Bill Jamieson: Why GDP is losing count in our inscrutable economy

Output figures fail to reflect intangibles such as well-being. Picture: Tolga Akmen/Getty

What explains the onward march of digital technology and a massive speed-up in information processing – but dismal figures on productivity?

Why is it that despite record inward investment and resilient consumer spending, business and household confidence remain dismally low?

Welcome to the world of paradox economics. Forecasters today are divided between predictions of a recession in the next 12 months and projections of continuing if subdued economic growth.

“Blame Brexit” is the universal cry – with an almighty Hallowe’en clash now looming between the UK government and the European Commission.

Brexit uncertainty has much to answer for. The Scottish Chambers of Commerce have provided a commendable – and commendably urgent – list of what now needs to be done, including automatic registration for key trade simplifications, clarification of intentions on the UK Shared Prosperity Fund – the proposed replacement for EU monies – and (most heartfelt of all) “a one-year moratorium on all policy measures that increase business costs.” Amen to that.

However, there are deeper problems about deficiencies in the measurement of our economic performance. For years we have bowed before the god of Gross Domestic Product (GDP), the most commonly used economic measure. It is followed with an intensity that belies growing doubts over its scope and accuracy. And these matter, because GDP is at the centre of economic forecasting and government policy-making.

So, can we count on how the modern economy works? The latest issue of the National Institute for Economic and Social Research (NIESR) review carries a timely clutch of in-depth analysis on various aspects of economic measurement. The centrepiece is a paper by economist Andrew Aitken on Measuring Welfare beyond GDP.

The broad outlines of Aitken’s critique will be familiar. He argues that while GDP does a reasonable job of measuring the marketable output of the economy, it should be downgraded, with more attention given to measures that reflect well-being.

His paper reviews developments in measuring welfare beyond GDP, including incorporating information on the distribution of income and wealth in the National Accounts, using time use as a measure of welfare, and the welfare consequences of “free goods”.

Only half of investment by firms is in physical capital, such as buildings and machinery. The other half is in intangible assets, such as branding, software and training. This has been true for the past two decades or more in the UK, but only if you step beyond measures in the National Accounts, which include only some intangible assets.

In another paper, economist Diane Coyle and David Nguyen argue that the digital transformation of the economy can pose serious challenges to traditional concepts and practices of economic measurement. They show how quality-adjusted prices of cloud services have been falling rapidly over the past decade – a phenomenon not captured by deflators used in official statistics. This has enabled the spread of data-driven business models and lowered entry barriers to advanced production techniques – for example, artificial intelligence and robotic-process-automation. In addition, while digital technologies make it easy for value to be transferred within or between companies, existing economic statistics often fail to capture this at all.

It is because of issues such as these that I have long felt GDP to be under-measuring our economic performance and certainly the efficiency gains made possible by information technology.

So, what should be done? Widen the scope of GDP? Publish a range of other indicators alongside the official quarterly release? But this immediately opens up questions about what exactly we should be measuring – and how. The problem of measuring intangibles, for example, is exactly that: how can they be measured more exactly? And can such measurements keep pace with the relentless pace of innovation?

The NIESR papers are a critical reminder that GDP is an incomplete reading of our economic pulse and conclusions drawn from it need to be qualified accordingly. Much further debate is needed here.

Barnett befuddlement Boris’s next challenge

If measuring the economy is challenging enough, making sense of the miasma of Scottish government funding presents a higher order of bafflement.

A report by the Public Accounts Committee last week said the Barnett Formula, used to calculate funding allocations for Scotland with baseline levels first determined in the 1970s, has become too complex.

Greater transparency, it said, was needed over the “complicated and opaque method” for calculating funding. In a gem of under-statement, it argues the current arrangements are “not explained in a way that is readily understandable to taxpayers” and need more parliamentary scrutiny.

Meg Hillier MP, chairwoman of the Public Accounts Committee, said of the “complicated and often opaque method for calculating funding levels for devolved administrations” that “the lack of detailed supporting information to parliament on this money makes it difficult for such ministerial decisions to be properly scrutinised”.

Of all the regions, Northern Ireland received the most spending per head (£11,190 in 2017-18), followed by Scotland (£10,881), Wales (£10,397) and England (£9,080).

The report has recommended that the Treasury should publish more detailed and transparent information about its funding decisions and explain how these are prioritised according to the needs of citizens across the UK.

A Scottish Government spokesman complained that the Holyrood administration “is no further forward than we were three months ago in knowing if there will be a UK spending review in 2019 and it is crucial that the UK government confirms its intentions so all devolved administrations have clarity.”

The Treasury says it will consider the findings of the report. For all the upheaval and uncertainty surrounding the new premiership, a commitment to clarify this from Boris Johnson when he visits Scotland cannot come soon enough.