The two supply-side policies

A “real” supply-side policy consists of implementing an economic policy that increases the supply of goods and services and labour demand: public support for investment and job creation, lowering taxes that have a negative effect on investment and employment. Such a “real” supply-side policy may initially require a large fiscal deficit. A “false” supply-side policy consists of reducing the generosity of welfare policies in order to finance a reduction in corporate taxes or a reduction in fiscal deficits. Such a policy may have positive effects (reduction of the windfall effects linked to welfare transfers, reduction in the risk of financial crisis), but these positive effects are threatened by the contraction in demand that they lead to. The European Union's fiscal rules are now forcing certain countries to use a "false" supply-side policy; it would be better if these rules included flexibility in the use of fiscal deficits when they are used to finance support for the supply of goods and services.