MANAGING THE ECONOMY:
Economic Objectives of the Government
What you need to know...
Main government objectives explained
- What does the UK government want to achieve through its macroeconomic policies? (see video below - after his confident introduction, it's a useful perspective on the main government objectives and some alternatives)
How do we measure economic growth?
The answer is GDP - watch the video below to confirm your understanding.
Economic growth: why is it important?
- You may ask yourself why economic growth is important? After watching the two videos below you should have a better idea of how to answer that question!
Economy Tracker: how is the economy performing?
- The BBC provides an up-to-date record of how the UK economy is performing through its Economy Tracker (click here to access it)
- How has the UK economy performed in terms of its main government objectives and their indicators (measurements)? - see below
- The UK continues to import more goods and services than it exports - this means the UK economy is running a Balance of Payments Deficit (aka Trade Deficit)
- Click here to find out more information about the UK's Trade Deficit
Inflation: why does it matter?
- Since 1750 inflation rates have averaged 2%
- Use the Bank of England's inflation calculator to work out the price of goods and services now compared to the past
- Back in March 2013 the rate of inflation as measured by CPI rose to 3.3%; however a person's household bills and expenditure may have risen by more or less 3.3%
- The BBC provides a useful budget calculator to indicate the true personal effect of the higher inflation rate; why not test it for yourself and/or your family
- In order to measure inflation the Bank of England looks at how prices have changed for a range of goods and services
- As you can see from the image opposite, the goods and services included in measuring inflation have changed over time
- The recent goods and services included in measuring inflation and those taken out are illustrated below! What goods and services would you include to accurately measure inflation?
- Why should we care about inflation? Some of the answers can be found by watching the video below!
Test yourself on Economic Objectives using the App below!
- It is very difficult for the UK government to achieve all its macroeconomic objectives at once; indeed one objective may conflict with another (see below and click on the links to further your understanding of key economic terms)
- Inflation versus unemployment: Falling unemployment might create demand-pull inflation ("too much money chasing too few goods"), as the employed will have more disposable income to spend; and/or it may cause cost-push inflation as labour costs for firms increase and they pass on these higher costs to consumers in the form of higher prices
- Economic growth versus inflation: with economic growth more goods and services are being bought and sold increasing the incomes of the employers and employees of these businesses; with higher profits and incomes these people will demand more and more goods and services which leads to (demand-pull) inflation, especially in the short term
- Economic growth versus a balance of payments: Strong GDP growth fuelled by high levels of consumer demand for goods and services might lead to a worsening of the trade balance as people demand more foreign imported goods and services
- Economic growth versus environmental sustainability: Rapid economic growth and development frequently puts extra pressure on scarce environmental resources threatening the sustainability of living standards in the future
- For stretch and challenge have a look at this pdf which explains in detail conflicts between macroeconomic objectives (this information is A-level standard)
Test yourself on Economic Growth using the App below
What about ethical issues of equity and equality in targeting these objectives?
- Equity is often based on the principle of fairness; this raises questions as to whether the government's persuit of its main macroeconomic objectives are fair for all people in the UK
- For example, does every member of the UK population benefit when the economy achieves economic growth?
- The UK government believes that it is ethically right to aim to minimise poverty and reduce income inequality (where incomes are too spread out and the gap between rich and poor is too wide)
- These alternative objectives are, in part, achieved through the tax and welfare benefits system
- However it would appear from the data (see above - click to enlarge) that the poorest members of society have seen a fall in real (adjusted for inflation) incomes in recent years, compared to a rise in real incomes for the rest of the population
- Also it's important to remember that a rise in 'average' incomes can hide inequalities in the distribution of income amongst groups and the whole population of a country (click here for more data and analysis)
Should income be distributed equally?
- Through a system of taxation and welfare benefits the UK government could redistribute income so that every person receives the same income; but is this equitable (fair)?
- How might an equal distribution of income affect the incentives of all members of the UK population from the unemployed to entrepreneurs running their own businesses?
- Check out the Economics Online website which has some interesting analysis and evaluation on the relevant issues
Stretch & Challenge: A more equal society is a more healthier and happier one
- Watch the video below and decide whether the distribution of income has any important implications for the health and well-being of a country's population
The Welfare State
- What is the welfare state?....over to you Ali G (click here)
- In its present form the welfare state in the UK is made up of the various benefits (e.g. JSA, Child Benefits, Housing Benefits) and services (Education, Social Housing, The National Health Service) provided by the government; however the welfare state has not always been in existence...
- In 1942, the Liberal politician William Beveridge, who the government set the task of discovering what kind of Britain people wanted to see after the war, declared that there were five "giants on the road to reconstruction":
In the years after the war, the Labour government tried to make this vision come true (see video below)
- There are a number of challengers facing the UK government when it comes to the welfare state
- As you can see below the life expectancy of the UK population has increased significantly over recent decades; as more people live longer the costs of providing pensions, benefits and healthcare increase; this creates problems over funding the welfare state
- It is no surprise that the government continues to increase the retirement age to help fund state pensions and other welfare services; this decision helps to compensate for a population that is living longer
- Also I'm sure you have seen the government's advertisements encouraging workers to participate in and contribute to private pension schemes with their employer; the government wants the working population to provide for themselves when they retire, reducing the burden on the welfare state in terms of the state pension pot of money
- The UK government faces a funding crisis for the welfare state; indeed as you can see from the graphic below the governments budget has been in huge deficit; it has had to make tough decisions on spending and the welfare state is one area where money has had to be saved
Welfare Benefits are changing
- In 2013 the UK government introduced reforms to the welfare system which included changes to the level and types of benefits given to people and the way in which they are paid (referred to as Universal Credit)
- There were 6 major changes to the welfare system
1. Universal Credit
2. Benefits Cap
3. Benefit Uprating
4. Disability Living Allowance replaced
5. Reduction in Housing Benefits
6. Localising Council Tax Benefits
- In the words of the UK Government, "Universal Credit will help claimants and their families to become more independent and will simplify the benefits system by bringing together a range of working-age benefits into a single payment."
-If you are unsure about the changes to the benefit system and what they mean, check out the Question & Answer section on the BBC's website
- Who will be affected by these changes to benefits and what will be their impact? (click here to find out)
- The reforms are partly designed to tackle the so called 'benefits culture' which exists in the UK (check out the video below)
- A useful glossary of key welfare system terms can be found here