Reports that UK GDP rose by 0.6% in the last quarter means that news outlets are full of articles heralding the end of recession and the start of recovery for the UK economy. Unsurprisingly members of the government have been milking this good news and taking as much credit as they can for having steered the country through dark times into a brighter future. In interviews George Osborne, the Chancellor of the Exchequer, implies that the improvement in GDP is a direct result of his government’s stewardship of the economy.
Gross Domestic Product (GDP) is a measure of economic activity, the detail of which is complicated but it boils down to the total value of goods and services that are bought and sold. So GDP tells us little more than how much money was spent in the UK economy in a given period. If the quarterly GDP figure is the same as or less than the previous two quarters we are officially in recession and officially miserable. If it’s higher than last quarter then the economy is growing and we’re officially feeling much happier.
So how does George Osborne influence the amount of money that’s spent in the economy? The most obvious way for the government to stimulate GDP is for it to spend money that it gets from taxation or borrowing, but Mr Osborne has made great play of the fact that he’s reduced government spending. He’s less inclined to admit that he’s made no reduction in taxation, but the two of these combined means that we’ve ended up with less spending money in the economy. This means that the government’s direct influence on GDP must be negative.
The other thing that the government has been doing with money is printing it (in collusion with the Bank of England through its quantitative easing programme) and giving it to commercial banks (in exchange for government bonds) in the hope that they will lend some of it into the economy where it will be spent, boosting GDP. Sadly, the bankers appear to be happy to take the money and use most of it to beef up their capital reserves (and continue paying themselves ridiculous salaries) so very little of it has found its way into places where it can be spent. In an attempt to encourage the banks to lend, the government has set up two schemes, one for businesses and the other for the housing market.
Funding For Lending allows banks to borrow cheaply from the government in the hopes that they will lend to businesses. Recent figures from the British Bankers Association show that lending to businesses has fallen since the scheme was introduced, suggesting that it hasn’t delivered much in the way of extra spending money into the economy.
Help To Buy offers house buyers in England cheap loans that are backed by the government so they can be used to fund a deposit on a house. Hard data on the effects of this are difficult to find but increases in mortgage lending and house prices suggest that the chancellor can take some credit for the increase in economic activity resulting from more houses being bought and sold in England.
However, if we look more closely at what happens to the money that’s lent by the banks as mortgages there doesn’t seem to be much for Mr Osborne to shout about. When mortgage money is used to buy a house it typically goes to a seller who has a mortgage to pay off, so apart from a bit of cash leaking into the economy via estate agents’ and solicitors’ fees, most of the money simply goes from one bank to another. In the case of someone buying a newly-built house a significant chunk of the mortgage money goes into the economy to pay for labour and materials, but new builds account for only 12% of house sales, about 80,000 annually. Those that are funded under Help To Buy will be a small proportion of these 80,000, so no great contribution to the increase of c.£2,265,000 in GDP.
I can’t tell whether or not the positive contribution to GDP of Funding For Lending and Help To Buy are enough to cancel out the negative contribution of George Osborne’s cuts in government spending but there’s no doubt that government policy had little or nothing to do with the 0.6% growth in GDP over the last quarter.
The truth is that politicians don’t have any real power over the economy, apart from the ability to drive it off a cliff (see Zimbabwe for details). GDP increases when people who have been hoarding money decide to spend or lend it into the economy and there’s little that George Osborne, Danny Alexander, or anyone else in government can do to influence these decisions.
We should also realise that GDP is a very clumsy way of measuring the health of our economy. If we all go out and spend our savings on beer and cigarettes we’ll see growth in GDP. Mr Osborne and his friends are not only kidding themselves that they’re in charge, they’re also kidding themselves that a rise in GDP means we’re on the road to recovery.