AQA Specification focus:
‘They should be aware that the importance attached to the different objectives changes over time.’
Governments pursue multiple macroeconomic objectives, but the relative importance of each shifts depending on historical, political, and economic conditions, reflecting changing priorities over time.
Understanding Changing Priorities
Macroeconomic policy does not operate in a static environment. Instead, priorities shift as governments respond to evolving challenges, such as inflation, unemployment, economic growth, and balance of payments. Recognising how these priorities vary helps explain differences in policy emphasis across decades.
Core Objectives and Their Flexibility
Governments aim to achieve:
Economic growth
Price stability
Minimising unemployment
A stable balance of payments on current account
While these are always present, their ranking in importance changes. For example, during periods of high inflation, price stability may dominate other objectives, while in recessions, unemployment reduction may take precedence.
Historical Shifts in Policy Priorities
The Post-War Era (1945–1970s)
Following the Second World War, the priority was full employment. Governments in the UK and other advanced economies used Keynesian demand management policies, such as fiscal stimulus, to maintain job creation. Economic growth was also vital to rebuild economies and raise living standards.
The 1970s and Inflationary Pressures
By the mid-1970s, the global economy faced stagflation (simultaneous inflation and unemployment). Price stability became a new priority, as traditional Keynesian tools worsened inflation. Governments began to adopt monetarist policies focused on controlling money supply and reducing inflation.
Stagflation: A situation where an economy experiences high inflation, high unemployment, and stagnant growth simultaneously.
The 1980s and Supply-Side Reforms
In the UK under Margaret Thatcher, priority shifted further towards controlling inflation and enhancing supply-side efficiency. Privatisation, deregulation, and reducing trade union power became tools to improve long-run growth potential. Unemployment was tolerated at higher levels if it meant reducing inflationary pressures.
The 1990s to Early 2000s: Stability and Growth
During this period, many governments prioritised sustainable growth and low inflation. Independent central banks, such as the Bank of England in 1997, were tasked with achieving price stability through interest rate control. The emphasis was on stability-oriented policy frameworks such as inflation targeting.
Inflation targeting: A monetary policy strategy where the central bank sets an explicit inflation rate goal and uses tools, mainly interest rates, to achieve it.
The 2008 Global Financial Crisis
The global financial crisis marked another dramatic shift. The priority became avoiding deep recession and minimising unemployment. Expansionary fiscal and monetary policies were reintroduced, including quantitative easing, to support demand and restore financial stability.
Quantitative easing (QE): A monetary policy where a central bank purchases government and corporate bonds to inject money into the economy and lower interest rates.
The 2010s: Austerity and Fiscal Discipline
Following the immediate crisis response, some governments, particularly in Europe, shifted focus to reducing budget deficits and public debt levels. In the UK, austerity policies aimed to restore a balanced budget, even at the expense of slower short-term growth.
The 2020s: Pandemic and Beyond
During the COVID-19 pandemic, priorities again shifted to protecting employment and supporting incomes through furlough schemes, subsidies, and record fiscal expansion. Once recovery began, attention turned towards managing rising inflation and public debt, showing another transition in priorities.
Factors Influencing Shifts in Priorities
Economic Conditions
High unemployment pushes governments to prioritise job creation.
Rapid inflation shifts focus to stabilising prices.
Recessions bring policies aimed at boosting growth.
Political Ideology
Left-leaning governments often emphasise equity and unemployment reduction.
Right-leaning governments may prioritise low inflation and market efficiency.
External Shocks
Oil price crises in the 1970s redirected focus to inflation.
The global financial crisis shifted attention to growth and stability.
COVID-19 redirected resources to health and income support.
Long-Term Objectives
While short-run priorities change, governments also pursue enduring goals such as sustainable growth, equitable income distribution, and maintaining fiscal credibility.
The Dynamic Nature of Policy Priorities
The specification requires awareness that the importance attached to different objectives changes over time. This reflects the reality that policymaking is shaped by context rather than fixed preferences. For students, understanding these shifts is key to analysing government policy choices and evaluating economic outcomes.
FAQ
Crises expose weaknesses in existing policy approaches and force governments to act quickly to stabilise the economy.
After a financial crisis, priorities may shift from balanced budgets to stimulating growth. Similarly, during a health crisis such as COVID-19, protecting employment and household incomes becomes central. Once recovery is underway, focus may return to inflation, debt, or long-term sustainability.
Groups such as the IMF, World Bank, and OECD can shape domestic priorities.
IMF loan conditions may require reducing budget deficits.
OECD recommendations may emphasise structural reforms for growth.
Global agreements on climate change may increase the priority of sustainable growth.
This influence means national governments often adapt priorities to meet international expectations.
Governments are sensitive to electoral pressures. High unemployment or rising inflation can damage popularity.
If unemployment is visible, reducing it often becomes the main priority.
If households face rising living costs, tackling inflation may take precedence.
Shifts in public concern push policymakers to adjust emphasis, even when this conflicts with longer-term goals.
This trade-off reflects the short-term conflict between objectives.
Reducing inflation often involves raising interest rates or tightening fiscal policy, which dampens demand and increases unemployment. Policymakers may view price stability as more important in restoring investor confidence and creating conditions for long-term growth.
Technological change alters both economic challenges and opportunities.
Automation and AI can lead to structural unemployment, raising the priority of retraining policies.
Rapid innovation can boost productivity, allowing governments to pursue both growth and stability.
Shifts in global competitiveness encourage focus on education, research, and infrastructure.
Governments adjust priorities to harness benefits while managing disruptions caused by new technologies.
Practice Questions
Identify two factors that may cause the government’s macroeconomic policy priorities to change over time. (2 marks)
1 mark for each valid factor, up to 2 marks total.
Possible answers include:
Economic conditions (e.g. recession, inflationary pressures).
External shocks (e.g. oil price crisis, global financial crisis, pandemic).
Political ideology (e.g. left-leaning vs right-leaning government preferences).
Long-term structural concerns (e.g. sustainability, public debt).
Explain why governments may prioritise reducing unemployment in some periods but controlling inflation in others. (6 marks)
Up to 2 marks for clear explanation of unemployment as a policy priority:
High unemployment reduces living standards and tax revenue, increases welfare spending, and is politically sensitive.
Up to 2 marks for clear explanation of inflation as a policy priority:
High inflation reduces purchasing power, distorts decision making, harms competitiveness, and creates uncertainty.
Up to 2 marks for linking the priority to context or examples:
1940s–1970s: full employment emphasis.
1970s–1980s: controlling inflation became dominant (stagflation, monetarist approach).
Recent times: shifting between employment support (e.g. COVID-19) and inflation control (post-pandemic price rises).
Maximum 6 marks: candidates must show awareness of why different conditions lead to different priorities, not just describe them in isolation.
