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 fnal policy objective.
So for example, the government might want to achieve low infation. he main instrument to
achieve this might be the use of interest rates and a target might be the growth of consumer
credit or perhaps a rise in the exchange rate.
!nly a limited number of policies can be used to achieve the government"s objectives. here is
a huge amount of research conducted in trying to determine the e#ectiveness of di#erent
policies in meeting key objectives. $ndeed the debates about which policies are most suitable
lie at the heart of di#erences between economic schools of thought.
he 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 e&ciently
Direct controls or regulation of particular markets
Find out more about schools of thought
$f you want to delve a little deeper into the di#erences between schools of thought in
'conomics here are a few links to resources available on the (ikipedia web site%
)eynes and )eynesian 'conomists% http%**en.wikipedia.org*wiki*)eynes
+onetarists% http%**en.wikipedia.org*wiki*+onetarist
,lassical economists% http%**en.wikipedia.org*wiki*,lassical-economics
The Objectives of UK conomic !olicy
he following are the +acroeconomic of objectives of the .) government%
Stable lo" in#ation / the 0overnment"s infation target is $%&' for the consumer
price inde(. he +onetary 1olicy ,ommittee sets interest rates at a level it thinks will
meet the infation target over a two year forecasting hori2on. he )an* of ngland
has been independent since +ay 3445 but infation targets pre/date the decision to
hand over control of monetary policy to the 6o'. $nfation targets were frst introduced
into the .) in !ctober 3447 and have played a role in keeping in#ation e(pectations
under control.
Sustainable economic gro"th as measured by the rate of growth of real gross
domestic product sustainable both in terms of maintaining low infation and also in
terms of the environmental impact of growth 8for example the impact of growth on
levels of pollution, household and industrial waste and the use and depletion of our
scarce resources9.
+igher levels of capital investment and labour productivity this is designed to
improve the .)"s international competitiveness and boost our trade performance in
goods and services. he pressures of globalisation and the increasing competition
within the 'uropean Single +arket make this one of the most important long/term
objectives of the government. 6ritain needs to be competitive in an increasingly
globali2ed world.
+igh employment / the government wants to achieve full-employment a situation
where all those able and available to fnd work have the opportunity to work. 6ut
unemployment can never fall to 2ero since there will always be a degree of frictional
and structural unemployment in the labour market. :t the time of writing,
unemployment in the .) is at low levels, with less than three per cent of the labour
force out of work and claiming the ;obseeker"s :llowance.
,ising living standards and a fall in relative poverty for example the objective
of cutting child poverty and reducing pensioner poverty over the next few years this
will re<uire a continuation of economic growth together with taxation and beneft
changes to make the distribution of income more e<ual
Sound government -nances / including control over the si2e of government
borrowing and the total national debt.
The Bank of England was made independent in May 1! and has the job of setting interest
rates as part of monetary policy. "nterest rates are viewed as a key weapon in keeping control
of demand and in#ationary press$res in the economy. Most economists are in favo$r of Bank
of England independence beca$se economists are likely to make better j$dgements on
interest rates than politicians seeking re%election&
he government always emphasi2es 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 profts and employment.
!f course the vagaries of and uncertainties in developments in the global economy make this a
di&cult objective to pursue. : dose of good luck as well as sound judgement is re<uired given
the domestic and e(ternal shoc*s that can a#ect the 6ritish economy at any time=