Discuss the extent to which supply-side policies will lead to an improvement in standard of living.

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(b) Discuss the extent to which supply-side policies will lead to an improvement in standard of living. [15]

YIJC 2024

Introduction

Supply-side policies aim to improve the productive capacity of an economy by enhancing the factors of production, which can shift the Long-Run Aggregate Supply (LRAS) curve to the right. 

SSP1 - Education & Retraining

One of the most common supply-side policies is increasing subsidies on education and retraining programs. By investing in human capital, the government aims to improve the skills and productivity of the workforce. This can be achieved through expanding university education, vocational training, or providing subsidies to encourage firms to retrain their workers.

When the labour force becomes more skilled, the LRAS shifts to the right from AS0 to AS1, indicating an increase in the economy’s productive capacity. This shift allows for a higher level of potential output, from Yf0 to Yf1. In cases where the economy is already operating at full employment, such as in Singapore, this can lead to an increase in real national income from Y0 to Y1, resulting in higher economic growth.

The increase in real national income boosts disposable incomes, allowing citizens to afford more goods and services, thus improving the material standard of living. For example, a more educated workforce may earn higher wages, giving individuals the financial means to access better housing, healthcare, and education for their families.

Moreover, an increase in education levels also improves the non-material standard of living. Higher education is often associated with greater job satisfaction and a sense of fulfilment, as individuals may have better opportunities to pursue meaningful careers. This can lead to improved mental well-being and greater life satisfaction.

While investment in education and retraining can enhance both material and non-material standards of living, the effects may take time to manifest. Skills development requires long-term investment, and there is often a lag before workers can fully utilise new skills in the labor market. Additionally, not all industries may benefit equally from this policy, potentially leading to uneven improvements in standards of living across sectors.

SSP2 - Tax incentives and grants to encourage investments

Governments often use tax incentives and grants to attract foreign direct investment (FDI) and encourage domestic firms to invest in capital goods. By offering lower corporate tax rates or investment grants, the government aims to increase both domestic and foreign investment, which can stimulate economic growth and increase the standard of living.

Increased investment leads to higher Aggregate Demand (AD), as investment is a component of AD. When firms invest in capital goods, AD shifts right from AD0 to AD1, leading to higher national income and economic growth. This translates into increased disposable incomes for citizens, contributing to an improvement in the material standard of living.

Moreover, investment in capital goods can also increase the economy’s productive capacity, leading to a rightward shift in the LRAS from AS0 to AS1. This raises potential output, from Yf0 to Yf1, improving long-term growth prospects and potentially leading to a more sustainable improvement in living standards.

A real-world example of such a policy can be seen in Singapore, where the government provided significant incentives to attract Las Vegas Sands to invest in the Marina Bay Sands (MBS) integrated resort. This investment created jobs, enhanced the skill sets of local workers in the hospitality and events sectors, and raised wages. The development of MBS also provided new leisure amenities for residents, contributing to an improvement in both material and non-material standards of living.

However, the benefits of FDI are not without risks. Foreign firms may be "footloose" and could relocate or downsize during adverse economic conditions, leading to job losses and instability. For instance, Dyson’s sudden decision (October 2024) to retrench workers in Singapore highlights the vulnerability of relying on foreign firms for employment. This volatility can reduce the long-term benefits of FDI for improving the standard of living.

Conclusion

In conclusion, supply-side policies such as investing in education and providing tax incentives for investment can lead to improvements in both material and non-material standards of living. Increased skills and productivity, along with higher investment levels, boost economic growth, raise incomes, and enhance access to goods and services. However, the extent to which these policies improve living standards depends on their effective implementation and the time required for their benefits to materialise. Moreover, there are potential risks associated with FDI, as foreign firms may not provide stable, long-term benefits to the local economy. Therefore, while supply-side policies are a crucial tool for improving living standards, they must be carefully managed to ensure sustainable and equitable growth.