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AS Macroeconomics / International Economy

Macroeconomic Objectives

All governments have targets and aims for the economy – in this chapter we consider the main objectives of macroeconomic policy.

Objectives are the aims or goals of government policy whereas instruments are the means by which these aims might be achieved and targets are often thought to be intermediate aims – linked closely in a theoretical way to the final policy objective.

So for example, the government might want to achieve low inflation. The main instrument to achieve this might be the use of interest rates (now set by the Bank of England) and a target might be the growth of consumer credit or perhaps the exchange rate.

Only a limited number of policies can be used to achieve the government’s objectives. There is a huge amount of research conducted in trying to determine the effectiveness of different policies in meeting key objectives. Indeed the debates about which policies are most suitable lie at the heart of differences between economic schools of thought.

The main policy instruments available to meet the objectives are
Monetary policy –changes to interest rates, the supply of money and credit and changes to the exchange rate
Fiscal policy – changes to government taxation, government spending and borrowing
Supply-side policies designed to make markets work more efficiently
Direct controls or regulation of particular markets

Find out more about schools of thought

If you want to delve a little deeper into the differences between schools of thought in Economics here are a few links to resources available on the Wikipedia web site:

• Keynes and Keynesian Economists:   http://en.wikipedia.org/wiki/Keynes
• Monetarists:       http://en.wikipedia.org/wiki/Monetarist
• Classical economists:   http://en.wikipedia.org/wiki/Classical_economics

The Objectives of UK Economic Policy

The Labour Government has several current macroeconomic objectives:

• Stable low inflation - the Government’s inflation target is 2.0% for the consumer price index. The Monetary Policy Committee sets interest rates at a level it thinks will meet the inflation target over a two year forecasting horizon. The Bank of England has been independent since May 1997 but inflation targets pre-date the decision to hand over control of monetary policy to the BoE. Inflation targets were first introduced into the UK in October 1992 and have played a role in keeping inflation expectations under control.
• Sustainable economic growth – as measured by the rate of growth of real gross domestic product – sustainable both in terms of maintaining low inflation and also in terms of the environmental impact of growth (for example the impact of growth on levels of pollution, household and industrial waste and the use and depletion of our scarce resources).
• Higher levels of capital investment and labour productivity – this is designed to improve the UK’s international competitiveness and boost our trade performance in goods and services. The pressures of globalisation and the increasing competition within the European Single Market make this one of the most important long-term objectives of the government. Britain needs to be competitive in an increasingly globalized world.
• High employment - the government wants to achieve full-employment – a situation where all those able and available to find work have the opportunity to work. But unemployment can never fall to zero since there will always be a degree of frictional and structural unemployment in the labour market. At the time of writing, unemployment in the UK is at low levels, with less than three per cent of the labour force out of work and claiming the Jobseeker’s Allowance.
• Rising living standards and a fall in relative poverty – for example the objective of cutting child poverty and reducing pensioner poverty over the next few years – this will require a continuation of economic growth together with taxation and benefit changes to make the distribution of income more equal
• Sound government finances - including control over the size of government borrowing and the total national debt.

The Bank of England was made independent in May 1997 and has the job of setting interest rates as part of monetary policy. Interest rates are viewed as a key weapon in keeping control of demand and inflationary pressures in the economy. Most economists are in favour of Bank of England independence because economists are likely to make better judgements on interest rates than politicians seeking re-election!

The government always emphasizes macroeconomic stability as one of its main aims – it believes that the stability of the economy is a pre-condition for improvements in capital investment, productivity, company profits and employment.

Of course the vagaries of and uncertainties in developments in the global economy make this a difficult objective to pursue. A dose of good luck as well as sound judgement is required given the domestic and external shocks that can affect the British economy at any time!