Objectives of Government Economic Policy
Business: Cambridge International GCSE (2027 Exams), topic 6.1.2
Objectives of Government Economic Policy
Government macroeconomic policy can be used to achieve a range of objectives. Objectives are the goals of government policy. Governments try to achieve aims using instruments.
Sustainable economic growth
- Economic growth is defined as an increase in real GDP. That is an increase in the real value of goods and services produced in an economy in a given period of time.
- Growth is important because it increases living standards, creates jobs, and provides governments with more tax revenue to spend on public services.
Price stability
- Most governments aim to keep inflation, or the rate of increase in prices, low and stable.
- Stable prices help people and businesses plan for the future.
- High inflation reduces the value of money, while very low inflation (deflation) can cause falling demand.
Low unemployment
- Governments aim to have low unemployment.
- Low unemployment means more people earning wages, higher consumer spending, and less government spending on benefits.
- High unemployment can reduce living standards and increase inequality.
Sustainable fiscal deficit and national debt
- A fiscal deficit is when a government spends more than it receives in tax revenue in a given time period.
- So, governments must borrow. Governments will aim to reduce this amount of borrowing.
- Keeping borrowing sustainable helps avoid a debt crisis.
- Too much debt makes it harder for governments to fund services like healthcare and education.
Low income inequality and poverty
- Governments do not tend to have explicit targets for inequality and poverty but they do not want it to get too large.
- Reducing inequality and poverty improves social stability, increases opportunities, and supports long-term economic growth.
Stable current account
- Although governments do not have explicit targets for the current account, they do try to improve their international competitiveness.
- A stable current account avoids large trade deficits, supports domestic industries, and reduces reliance on borrowing from abroad.