What are supply-side reforms?

Chancellor planning further regulatory changes for British industry to be announced this autumn

Joe Sommerlad
Tuesday 27 September 2022 17:39 BST

Kwasi Kwarteng denies his mini-Budget is ‘a gamble’

Britain’s already-embattled new chancellor Kwasi Kwarteng will announce a package of supply-side reforms in October and November as part of a “medium-term fiscal plan”, the Treasury has said.

Mr Kwarteng will unveil “changes to the planning system, business regulations, childcare, immigration, agricultural productivity and digital infrastructure”, it was announced, in addition to further post-Brexit changes to the regulation of the UK’s all-important financial services sector to ensure it “remains globally competitive”.

The chancellor will then set out his fiscal plan on 23 November, which will contain “further details on the government’s fiscal rules, including ensuring that debt falls as a share of GDP in the medium term”, according to the Treasury.

The Office for Budget Responsibility will issue its full forecast for the calendar year on the same date, having been unable to assess Mr Kwarteng’s tax-slashing, heavy-borrowing “mini-Budget” before its announcement as it was not considered a formal Budget statement.

Supply-side reforms are, very simply, policy decisions introduced in order to make particular markets and industries more efficient and productive, the theory being that government interventions like lowering taxes and cutting “red tape” will increase the supply of goods and services and thus stimulate growth and employment.

An example might be relaxing Britain’s Sunday trading laws, which increases convenience for the consumer by allowing larger superstores to stay open for longer, giving shoppers greater choice and encouraging them to make purchases.

But the downsides of such a step have to be taken into account too.

Implementing a measure like this could eat into the tactical competitive advantage awarded to smaller shops and increase the likelihood of their larger retail rivals cannibalising trade and developing a monopoly. That in turn would end up leaving customers with fewer options and held hostage to flatlining prices.

As the above scenario illustrates, the success of supply-side policy adjustments is not guaranteed and some economists argue it is fundamentally flawed, in that the ready availability of goods does not necessarily create demand.

Other examples of government supply-side reforms might include offering tax reliefs to companies developing low-carbon technologies to encourage the adoption of renewables, building a new rail link between cities to encourage trade between those locations or investing in a faster broadband network to support businesses.

Mr Kwarteng has suffered a nightmarish start to life in No 11 Downing Street after the contents of Friday’s “plan for growth”, seen by most economists to disproportionately favour the rich, spooked international currency markets and sent the value of the pound sterling into freefall. Sterling dropped to an all-time low against the US dollar on Monday forcing Andrew Bailey, the governor of the Bank of England (BoE), to issue an emergency statement to calm the jitters.

The BoE’s Monetary Policy Committee (MPC) “will not hesitate to change interest rates as necessary to return inflation to the 2 per cent target sustainably in the medium term, in line with its remit”, Mr Bailey said.

The MPC is scheduled to gather on 3 November to discuss interest rates and is widely expected to introduce a further dramatic increase in a bid to stabilise the economy already mired in sky-high inflation and an associated cost of living crisis.

Labour characterised the chancellor’s plan to save £45bn – which included measures scrapping the 45p top rate of income tax and the cap on bankers’ bonuses as well as cuts to corporation tax, stamp duty and a proposed rise in national insurance contributions – as “reckless gambling”. That opinion has been shared by some Tory MPs, several of whom have reportedly already submitted letters of no confidence in Liz Truss’s three-week-old government to Sir Graham Brady’s 1922 Committee.

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