Economics Tuition: Consider whether economic growth should be the top priority goal of a government. [15]

In 2007, the Singapore government increased the Goods and Services Tax rate to 7% and decreased the corporate tax rate to 18%.
(b) Consider whether economic growth should be the top priority goal of a government. [15]
Question Analysis

  • Explain why economic growth is a relatively more important goal while also recognizing that there can be conflicts with other economic objectives
  • Reach a reasoned conclusion of whether it should be the most important aim of government

Main Body

1. Explain briefly the key economic objectives of government and why it is important to achieve them:

  • Efficiency in resource allocation
  • Efficiency in resource allocation
  • Equitable income distribution
  • Full employment
  • Economic growth
  • Price stability
  • Healthy BOP

2. Explain how economic growth, in terms of actual and potential, might help to attain the other economic objectives of a govt:

a) Higher Employment

  • Assume economy is not at full employment, analyse how use of expansionary fiscal and monetary policies will raise AD → increase production, employment & NY → economic growth together with higher employment of resources are achieved without any conflict.
  • Higher national income → allows country to diversify → higher employment

b) Lowers inflation

  • If adopts supply side policy, not only is potential growth encouraged, a rise in productive capacity/ AS will lead to fall in GPL. Helps to avert inflation.

c) Healthy BOP

  • Analyse effect of fall in GPL on inflation rate → ↑ export price competitiveness → assume PEDx > 1 → ceteris paribus, improvement in BOP
  • Also, with higher income, can afford to spend on R&D → improve competitiveness of exports → improvement in BOP

d) Greater Equity in income distribution

  • Depending on the area into which government expenditure is channeled, greater equity in income distribution can result eg. govt investment in education and workers’ training
  • With higher national Income → makes it easier for govt to redistribute income to poor → greater equity

e) Higher SOL

  • With economic growth → higher national income → can afford to spend more on education, health care → economic development, improvement in lifestyle, especially beneficial for a developing countries → higher SOL

3. Analyse the costs of pursuing economic growth as a macroeconomic objective

i. Inflationary situation may arise

  • if the economy is already near to or at full employment , ↑ AE may lead to overheating and high inflation → increases COL

ii. May lead to structural unemployment

  • Due to economic growth, workers who are not able to meet the new demands in the work place may experience a mismatch of skills between what they possess and what is demanded in the new and growing economy → structural unemployment may hence arise.

iii. Worsens BOP

  • May worsen BOP due to importation of large amount of raw materials and capital equipment, especially for a country undergoing massive industrialization. Hence this may lead to fall in foreign reserves → may incur external debt → burden on future generations.

iv. Widens income gap

  • The fruits of economic growth may benefit industries which are the new niche sectors more than other → ↑ in income may not be shared equally by all. The bulk of the increase in income will be in the hands of the personnel in the sunrise industries → widening the income gap.

v. Non-material aspect of SOL may fall

Due to industralization, etc, may give rise to

  • Negative externalities eg. pollution, depletion of natural resources
  • Stress, heart diseases

4. Dependent on Prevailing Economic Conditions

i. Whether economic growth should be the top priority goal of a country is dependent on the prevailing economic conditions faced by a country.

ii. For example, in 2003, where S’pore experienced one of the highest unemployment rate, the top priority goal at that point in time was to implement policies to counter the high unemployment rates.

Conclusion

There is no doubt economic growth is a relatively more important objective. However, due consideration should be given to the various costs mentioned above as a result of the conflicts between the different goals. These may potentially destabilize the economy and adversely affect long term growth. Whether it should be the top priority goal depends largely on the relative priorities of the government and the prevailing economic situation.