Wednesday, 13 June 2012


There are times when I find myself agreeing with both sides in an argument and end up scratching my head as to whether they’re arguing about the right thing.  Today’s extensive coverage in the Western Mail’s Business section of the GVA vs. GDHI argument is a case in point.
The Welsh Government has chosen to adopt GDHI as its headline economic measure and the Western Mail set about finding people to explain why that was the wrong measure to adopt.  They half succeeded.
The Welsh Government argues that GDHI is a better measure of people’s real wealth, whereas a number of economists argue that GVA is a better measure of economic performance.  It seems to me that they’re both right.  The argument isn’t really about what the ‘best measure’ is, but about what it is we’re trying to measure and why.  It was a question which was skated round, rather.
If we are setting out to measure the relative wealth of people in Wales compared to the UK average, then I’d agree that the Welsh Government has probably selected the best measure to do that.  What it is not, however, is an effective measure of Welsh economic performance.  Because it includes all household income, it includes the fiscal transfer which results from the taxation and benefit system, which to some extent hides or disguises underlying economic performance.
That highlights an interesting point in itself.  It is theoretically possible for Wales to reach 100% of the UK average for GDHI with absolutely no underlying improvement in the Welsh economy, simply by increasing the redistributive impact of taxes and benefits - and without any action at all from the Welsh Government.  I can’t conceive of any UK Government actually doing that, but that doesn’t mean that it couldn’t be done.  It might even satisfy many people in Wales that we were getting a ‘fair deal’; but it wouldn’t really mean that the Welsh economy was successful.
On the other hand, if we want to measure underlying success, then GVA is a much better measure.  It tells us the extent to which we are paying our way rather than depending on fiscal transfers.
The question that needs to be asked – and really doesn’t seem to have been probed in any depth – is why the Welsh Government feels that measuring household wealth is better than measuring the state of the Welsh economy.  Why measure equality of wealth rather than equality of performance?  Surely anyone concerned about the Welsh economy would be more interested in measuring to what extent we are economically self-sufficient – even if we never actually decide to turn that into political independence?
It is difficult to avoid the conclusion that the measure has been chosen primarily because it makes the numbers look better.  That would make it another victory for spin over substance.


Anonymous said...

'The question that needs to be asked – and really doesn’t seem to have been probed in any depth – is why the Welsh Government feels that measuring household wealth is better than measuring the state of the Welsh economy.'

You don't have to be Einstein to know why, the majority of Welsh voters, politicians and media are economically illiterate, so the WG pointing to Welsh GDHI which rises more often than not even in a recession as opposed to Welsh GVA which continues to fall is an easy way of generating economic 'success' and avoiding awkward questions from those who are more economically astute about their stewardship of the economy.

Anonymous said...

The problem is the Welsh Government doesn't or can't "steward" the Welsh economy. Their role is "economic development" which is the devolved version of Vince Cable's Business portfolio. It covers the allocation of grants to business. The Chancellor holds all of the economic levers for the UK, and if politicians wanted to increase Wales' GVA compared to the UK, then UK-level politicians would have to make things easier for the poorer parts of the state and harder for the wealthier parts of the state.

Welsh politicians in the Assembly can do very little about this.

Anon above for example says GVA "continues to fall"'; only as part of the UK average. On its own it has tended to grow. If a Welsh politician wanted to increase Welsh GVA compared to the UK average they would have to find a way of slowing GVA growth in south east England. Otherwise the situation would be completely dependent on England and the square mile.

John Dixon said...


"The problem is the Welsh Government doesn't or can't "steward" the Welsh economy."

I agree. The problems arise when they start claiming that they can or are doing so, as in the hopelessly exaggerated claims a few years ago for the effect of Pro-act and Re-act, or that they are going to do so, as in setting targets (since conveniently forgotten) for Welsh GVA compared to UK GVA.

It seems to me that it's going to be difficult to get away from a 'Wales vs UK Average' comparison. That's a pity, because the important measure isn't between what happens in Wales and what happens elsewhere, but the comparison bwteeen the level of economic activity in Wales and the sort of public expenditure, services and benefits which we wish to provide. Bringing those two into balance is the essential task; it's about being able to 'pay our own way'. And one does not need to support Independence to want to achieve that.

Instead of setting that as a clear target, and identifying what needs to be done - whether by the UK Government or the Welsh Government - to achieve that, we seem to have politicians who are more interested in claiming credit for the good and blaming others for the bad, and in choosing the measure which most makes them look successful.

Anonymous said...

Fair point John. The setting of the original 90% GVA target is a perfect example. The only way such a target could have been attained would have been if the UK Government also signed up to it. Because if your GVA % aim is relative to that of the UK, your % score will depend on economic activity in England.

Pro-Act and Re-Act had some real figures attached in terms of the number of jobs they saved and real workers they helped "bail out". But the programmes were too small scale to have altered the overall headline statistics. The Welsh economic development budget is or was about £220m per annum at the time. Welsh GVA was £45bn.

There is an obvious need for economic progress in Wales, a larger and more successful private sector and higher-paid jobs.

It is going to be impossible though to reach 90% of the UK GVA for as long as the south-east of England and City of London drag the UK average rate so far upward. Unless a future UK Government implements serious redistributive measures, or funds tax breaks on the periphery using the proceeds of the financial sector in the south-east. The UK functions very poorly as a union in that sense.

John Dixon said...

"The UK functions very poorly as a union in that sense.

Indeed. And Wales loses out badly as a result. We do need to be careful though about seeing this solely, or even mainly, as an 'England-Wales' issue. Peripheral regions of England suffer just as badly as does Wales. And even within Wales, the picture for the Cardiff area looks better than the picture for Wales as a whole.

Whether within the union or outside it, redistributive policies are required if we want to see fairness. And what we really need is not just redistribution of the wealth after it's created, but redistribution of the wealth creation. Much, much harder to do of course.