Economic Objectives of the Government

Most of the governments round the world have four main objectives. These are

  • Keep inflation under control
  • Maintain a low level of unemployment
  • Achieve a high level of growth rate
  • Maintain a healthy balance of payments.

Government Economic Policies

Government influences the economy through its economic policies. These are

Fiscal Policy

It is related with taxes and government spending. This policy is there to control inflation and demand in the economy. Usually government collects money in the form of taxes and spends money through its development expenditure such as building roads, bridge, defence, transports etc. Government constantly monitors the aggregate demand in the economy. Inflation rate gives the correct measure of the aggregate demand in the economy.

When the aggregate demand in the economy is high, prices rise, this shows that the economy is spending too much. In this case, the government will lower is expenditure budget and cut back on investment spending, such as on road construction and hospital equipment. On the other hand the government might also increase the taxes, which would take spending power out of the economy by leaving consumers and businesses with less income to spend.

In the opposite scenario, when the economy is heading for a recession and unemployment is rising, the government might increase its expenditure plans. There might be a reduction in taxes so as to leave consumers and businesses with higher disposable incomes.

Monetary Policy

Monetary Policy is related with a change in interest rates by the government or the Central bank. When the forecast for inflation is that it will rise above the targets set by government, then the Central Bank will raise its base rate and all other banks and lending institutions will follow. It is usually done when the economy is at the boom stage of the business cycle.

A higher interest rate will result in

Business will not be able to expand as they have to pay more interest to the bank for their loans and they have less profit left.
Businesses that are planning to take loan for expanding may postpone their decisions and wait for a cut in interest rates.
Consumers demand will also fall as they will not be getting cheap loans to pay for the buying new houses and luxury items.

If inflation is low and is forecasted to remain below governments targets, then the Central Bank may decide to reduce interest rates.

Supply side policies

It includes all those policies which aim at improving the efficient supply of goods and services. These might include:

  • Privatisation
  • Imparting training and improving the education level of the workforce resulting in higher skills.
  • Increase competition in all industries by removing entry barriers, thus leading to more efficiency.