© The Financial Times Ltd 2015 FT and 'Financial Times' are trademarks of The Financial Times Ltd.
December 5, 2012 7:27 pm
Since delivering his first Budget in June 2010 time appears to have stood still for George Osborne and the economy.
Two Budgets, two Autumn Statements and many growth plans later, economic output in the third quarter of this year stood at £361bn, just £2bn or 0.6 per cent higher than two years earlier. The public finances appear the same too. In 2010, the chancellor said the structural deficit would be eliminated in five years. He still requires another five today.
While Mr Osborne concedes “there are no miracle cures” for Britain’s stagnation, the Treasury believes things are not as bad as the headline figures suggest.
Ed Balls, shadow chancellor, delighted in taunting the government with them in the House of Commons on Wednesday. “The longest double-dip recession since the second world war now followed by the slowest recovery in the last hundred years,” he said, citing official figures.
Britain’s recovery from this recession is slower than for any past downturn for which reliable data exists and the gross domestic product dip now is longer and deeper than any since the war. With output still 3.1 per cent below the peak in 2008, Britain’s growth is performing worse than every other Group of Seven economy bar Italy.
Increasingly, however, there is dissatisfaction with the use of GDP as the sole arbiter of an economy’s performance. Andrew Dilnot, chairman of the Statistical Authority said last month that while the national accounts, over which he presides, were “a thing of great beauty, great elegance and significance ... the idea that the change in the level of GDP is a good measure of everything that’s gone on in the economy doesn’t seem to be right”.
Speeches such as this from respected independent figures have come as music to the Treasury’s ears because Britain’s economic performance on other measures since 2010 is much better than for GDP.
The level of employment has already surpassed the 2008 peak and on this measure, the downturn is the shortest and shallowest since the war. “The UK has a higher rate of labour force participation than either the US or the euro area,” the Treasury boasted on Wednesday.
In his speech, Mr Osborne highlighted the 1.2m new jobs created in the private sector since the coalition government came to office. Even though many of these jobs are part-time, the number of hours worked in Britain is also close to the pre-crisis peak. In the third quarter, hours worked was only 0.4 per cent below its 2008 level.
But there are also problems in the way GDP is calculated, which potentially exaggerated both the boom and the bust. The Office for National Statistics measures banking output based on the size of banks’ balance sheets, which expanded at breakneck pace before the crisis and are now shrinking quickly.
Headline GDP in Britain is also distorted by North Sea oil and gas extraction, which has been declining rapidly as it becomes more difficult to exploit the remaining reserves.
These two sectors account for 9 per cent of output so excluding them makes a big difference. The remaining 90 per cent or so of the economy has grown 4.5 per cent since 2009, the Treasury calculated, “and is now around 1 per cent below its pre-crisis peak”.
Excluding oil and finance, the British recovery still lags behind Germany’s and the US’s, but exceeds the eurozone’s and is on a par with France’s.
Mr Osborne is seeking, therefore, to move up from close to the bottom of the G7 recovery league to a mid-table position.
While many economists sympathise with the chancellor that GDP is not the only relevant measure of economic performance, the Treasury’s attempts to create a warmer glow around international comparisons comes unstuck in three important areas.
First, no country can ignore weak sectors of its economy just because the figures look bad.
Second, the combination of strong employment growth with weak output results in terrible productivity performance, a feature common to many European economies. This suggests the scope for rapid growth is limited as there are fewer unemployed resources to mop up as a recovery continues.
Third, the two sectors the Treasury likes to exclude happen to contribute disproportionately to tax revenues. While accounting for 9 per cent of output, they provide a third of corporate tax revenues. Their weakness explains why so much austerity is needed even though output in other parts of the economy has almost recovered to its pre-crisis peak.
For many Britons, therefore, the recovery might be close to complete, but they will have to pay much higher taxes and suffer worse public services because the cash cows of the past have lost their lustre.
Copyright The Financial Times Limited 2015. You may share using our article tools.
Please don't cut articles from FT.com and redistribute by email or post to the web.
Sign up for email briefings to stay up to date on topics you are interested in