GDP, National Debt, Productivity and…cake

So,the Qtr 1 2015 GDP statistics have just been released and GDP growth has shrunk on previous quarters.  A few weeks ago the Government was predicting 0.7% growth, earlier this month the ONS was hinting it might be nearer 0.4%.  In actual fact it was less than this at 0.3%.

It seems like the reasons are that the construction sector has significantly shrunk.  Is this ‘just one of those things’ / seasonality factors / evidence of the chickens coming home to roost as the coalition’s policies of encouraging a housing bubble and the expansion of personal debt to fund consumption start to hit the buffers?  Whichever of the above you think most appropriate  will depend less upon the data itself and more upon the political lens through which you view it.  By the way, the three above are not an exhaustive list by any means; it sometimes feels like whenever two economists are gathered together there will be at least three interpretations of the data.

Clearly it is not what the Coalition wanted to hear with only a few days before the election.  Ah yes, we will be told, but look at the (relatively) low levels of unemployment; that, surely, is evidence of a (again, relatively) robust economy.  Well, perhaps; the counter view might be ‘look at the level of tax income received by the treasury during the ‘recovery –  it has remained pretty much static’.  If there is a recovery it is yet to meaningfully manifest itself in increased taxation receipts –  and if it does not, can it really be called a recovery?  The OECD highlighted this concern in the assessment of the state of the UK economy released in February 2015.

They also had other concerns:  the low levels of business investment and spend on R&D; low levels of UK productivity relative to other advanced economies; burgeoning levels of inequality (with all that that means for subdued future economic growth) and, of course, the fear that we have another houseprice bubble building up.


The fact is, all the main parties manifestos are hugely reliant upon future growth in tax receipts –  which is driven by assumed levels of future economic growth.  It is going to take a lot, lot more than cutting welfare for a (mythical?) subset of ‘feckless poor’ or mansion taxes for either Labour or the Conservatives to achieve its target of National Debt to GDP being some 75% by the end of the next parliament.

Consumption is, once again, the economic activity which is, just, holding up the GDP performance.  But we know from bitter recent experience that where this is fuelled by escalating levels of personal debt and/or the erosion of savings rates that this cannot continue indefinitely.  Another bubble anybody?

Thoughts of resurrecting the ‘march of the makers’ (to use the Chancellor’s phrase of 2010) and exports being a  key component of future UK economic recovery now look a little forlorn in the face of the IMF’s recent announcement that it has revised down its projected average annual GDP growth rates for the ‘advanced’ economies to 2020 from some 2.5% pa to 1.6%.  Most of our export markets are just such ‘advanced’ economies.


Some pundits tell us that  this means  we must ‘stick to the task’ and that more cuts are necessary to restore economic confidence.  This despite the fact that the intellectual underpinnings of such a view (Ricardian Equivalence) are regarded as ‘bunkum’ by Keynesian economists on both sides of the political spectrum.  Not only this, the Office for Budget Responsibility (which was created by George Osborne and for which he must be applauded) have recently confirmed that the austerity of 2010 –  2012 was unnecessary and sucked growth out of the economy at a rate of some 1% per annum over the term of the Coalition.  As the OBR also notes, the UK was not in the same position as Greece in 2011, despite what the Chancellor claimed.  Given this, it would seem , at the very least, highly questionable that even greater austerity cuts in  new parliament would produce a different result and actually deliver the longed for GDP growth.

Productivity is regarded as a key challenge for the UK economy.  But if we have more people in work (albeit in low paid and perhaps insecure jobs) then productivity will suffer. But perhaps it is better this way than we have more out of work and greater automation of production.  Increasing productivity is often seen as a panacea for addressing the problem of low levels of disposable income in the UK.  Of course, there are other ways to deal with this –  addressing ballooning house prices would be one. And perhaps it also appropriate to consider whether the problem is not really one of increasing productivity (ie generating more) but how society divides up between labour and capital the existing cake….


If you would like to learn more on the subject, please contact Stephen Gregson. To read more of Stephen’s blogs, click here.