capacity over time.
Measures that make work and investment more rewarding, so people supply more labour and firms commit more capital.
Define privatisation (2 marks)
What comes up: a 2-mark question asking you to define privatisation.
Write (two marks): (1) the sale or transfer of assets / firms (1) (2) from the public sector to the private sector (1).
Watch out: saying only "selling a business" is too vague. The credited answer names the move from public (state) to private ownership. Do not confuse privatisation with deregulation: deregulation removes rules, privatisation changes ownership.
Examples include widening the gap between wages and benefits so that working pays noticeably more than not working, and offering tax relief on investment so that firms keep more of the return. Stronger incentives draw more people into the labour force and encourage firms to expand their productive capacity.
Lower direct taxes (such as income tax and corporation tax) leave workers and firms with more of what they earn.
Cutting income tax can encourage people to work more hours or to enter the workforce, because each extra hour is worth more after tax. Cutting corporation tax leaves firms with more profit to reinvest in new machinery, technology and capacity, and can attract foreign firms to set up in the country.
change the rules governing how workers are hired, paid and represented, to make the labour market work more flexibly.
These can include making it easier for firms to hire and dismiss workers, adjusting the role of trade unions, and reforming benefit rules. The aim is to help workers move into jobs faster and to make firms more willing to take on staff. These reforms can be controversial because greater flexibility for firms may mean less security for workers.
Deregulation is the removal or reduction of rules and red tape that restrict how firms operate.
Fewer regulations lower firms' compliance costs and make it easier for new firms to enter a market. More competition tends to push firms to cut costs and improve quality. The risk is that some regulation exists for good reason (safety, the environment, financial stability), so removing it can have harmful side-effects.
Privatisation is the sale or transfer of assets from the public sector to the private sector.
The argument is that private firms have a profit motive that pushes them to be more efficient than state-run organisations, so output rises and costs fall. Critics point out that a privatised firm may simply become a private monopoly, raising prices rather than improving service.