Thursday 6 October 2022

Four negative numbers can become one positive number - with enough faith


The UK Government continue to insist that they have a ‘plan for growth’. They do not: they have a plan for tax cuts, half a plan for spending cuts, and a half-baked plan for deregulation, the sense of which the head chef, Jake, is having difficulty convincing even his fellow cultists about. Their ‘plan’ for growth consists of little more than an unshakeable faith that growth will inevitably follow the implementation of those three ‘plans’ despite a complete lack of corroborating evidence.

Leaving aside the question of whether growth is always desirable or even attainable anyway (infinite growth in the context of a finite quantity of resources, for instance, is at the very least questionable), and assuming that what the PM means (although she hasn’t actually spelled it out in so many words) is an increase in overall GDP, how likely is it that growth will actually happen? There are a number of different ways of calculating GDP (all of which should ultimately produce the same answer, although the presence of estimated numbers in all of them means that there can be some variation). One of the most common is the simple equation:

GDP = C + G + I + (X-M)

By the same token, any increase in GDP can be measured by the increase in the total of the four factors, which are: C = consumption, G = government spending, I = investment, and (X-M) = the difference between exports and imports. (Prof Richard Murphy has more here). For GDP to increase, simple arithmetic tells us that at least one of those four terms must increase. The problem is that the increasing gap between prices and income will reduce C, the government is due to reveal on 23 November (assuming that the markets and restive backbencher allow it to wait that long) by how much it will reduce G, I is outside the control of the government to a large extent, but investment in new plant, equipment etc looks like a risky assumption in a time of economic uncertainty, and we know that (X-M) is impacted directly by Brexit. A government which was serious about growth would want to ensure that household consumption could at least remain static rather than fall, it would ensure that government spending – particularly on infrastructure – rose, it would do its best to create the sort of stability which reduces the risk to businesses of making large investments, and it would seek a closer trading arrangement with the UK’s closest and biggest markets. In reality, a government which claims to be committed to growth is actively taking decisions in relation to all four of those factors which will either suppress growth or, even worse, ensure a recession. No amount of blind faith can make four negative numbers add up to a single positive one.

There is, though, another possibility, and that is that the PM is not referring to growth in GDP at all. She wouldn’t be the first to confuse ‘making people wealthier’ with ‘economic growth’, and leaping from there to an assumption that an increase in the concentration of wealth amounts to economic growth. It would make rather more sense of her statements, to the extent that making sense of them is a realistic possibility. If the wealthiest in society have more money in the bank, the inescapable corollary is that they will be wealthier as a result, and if all the people with whom you mix are in that ‘wealthiest’ category, it can be easy enough to believe that ‘people in general’ are getting wealthier. The salary of a back-bench MP puts MPs in the 95th percentile of employed people in the UK, and many of those with whom they socialise (and from whom they seek donations) will be in an even higher percentile. The numbers, to say nothing of the everyday experiences of the rest of the population, might tell a different story; but who needs numbers when you have faith? That would be almost like asking an expert.

1 comment:

Anonymous said...

They may be in the 95th percentile based on the salary of an MP, but most of the decision makers in the Tory party are in the cabinet with far higher salaries and a very large proportion of those outside the cabinet have second jobs so the reality is the figure is far higher. So the are even more out of touch out of touch with reality.