Numbers prove everything … or nothing!

I have always tended to analyze National Statistics in my own particular way. My interest or purpose is somewhat different, I am not so much interested in the absolute figure for GDP, or the growth inferred, but, the money flows and how well the economy is doing in terms of generating wealth.  The 2014 UK GDP figures infer growth, however to the wider population that seems an illusion. Perhaps the population at large is wiser than the commentators.

GDP, at best, is a statistical representation of the total activity within the economy. It is somewhat debatable whether it is a good measure for determining the success or otherwise of the economy. If the overall activity is increasing, without a proportional increase in outputs, there could equally be a case to say the economy is failing. If we look on ourselves as an island, without needing anything from the rest of the world, then an increase in activity would be a sign of growth. Unfortunately, much as we like calling ourselves an island economy, we are dependent on the rest of the world for a fair proportion of the food we eat, the clothes we wear and the goods we consume, so, we are not an island unto ourselves, but part of the big ugly world!

If we look at the first formula for deriving GDP {GDP = (Sum of population consumption expenditure) + (Government Consumption Expenditure) + Investment/Savings} we should see that is close to being an operating cost for the economy as a whole, and if we exclude Investment/Savings it would indeed represent an accountant's definition of operating cost. Just as with a company, increasing cost without at least a proportional increase in sales is an indication of impending failure.

Our outputs, are our earnings from the rest of the world, and made up of a simple figure called current account. This is the sum of exports of goods and services, interest and dividends received from the rest of the world less the sum of imports of goods and services, interest and dividends paid to the rest of the world. If this figure is in positive territory then an increase in GDP (the cost of running our economy) does not matter, however if this figure is in negative territory an increase in GDP is indicative of erosion of it's competitiveness.

For the record the UK current account has been in deficit since around 2001. In 2010 when the current Government took office this amounted £30 billion the bulk of which was on the import export account In the tax year to 2014 it amounted to -£75 billion. The import export balance has remained around -£30 billion.

The last time the UK had control over the Government deficit and a current account surplus was under the Chancellorship of Kenneth Clarke and for the first two years of Gordon Brown while he kept to the Clarke spending plans. Our current Chancellor, if you exclude the effects of the Bank bailouts on the government deficit, has barely made a dent in the deficit, with this likely to approach £90 billion for the current calendar year as opposed to £98 billion he inherited!

When Cameron came into office he made much of paying our way in the world, this is not so much about government deficit but more about the current account. If the current account is negative we have to borrow or sell assets to pay for our consumption. We don't have to look far to see the transfer of assets to the outside world, the bulk of our utilities are now under foreign control. In plain English this means that forever we pay a percentage of our electricity, gas and water bills to foreign countries (with the reduction of corporate tax from 30% to 21% it is highly probable that the dividend going offshore exceeds the amount of corporate tax we collect).

Oh dear Mr Cameron you have failed dismally. You have presided over an increase in our current account deficit from £30 billion to £75 billion. Even your stated aim of getting rid of the Government deficit is in tatters, £98 billion to £90 billion in five years does not add up to much, does it?

Let me briefly look at our National statistics as published in 2014 Blue Book.

There are several significant changes in how we have derived our GDP. Most of these changes are in the interests of falling in line with Euro Stat's request to test whether the figures are exhaustive as well as some recommendations by the OECD. One of the effects of these changes is to increase the size of the informal economy by the specific inclusion of prostitution and drug smuggling.

Up until 2010 we included a flat estimate of 1.25% for the size of the informal economy. In the Blue Book of 2012 in order to reconcile 2010 figures this was increased to 1.7%, the latest change increases this to about 3%. One might say not altogether infeasible.

My own analysis of 2011 which looked at the money flows, would suggest that it is extremely unlikely that the population could have afforded spending an extra £10 billion on prostitutes and drugs when the 2011 figures, without this addition, already imply an increase of borrowings or withdrawal of savings by the public of £85 billion   

Other changes regarding the inclusion of research and development expenditure as well as unused ammunition produced are no less problematic. Generally research and development is simply part of a company's operating cost and any figure included under this heading as part of our Investment is largely anecdotal. As it is, we come pretty close to scraping the bottom of the barrel when we include the DVLA fee for personalized car registration plates as investment by the public!

The accuracy or otherwise of the figures is not really an issue as long as there is consistency in their compilation. My own conclusions about our national statistics are that a large part of the cash surplus on sale of homes is being used to fund consumption expenditure. Put another way we are using part of housing price inflation in arriving at our GDP or slowly eating up our capital, to fund our consumption!

Oh dear Mr Cameron, perhaps you, like Boris Johnson cannot see, that in selling prime real estate to a foreign company we will bleed forevermore as we pay our rent to a foreign country! Perhaps that is why you have done nothing to stop the widening current account deficit, where the bleeding on "factor account" (rent, interest and dividends) now exceeds the deficit on imports/exports. 

What can I say, Mr Cameron?

Except  … In spite of all your huff and puff, we are definitely not paying our way!

Addendum added on 1st January 2015.

As some who read this have not believed here is a graphic:

Historical Data Chart

 

 

 

 

 

The points on this graph are quarterly figures dating back until 1976, The dark dotted line is a moving average that better defines the trend. While the trend was downwards throughout Gordon Brown's chancellorship, under Osborne it has gone over the edge of the cliff and is now in free fall.

Another 5 years of "the plan", Mr Cameron, and we will be lucky if the world is prepared to pay a dollar for a pound! Currently an exchange rate of 1.38 to the dollar will correct the bleeding on factor account excluding foreign aid payments we make.

Oh!

 

   

 

 

 

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