What you'll learn

• The four main economic objectives: full employment, price stability, economic growth and a sound balance of payments.
• Why trying to achieve one objective can make another harder to achieve.
• How other aims, such as reducing inequality and protecting the environment, affect government decisions.
• How to discuss winners, losers and trade-offs in exam answers.

3.2.2.1 Economic objectives of the government

The starting point: governments have targets

The macroeconomy means the economy as a whole: national output, employment, prices and trade with other countries. Governments set broad targets for the macroeconomy because economic conditions affect households, firms and public services.

Governments usually want several things at once. That is the difficult bit: the same policy can help one objective but damage another.

The main economic objectives of government policies

1. Maintaining full employment

Full employment means almost everyone who is willing and able to work can find a job. It does not mean unemployment is literally zero, because some people will always be between jobs, moving area, retraining or searching for better work.

Unemployment means people are able and willing to work but cannot find a job.

Full employment matters because more people in work usually means:

• higher household incomes
• more spending in shops and businesses
• more tax revenue for the government
• less need for welfare payments
• better living standards and wellbeing

A UK example is the furlough scheme during COVID-19. The government paid part of many workers’ wages to reduce job losses when firms had to close or reduce activity.

2. Ensuring price stability

Price stability means the average level of prices rises slowly and predictably. The price level is the average price of goods and services across the economy.

Inflation is a rise in the average price level over time. In the UK, inflation is usually measured using the Consumer Prices Index, or CPI, which tracks the price of a basket of common goods and services.

The UK inflation target is 2% CPI inflation. This does not mean every price rises by exactly 2%. Some prices rise faster, some rise more slowly, and some may fall.

The 2022–23 UK inflation spike, linked to energy prices, food prices and global supply problems, showed why price stability matters. If wages do not rise as fast as prices, people’s real purchasing power falls, creating a cost-of-living squeeze.

3. Achieving economic growth

Economic growth means an increase in the economy’s output over time. Output is usually measured by Gross Domestic Product, or GDP, which is the value of goods and services produced in a country over a period of time.

Real GDP is GDP adjusted for inflation. Economists use real GDP to see whether the economy is genuinely producing more, not just charging higher prices.

Economic growth can improve living standards because firms produce more, workers may earn more, and the government may collect more tax to spend on schools, the NHS and infrastructure.

However, growth is not automatically good for everyone. If growth depends on pollution, long working hours or insecure jobs, there may be moral and sustainability concerns.

4. Having a balance of payments

The balance of payments is a record of money flowing between the UK and the rest of the world. A key part is trade in goods and services.

An export is a good or service sold to another country. An import is a good or service bought from another country.

Governments usually want to avoid a large, long-lasting balance of payments deficit, where more money leaves the country than enters it through trade and other flows. A deficit is not always a crisis, but a persistent deficit can suggest the country is relying heavily on imports or borrowing from abroad.

Brexit changed trading arrangements with the EU, affecting some UK exporters and importers through extra paperwork, delays and costs. Energy price shocks also matter because the UK imports some energy, so higher global energy prices can worsen the trade position.

Conflicts arising from government objectives

A trade-off happens when improving one objective makes another objective harder to achieve.

For example, policies that increase spending may help growth and employment, but if demand rises faster than firms can increase output, prices may rise too. That helps growth but risks inflation.

The opposite can also happen. Policies to reduce inflation may slow the economy.

Other government objectives

Reducing inequality

Inequality means income or wealth is distributed unevenly between people or groups. Governments may try to reduce inequality through benefits, progressive taxation, education spending, public services and minimum-wage rises.

For example, increases in the National Living Wage can raise incomes for low-paid workers. But firms such as cafés, care homes or supermarkets may face higher wage costs. Some may raise prices, reduce hours or hire fewer workers, especially if demand is weak.

So reducing inequality can support fairness and living standards, but it may conflict with price stability, profits or employment if handled poorly.

Managing environmental change

Environmental change includes issues such as climate change, air pollution, biodiversity loss and resource depletion. Governments may aim to reduce carbon emissions, encourage renewable energy and improve air quality.

Environmental policies can create trade-offs. For example, charges on polluting vehicles may improve air quality, but they can be expensive for low-income workers who need a car for work. Green investment can create jobs in renewable energy, but some workers in high-pollution industries may need retraining.

Moral, ethical and sustainability considerations

An ethical consideration is about what society thinks is fair or right, not just what increases GDP.

The pursuit of government objectives can negatively affect groups of people:

• Raising interest rates to reduce inflation can hurt mortgage holders and firms with loans, even though savers may benefit.
• Pursuing rapid growth through airport expansion or road building may create jobs, but local residents may face noise, congestion and pollution.
• Cutting taxes to encourage growth may benefit workers and firms, but it could reduce government revenue for public services.
• Environmental taxes may support sustainability, but they can be unfair if poorer households spend a larger share of income on energy and transport.