Perversely, today’s surprise GDP figures have provided meat to all sides. Labour claims it was their action while in government that helped grow the economy 1.1% in the second quarter compared to the first. The Coalition claim the figures validate their approach of expedited deficit reduction, pointing to the fact that the majority of the 1.1% growth (around 1 percentage point of it) came from the private sector.
AFP reports Osborne as saying:
“Today’s figures show the private sector contributing all but 0.1 percent of the growth in the second quarter, and put beyond doubt that it was right to begin acting on the deficit now.
“While I am cautiously optimistic about the path for the economy, the job is not yet done.
“The priority now is to implement the budget policies which support rebalancing and help ensure … sustained growth.”
This is, of course, a bit misleading. GDP is calculated on a value-add basis – the difference between the value of a produced good or service, and the value of the materials used to create it.
What this means in practice is that the stated government contribution to GDP doesn’t accurately reflect government expenditure. For example, the government could buy £1bn of baked beans and fill the House of Parliament with them, and it would add very little to the government share of GDP. The value add would end up elsewhere – in consumer expenditure or exports/imports, for example.
So quite a lot of Government expenditure doesn’t show up in the government consumption share of GDP – this is the difference between what the Government produces on a value-add basis, and the total income it derives from taxation and borrowing (a lot of government expenditure is just a transfer from one group to another).
This is quite an important point in the context of savage cuts to government department budgets. When the government scales back expenditure, the feed-back effects are more broadly felt – we can expect wider consumption and capital investment to fall because some business and consumers rely on government transferring tax revenues to them (for which they may or may not provide services).
And if you scale back government expenditure by enough, you can start having material effects on non-Government components of GDP because of the way the national accounts are assembled. This may mean lower or negative GDP growth.
Osborne’s analysis of these results therefore seems a little naïve, or deliberately misleading.