Lost: £200bn of GDP
Today 2016 Q4 GDP figures showed growth of 0.6 %, and the economy continuing to survive the Brexit vote.
But we should not lose the wood for the trees. The economy is still bearing serious scars of the financial crisis and the austerity which followed.
Today’s figures also give us an annual figure for GDP growth in 2016 of 2%.
Taking a longer-term perspective, this is a poor outcome, continuing a run of poor outcomes since the financial crisis. Average growth since 2010 (the first year of recovery after the crisis) has been just 2% a year.
When the OBR first forecast outcomes under the coalition they expected growth to be well above this, at 2.4 % a year – and this was still pretty conservative.
The chart below shows annual growth figures from 1831, with averages across continuous expansions – defined here as runs of years broken by two consecutive negative annual growth figures. On this longer-term perspective, the 2% average since the financial crisis is the lowest episode on record (just) for a continuous expansion, and by far the lowest since the war. In the pre-crisis decades (1981-2007) growth averaged 2.8% a year. The closest previous episode of growth as low as that seen in the current episode was over the 1880s-1910s when growth averaged 2.1% pa. (Though pre-war figures should be approached with caution.)
Real GDP growth and averages across expansions and contractions, 1831-2016
This is not splitting hairs. Reduced growth is cumulative in effect and means the economy (and incomes) are greatly smaller than expected when the coalition took office.
We can estimate the impact of this by projecting GDP figures forwards in cash terms from 2009. The economy has increased in size from £1,520bn in 2009 to an estimated figure of £1,930bn in 2016 (see end for method). But according to the OBR’s original projection of growth of the economy in cash terms it should have grown to £2,150bn.
The shortfall is therefore £220bn – equivalent to nearly two NHS budgets.
GDP in cash terms: OBR expectation v outturn, £bn
And of course a much weaker economy means a much lower tax take. With government revenues accounting for around 36% of the economy, 36% of 220bn is £79bn. This corresponds very closely to the shortfall in public borrowing against original expectations of £84.8bn that the OBR have recently reported for 2015-16.
We are still operating under the delusion that cutting spending is somehow good for the economy. It isn’t. It damages the economy and the labour market, and so also damages taxes which means it doesn’t even repair the public finances. It doesn’t seem the greatest leap of logic to the idea that the opposite might be true. That government spending strengthens the economy, increases revenues and so supports the public finances.
(Notes on method: The ‘expectation’ is based on the OBR forecast nominal GDP growth rates in June 2010, but projected forward from the current 2009 cash figure, to put them on a consistent basis against current outturns, and hence updating for changes in ONS methodology for estimating GDP in the intervening period. The original OBR forecast extended only to 2015; I have projected a cash forecast for 2016 at the same growth rate they projected for 2015. The cash outturn for 2016 uses the newly published ONS volume figure and the OBR forecast for the GDP deflator.)