The Government's Economic Objectives
What Does a Government Want for the Economy?
Every government — regardless of its politics — pursues a set of economic objectives. These are the targets it tries to hit when managing the economy. Think of it like steering a car: there are several instruments to watch at once — speed, fuel, temperature — and letting any one of them go wrong causes problems. The four principal objectives are: economic growth, full employment, price stability, and a satisfactory balance of payments. Governments also pursue further aims such as a fair distribution of income and environmental sustainability.
The four principal economic objectives of government are: economic growth, full employment, price stability (low inflation), and a satisfactory balance of payments. Governments also pursue further aims, including a fair distribution of income and environmental sustainability.
Economic Growth
Economic growth means the economy is producing more than it did before. When growth is positive, businesses earn more, workers receive higher wages, and the government collects more tax revenue to spend on public services. The UK government aims for sustainable growth — growth that can continue without causing harmful inflation or environmental damage. In practice, around 2–2.5% is often cited as the UK's sustainable long-run trend rate of growth (note: 2% is the inflation target, not a growth target).
Growth matters because it raises living standards: if the economy grows faster than the population, each person has access to more on average. However, growth alone does not guarantee that everyone benefits — the gains can be concentrated among the already wealthy, widening inequality.
Low Unemployment
Full employment is the goal of ensuring that virtually everyone who wants work can find it. High unemployment is costly in multiple ways: individuals lose income and purpose; the government must pay out more in benefits while collecting less in income tax and National Insurance; and the economy wastes productive capacity that could have generated output. Governments therefore aim to keep the unemployment rate as low as possible without triggering inflation.
Inflation is the enemy of price stability. When prices rise quickly, people’s savings buy less, businesses struggle to plan for the future, and exports become more expensive for overseas buyers. The Bank of England has a formal target of 2% inflation per year, measured by the Consumer Prices Index (CPI). At 2%, prices are rising slowly enough that consumers and businesses can absorb it — but low enough that savings retain their value over time.
If inflation rises well above 2%, the Bank of England's Monetary Policy Committee (MPC) will typically raise interest rates to cool spending. If inflation falls too far — or prices actually fall (deflation) — consumers may delay purchases expecting further falls, which slows the economy. Price stability therefore sits in a “Goldilocks zone”: not too hot, not too cold.
Balance of Payments
The balance of payments records what a country earns from selling its goods and services abroad (exports) versus what it spends on foreign goods and services (imports). The current account is the most closely watched part. If the UK imports far more than it exports, it runs a current account deficit. Persistent large deficits can be a problem because they mean the country is effectively living beyond its means — borrowing from abroad to fund consumption. Governments aim for a position where exports and imports are broadly in balance, or at least where any deficit is manageable.
A current account deficit means a country is importing more than it exports. This is not automatically bad — the UK has run a deficit for many years — but a large, growing deficit signals a potential loss of competitiveness and may require overseas borrowing to finance.
Fair Distribution of Income
Even when the economy is growing, not everyone shares the benefits equally. The government therefore has an objective of reducing income inequality. It pursues this through progressive taxation — taking a higher percentage of income from higher earners — and through spending on welfare benefits, public healthcare and education. A highly unequal society tends to have lower social mobility, more crime, and worse health outcomes. However, reducing inequality costs money and can involve trade-offs with other objectives.
Protection of the Environment
Governments increasingly treat environmental sustainability as a macroeconomic objective in its own right. Economic growth can damage the environment through carbon emissions, resource depletion and pollution. Governments set targets to reduce emissions, invest in renewable energy, and use taxes on pollution to change behaviour. The challenge is that these measures can raise costs for businesses and consumers in the short run, creating a potential conflict with the growth objective.
The most important insight in this topic is that the objectives often pull against each other. Pursuing one objective can make it harder to achieve another. Here are the most commonly tested conflicts:
Growth versus inflation. When the economy grows rapidly, consumers have more money to spend. This surge in demand can push prices up — causing inflation to overshoot the 2% target. The government faces a choice: keep stimulating growth and risk higher inflation, or slow the economy to control prices.
Growth versus the balance of payments. A booming economy increases consumer incomes, and people tend to spend some of that extra income on imported goods. This worsens the current account deficit. Growth that is too fast can therefore damage the balance of payments position.
Reducing unemployment versus controlling inflation. If the government cuts interest rates or increases spending to create jobs, this stimulates demand — but excess demand can fuel inflation. Economists describe this as the “inflation-unemployment trade-off.”
Growth versus environmental sustainability. More output generally means more energy use, more transport and more waste. Rapid economic growth tends to increase carbon emissions and resource use, conflicting with environmental targets.
Growth versus income equality. In periods of strong growth, profits and returns to capital often rise faster than wages for low-income workers, widening the gap between rich and poor. Redistribution through taxation may dampen the incentive to invest, potentially slowing growth.
Why Governments Must Prioritise
Because the objectives conflict, no government can maximise all of them simultaneously. Priorities shift depending on the state of the economy. During a deep recession, growth and employment take priority. When inflation spikes, price stability becomes the most urgent concern. A government might also face external pressures — a global rise in oil prices, for instance, pushes up inflation and worsens the current account at the same time, forcing difficult choices. Understanding these trade-offs is one of the most important skills in GCSE Economics: the ability to explain why a policy used to achieve one objective might damage another is exactly what evaluation marks reward.