Macroeconomic objectives of governments

There are six main objectives which governments generally wish to pursue:

  • increased economic growth (real rises in GDP)
  • control of inflation
  • reduction in unemployment
  • restoration of equilibrium in the balance of payments on current account
  • a more equal distribution of income
  • protection of the environment

The order of priority varies according to the politics of a particular government and institutional arrangements such as the Monetary Policy Committee. Some governments see the control of inflation as the most important macroeconomic goal. Others, such as governments with a socialist leaning, would focus on the redistribution of income an the reduction of unemployment.

Trends in macroeconomic measures
In the years since the last UK recession of 1990-92, the UJ has seen economic growth at a trend of between 2 and 3% per annum, and inflation hardly reaching 3%, although cost pressures from increasing commodity prices threaten to push inflation over the 3% ceiling at the time of writing.

Unemployment, as measured by the Labour Force Survey, has settled at just over 2.6 million (8%) in 2010, with the claimant count at a low of 1.52 million in April 2010.

The trade in goods of the balance of payments is currently recording a £100 billion deficit, while the current account deficit as a whole is £2 billion. The deficit is wider during periods of higher economic growth, wich as the late 1980s, early 2000s and 2005. THe UK has the third largest current account deficit in the world, after the USA and Spain. As the dollar has been falling against the pound this is expected to worsen, but as the slowdown is exported from the USA to the global economy, the current account is likely to see a degree of self correction. The pound has fallen against the Euro, which is by far the most important trading currency in the UK, and this is likely to lessen the deficit.

The distribution of income described on the national statistics website shows a widening durring periods of economic growth, but other factors that help to explain this uneven distribution include accelerating wages at the top end of the scale, a fall in male participation in the workforce, an increasing number of workless households, and changes in the tax and benefits system.

Perhaps the least achieved objective is the protection of the environment. Clear and unambiguous indications are given in national statistics of carbon emissions. The Kyoto Protocol, ratified by 170 countries (but excluding the USA), states that by 2012 the developed countries will reach a carbon emissions level 5% below their 1990 levels. Although the UK has seen some improvement, it is not on target. The EU Emissions Trading Scheme set up in 2006 has not yet led to a carbon reduction, but as the prices of permits rise this situation should improve.

While each of these objectives can have serious effects on economic agents if it is out of control, some clearly have a more immediate impact on people’s lives. For instance, unemployment not only means lost income byt can mean a long-term reduction in a person’s employability through loss of skills and training. However, it might be that the government cannot solve unemployment in the short term. Many economist believe that too much cushioning of the unemployed results in an inefficient labour market, and that competition and increased incentives for those out of work are a better approach to dealing with unemployment.

Similarly, inflation of 2% is not thought to be a problem, ans as long as incomes move in line with inflation there will be no serious side effects. Most people’s wages, and also student grants and pensions, are adjusted in line with inflation, and so reducing inflation below this point is not a priority. However, as inflation rises there comes a point where it erodes international competitiveness, discourages foreign inward investment, and causes income redistribution away from savers to borrowers to such a degree that it destabilising effects become a major concern.

A current account deficit on the balance of payments is of no concern to governments if there is enough trust in the capital markets and the value of currency. It is, however, a sign that a country may be overspending relative to it’s income and at some point the outflow of money will have to be compensated by inflows. The UK has international investments abroad with enormous earning potential, which may me an the balance will be restored uf the situation is left to itself (lassiez faire). Many economists think that the UK government should not try to rectify a current account deficit with demand management. However, most agree that supply side policies should be used to restore competitiveness in the long run.

Perhaps the most contentious of policy objectives is the idea of taxing the rich and giving to the poor. Some would argue that redistributing income from the rich to the poor through taxes and benefits is simply unfair, destroys incentives and reduces the work ethic. The main drawback with social expenditure is that is has little effect on reducing poverty; some argue that it can even create a ‘dependancy culture’. However, extreme poverty is debilitating and leaves potential workers caught in a cycle of weakness. They may be unable to sustain permanent employment at the available rates of pay due to personal circumstance, dependants, a lack of skills or the high cost of housing.

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