Macroeconomic objectives

Full employment is a situation where almost everyone who is willing and able to work has a job (1) — unemployment is very low, with only a small amount of unavoidable (e.g. frictional) unemployment remaining (1).

Reason 1 — money keeps its value (1 + 1). With stable prices, money does not lose its purchasing power quickly (1), so people's savings and incomes are protected and they can buy what they expect (1). Reason 2 — it helps planning (1 + 1). When prices are stable, firms and households can plan and invest with confidence (1), because they can predict future costs and prices, which encourages investment and growth (1).

Economic growth — a rise in the output of goods and services — brings several benefits. First, higher incomes and living standards. As the economy produces more goods and services, people's incomes rise, so they can consume more and enjoy a higher standard of living. Second, more jobs. To produce more output, firms usually employ more workers, so growth tends to reduce unemployment, which raises incomes further and cuts welfare spending. Third, more government revenue. With higher incomes and output, the government collects more tax revenue, which it can spend on healthcare, education and infrastructure, improving people's lives and supporting future growth; growth can also help reduce poverty. So economic growth raises incomes and living standards, creates jobs and provides the government with funds for public services — which is why it is a central aim. (It must, however, be sustainable to avoid inflation and environmental damage.)

These two aims can conflict because achieving full employment tends to push prices up. As a government succeeds in creating more jobs and reducing unemployment, more people are earning and spending, so total spending in the economy rises. With lots of spending and most people already in work, firms find it harder to meet the extra demand and may raise their prices — causing inflation. At the same time, with few unemployed workers left, labour becomes scarce, so workers and unions can bargain for higher wages; firms then pass these higher wage costs on as higher prices, again raising inflation. So pushing towards full employment can lead to higher inflation, which conflicts with the aim of stable prices. This is why a government often cannot achieve both at once and may have to accept slightly higher unemployment to keep inflation low, or accept higher inflation to keep unemployment low.

Both aims matter, so saying one is always more important is debatable. Why controlling inflation might be more important: high or rising inflation erodes the value of money and savings, hurts people on fixed incomes and the poor, makes it hard for firms to plan and invest, and can damage a country's export competitiveness; uncontrolled inflation can spiral and harm the whole economy. Why reducing unemployment might be more important: unemployment means lost output for the economy and lost income and hardship for the workers affected, with poverty and social problems (crime, ill-health) and higher government welfare spending; the human cost of unemployment is severe and concentrated on those out of work. Judgement: which aim is more important depends on the country's situation. If inflation is very high and rising, controlling it may have to come first, because runaway inflation harms everyone. But if unemployment is very high while inflation is low, reducing unemployment is likely more urgent because of the hardship and lost output it causes. Because the two aims can conflict (reducing unemployment can raise inflation), a government usually has to prioritise according to which problem is worse at the time. So neither is always more important — it depends on which is the more serious problem facing the economy.

Reducing income inequality (redistribution) is one of the government's possible aims, and whether it should be a main one is debatable. Why it should be a main aim: large inequality can mean the poor lack basic goods like food, healthcare and education, which is unfair and can trap families in poverty; reducing inequality through progressive taxes and welfare can raise the living standards of the poorest, reduce social problems (crime, ill-health) and even boost demand, since poorer people spend a larger share of any income they receive. Why it might not be a main aim: redistribution can have drawbacks — high taxes on the rich and on firms may reduce incentives to work, invest and take risks, slowing economic growth; generous benefits may discourage some from working; and the money spent has an opportunity cost. Other aims — growth, low inflation, low unemployment — may do more to raise living standards overall. Judgement: reducing income inequality should be an important aim, because extreme inequality is unfair and harms the poorest and society. But whether it should be the main aim depends on the country: in a country with severe poverty and inequality, it may rightly be a top priority, but it must be balanced against the need to maintain incentives and growth, since a growing economy also helps the poor. So redistribution is a legitimate and important aim, but usually one of several rather than automatically the single main aim.