Government can increase real GDP

Some replies to the new that real public spending grew by 1.6% contributing positively to economic growth said they did not think government could produce positive output. I have used official figures, based on normal GDP accounting conventions.

Presumably all agree that if someone sets up a fee paying school or a private healthcare business the income for those ventures add to GDP. Similarly if the state provides education and health care paid for by tax and borrowing that too adds to GDP. One of the main reasons for the positive increase in state output was more students educated and more patients treated by the state.

I have also been criticised for failure to understand causality. I did not comment on causes in the short piece I wrote. Some of the increased state spending resulted from its high borrowing and from the state of the economic cycle. Some came from positive decisions to increase spending as with overseas aid and EU programmes. Some came from increased numbers  needing services, and some from chosen service improvements.

The interesting thing is that high levels of borrowing-fiscal stimulus- and of spending have not prevented a downturn. The situation shows that action is needed to bring about the private sector led ecovery the government seeks.

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39 Comments

  1. lifelogic
    Posted May 26, 2012 at 10:17 am | Permalink

    I see more government gimmicks and PR stunts with the Mary Portas to kick-start high street renaissance (in a few selected high streets what about all the rest the government is killing or has killed), Cameron’s pretend war against prisoner’s votes and the ECHR and now Theresa May with the United Kingdom will stop migrants if euro collapses … “work is ongoing”. How will she do that leave the EU?

    PR spin froths and pathetic gestures with no substance as usual.

    The BBC seems to have so indoctrinated the whole of the country in socialist and wealth and anti business drivel that on tv and radio discussion programs no one (not even the supposed tories) can even say that “of course people should be allowed to sell their Olympic torches” that they have bought”, “or fire non performing or not needed staff”.

    • lifelogic
      Posted May 26, 2012 at 2:21 pm | Permalink

      Governments could indeed do positive things – it is just that they so rarely do. They just do stupid things like wind farms and PV gimmicks or try to buy votes. Worse still they encourage the private sector to do stupid things such as the PV drivel.

      You say “Action is needed to bring about the private sector led recovery the government seeks”. Indeed it is so why after 2 years has nothing been done?

      In order of importance.

      A sense of a smaller government pro business vision
      Functional Banking
      Lower taxation & smaller state
      Easy hire and fire
      Fewer regulations

      • Bazman
        Posted May 26, 2012 at 10:19 pm | Permalink

        Love lists. Me.

    • Bazman
      Posted May 26, 2012 at 10:29 pm | Permalink

      Where did you serve your time lifelogic? Or to put it another way. Where did you school?

      • lifelogic
        Posted May 28, 2012 at 9:27 am | Permalink

        A small northern grammar school since you ask.

        • Bazman
          Posted May 29, 2012 at 7:00 pm | Permalink

          Forced northern comprehensive myself. I was one of the spazzers imputed into the grammar school system and have been drilling ever since. LOL! I told you I would never help you..

  2. Paul Danon
    Posted May 26, 2012 at 11:05 am | Permalink

    Is there such a thing as genuine GDP – productivity that comes from the private sector? It’s madness to think that a government’s spending money raised through debt, tax or printing is genuine economic activity.

  3. Leslie Singleton
    Posted May 26, 2012 at 11:22 am | Permalink

    Okay, but why does anything the state does have to be described as State Spending (putting up the backs of those whose gut says that State Spending is part of the problem and rarely “good”) rather than say Health Spending? Presumably if Redwood sets up a Hospital that is described as setting up a Hospital not Redwood’s Spending. Pure ignorance on my part but the sort of question which if asked down the Dog and Duck would get you blank stares.

    • Leslie Singleton
      Posted May 26, 2012 at 2:30 pm | Permalink

      Yesterday I asked for an explanation for the rise in Spending being called a cut by Mr Balls (and now by a group campaigning chez Mr Clegg). The lack of the sort of reasoned reply which is your hallmark, or indeed any reply yesterday, spoilt my evening. Today I see Mr Heffer is telling us that Gov’t Debt which was 80% of GDP in 2010 will increase to 95% in 2013, which again doesn’t smack of cuts to me. Is there to be no attempt by anybody to reconcile this stuff with an explanation why different people are saying different things? Seems extraordinarily important to me that the population has a better undertanding of what is going on and even more important that Conservative MP’s (nudge nudge wink wink) rebut what Labour are saying, which as Mr Heffer says is becoming more plausible by the day.

      • uanime5
        Posted May 27, 2012 at 12:54 pm | Permalink

        The reason for this is simple. The Conservatives wish to be seen as a party that’s introducing austerity to cut the deficit, mainly because during the 2010 election they said they would eliminate the structural deficit in one Parliament. So it they admit that they’ve increased the deficit and massively increased the debt they won’t be able to blame Labour for the problems caused by the deficit and debt.

        Consequently Labour can claim that Conservative cuts are bad for the economy because the Conservatives won’t admit that they haven’t cut the deficit or debt.

        • Lindsay McDougall
          Posted June 1, 2012 at 12:06 pm | Permalink

          The coalition has cut the deficit but not as rapidly as I would like, with the consequence that total government debt is still rising more rapidly than it should. Those of you who pooh pooh deficit reduction should remember that the interest on total government debt is a significant proportion of public expenditure (11%?) and it’s still rising. So none of us is for turning.

          I haven’t yet had uanime5’s support for freezing public sector pay until it matches private sector pay – level for level. Why ever not? You do believe is fairness, don’t you? You tell us ever so often that you do.

    • lifelogic
      Posted May 26, 2012 at 9:12 pm | Permalink

      The point about state spending is that no one pays “at the point of use” so no one really cares what is delivered. Consequently it usually delivers very little, perhaps 10% of delivered true value as compared to cost.

  4. Denis Cooper
    Posted May 26, 2012 at 12:15 pm | Permalink

    The GDP statistic attempts to measure the volume of money transactions, as I recall using three methods of calculation which should arrive at very similar answers.

    It no longer bears a close relationship to the tons of steel produced or coal mined or wheat harvested; it can be diminished if people decide to economise by having their hair cut less often, and it can be augmented if people decide to seek light relief by gambling.

    So if the government continues to borrow money, directly from private investors or now indirectly from the Bank of England, and it continues to spend that money to pay its bills as it does, then the recipients of that borrowed money will have it to spend in their turn, and if that increases the volume of money transactions that will increase GDP.

  5. waramess
    Posted May 26, 2012 at 1:12 pm | Permalink

    Maybe as a technicality you could include government spending as part of Domestic Product but it isn’t really, is it?

    A private school or a private hospital are generating a return on capital invested (the lifeblood of all productivity) and this is the real test of “product”. Government spending is included in GDP because it is a (Keynesian) catch all for this particular statistic and has nothing at all in reality to do with the countries “product”.

    A state school or state hospital generates no return on capital invested at all, and in fact exists only by way of extracting “product” from society. In other words whilst counting government spending in the figures for GDP it is simply a means of measuring what the government have taken out of the private sector.

    To confuse the similar actions of private and state education as being the same is quite wrong.

    Certainly to count government spending as “product” leading to “growth”, particularly when it has been achieved through greater borrowing, is surely to miss the point entirely

    • Bazman
      Posted May 26, 2012 at 10:41 pm | Permalink

      The problem being as in banking, for society to exist and create wealth for the private sector. Much like the middle class social security system. Which of course does not exist. Oh really? It’s amazing how little we hear about this. Wonder why? Ram it.

    • Denis Cooper
      Posted May 27, 2012 at 9:02 am | Permalink

      I can’t go along with the idea that a state hospital produces no “return” while a private hospital may produce a “return”.

      Say that a young adult is hit by a life-threatening disease or accident.

      Very large sums of capital have been invested in raising and educating that person; if he dies all that investment must be written off, but if a hospital saves his life then that capital investment is preserved along with his life, and potentially he’ll have decades of productive work ahead of him.

      In such a case it’s close to immaterial whether or not the hospital accountant can say afterwards that treating him has produced a return on capital for the hospital, and it doesn’t matter a whit whether it’s a private or a state owned hospital.

      Of course it’s possible to invest too much capital in raising and educating children, more than they can ever repay over their adult lives, and especially so if the state allows them to spend much of their potentially productive years unemployed and on benefits, or they are forced to emigrate; and similarly it’s possible to spend too much on running hospitals, whether private or state owned.

      • waramess
        Posted May 27, 2012 at 8:36 pm | Permalink

        All capital invested in hospitals to provide the infrastructure is provided by taxpayers, whilst the hospitals are run without the need to provide the taxpayer with a return on that investment.

        This is not to say the hospitals do not provide a socially beneficial service it is to say however that government spending on hospitals is not a contribution to growth in the economy, whilst a private hospital providing a return on capital to its providers in a competitive environment is doing so.

        Just because the end result is the same does not defeat the argument: a burglar may have the same income as you but he is not contributing to growth whilst you are.

        • Denis Cooper
          Posted May 28, 2012 at 7:26 am | Permalink

          But the service provided by hospitals is not just “socially beneficial”, it’s also “economically beneficial” insofar as it prevents the loss or under-utilisation of the capital invested in raising and educating workers. If a hospital could estimate the economic value of the treatments provided during a financial year and put that added value into its annual accounts then state owned hospitals would (or should) be found to be providing a return on the taxpayers’ capital invested in their infrastructure. Looking at it just from the point of view of profits a hospital makes through charges paid by its patients must give an incomplete picture. Which would be preferable: a privately owned hospital which was providing treatments of no therapeutic value but which was nonetheless making a profit for its investors – and there have been clinics like that in the past, and no doubt there still are now – or a publicly owned hospital which did provide effective treatments but which showed no profit at the end of the year?

  6. Local Tory
    Posted May 26, 2012 at 1:24 pm | Permalink

    John, that was spot on. The first task is to win the political argument against the fantasy economics of the left which could lead to the ruin of the UK. Labour are still saying that government borrowing can give people what they want. Liberal academics are also arguing for a huge fiscal stimulus on the scale of WWII. It is true that in the 1930s a combination of issues pulled us out e.g. abandonment of the gold standard, an empire tariff wall that favoured the UK metropolitan manufacturer, housing investment (as one of my fellow contributors to your blog mentioned to me) and WWII, etc.

    However, that time around many institutions had been allowed to fall over, providing for a moratorium of sorts, and the state still had space to expand into. This time, we are still afloat but remain soaked in debt (and the de-leveraging will take years), and the modern big state is now business as usual. In the UK this has been further compounded by the Labour government having completely mismanaged the cycle fiscally.

    In reality, a fundamental law of financial economics that applies to both companies and governments is that debt can be OK until the probability of distress becomes unacceptable. The truth is that we simply don’t now have much fiscal room for manoeuvre. Focused small scale stimulus along the lines you have outlined is the only real option. This is also being accompanied by a monetary stimulus.

    Therefore, I agree that the private sector is going to have to pull out this time around. Cutting corporate tax rates is a good start. But the government could help cut other business costs too e.g. by keeping business rates down and with subsidies to supply business with energy at cost. We should also deal urgently and sensitively with the entrenched areas of regional structural unemployment. We need a nationally flexible labour market.

    • uanime5
      Posted May 27, 2012 at 12:58 pm | Permalink

      “We need a nationally flexible labour market.”

      If by this you mean uprooting people and moving them to where there are jobs then expect it to be greatly opposed. However if you mean more home based jobs this could be viable as people wouldn’t need to live near their place of work.

  7. stred
    Posted May 26, 2012 at 3:20 pm | Permalink

    Presumably, if HMG makes a number of variations to a defence contract, as with the decision to alter the launch system of the 2 (1 unwanted) aircraftless aircraft carriers, then the excessive, non-competitive and negotiated, charges will be registered as an increase in GDP. Taxpayers rejoice!

  8. forthurst
    Posted May 26, 2012 at 3:23 pm | Permalink

    “One of the main reasons for the positive increase in state output was more students educated and more patients treated by the state.”

    Obviously, the solution for the government is to keep importing more people from parts of the world were they have large families and marry blood relatives from choice.

    Is there really any reason why allowing the state to control an ever increasing proportion of the GNP would not be the way to maintain positive growth and full employment? Central planning by fallible mortals can lead to indifferent results viz a viz the USSR, so maybe the right mixture of central planning and corporatism for banksters, media companies and others is what is needed (by politicians, not us, obviously)?

    Why is GNP as opposed to GNP per capita, the appropriate measure of economic activity? The latter figure tells us whether we are likely to be in work and whether we can afford to pay for our way. The former figure simply tells us how badly Mrs May is doing her job. Why am I supposed to cheer when Mrs May allows ‘business leaders’ to import workers whilst putting English people on the dole?

    • Alan Wheatley
      Posted May 27, 2012 at 10:59 am | Permalink

      I agree, it is GNP per capita that counts.

      • sm
        Posted May 28, 2012 at 3:03 pm | Permalink

        Government can increase real GDP? GDP per capita would be better as would other measures such as miles driven per capita.

        If the chosen inflation deflator was lower for any reason , real GDP would be higher? Should we suspect this sleight of hand?

        Real US GDP? analysis link
        http://www.marketoracle.co.uk/Article34751.html

        Also should real GDP be deflated by a debt adjustment (private or public) and or other injection of money issued debt free or otherwise privately created interest bearing debt.

    • lifelogic
      Posted May 28, 2012 at 5:52 am | Permalink

      Exactly.

  9. Mike Stallard
    Posted May 26, 2012 at 3:45 pm | Permalink

    A little rider to your remarks on education.
    At the moment it is the Comprehensive or nothing.

    There are still a few – a very few – Grammar Schools around. Ours costs an affordable £10,000 a year. That deals with a tiny few.

    To get a public school education nowadays is well beyond even the richest people. £30,000 a year. This means the world is being scoured for pupils. The Middle Classes are being denied and that means that the children who get the first class education are no longer the ballast of a patriotic and noble Christian society, as they were during the days of Arnold at Rugby. They are now very rich Chinese, Arabs and possibly a few Russians.
    We badly need some schools which cater for the children of doctors, lawyers, even vicars and teachers. And these will have to be independent because the State has simply not got the ability to keep its hands off something which is does not understand.
    An enormous opportunity awaits anyone who starts up a Rugby for the 21st century.

    • uanime5
      Posted May 27, 2012 at 1:09 pm | Permalink

      What we really need is more humility in the middle class and less “I earn a lot of money therefore my child should get a better education that people who don’t earn as much money as me”.

      If you don’t like the existing schools then become a Governor and try to improve them.

      • lifelogic
        Posted May 28, 2012 at 6:01 am | Permalink

        Money has to have some advantages otherwise why would anyone bother to earn it.

        The private schools are often not really very much better they just have a better input of pupils with interested parents. They can also get rid of any who are disruptive. This makes their job relatively easy in comparison to the state sector.

        They perhaps give the children a different accent, attitude and sometimes polish and a bit more Latin and Greek to help them feel superior on occasions. Often, however, it seems the end product lacks any real drive and ends up as University drop outs, second rate lawyers or worse still Oxford PPE graduates.

      • Lindsay McDougall
        Posted June 1, 2012 at 11:52 am | Permalink

        No! If you don’t like existing schools, reinstate the grammar schools. We have a social mobility tsar called Alan Milburn, which is a joke considering that the grammar schools were one of the best tools for social mobility that there has ever been – and we abolished them.

  10. Brian Tomkinson
    Posted May 26, 2012 at 7:42 pm | Permalink

    The media and many poiticians talk about growth and austerity as though they are mutually exclusive. They are not. How can government borrowing money to stimulate GDP be sensible in current circumstances where the government is already planning to virtually double the national debt in just 5 years? What is the cost benefit analysis of such behaviour? The government wants growth primarily to increase its tax take, if that growth comes from government paid employment with borrowed money the government will have just increased the debt; it may have made a good headline but what will it have achieved in addressing its primary obligation to reduce the deficit? Large companies are sitting on £750 billion and need encouragement to invest, this would provide useful growth but with cabinet ministers like Cable in post there is no chance.

  11. simon
    Posted May 26, 2012 at 8:40 pm | Permalink

    According to the OBR (Office of Budget Responsibility) NET public expenditure is down by quite a lot – i.e. the government has reduced capital expenditure. The only reason that government spending is up is that it’s economically neutral spending has increased – i.e. more people are unemployed, interest payments have increased, ‘loans’ to the IMF, etc.

    If the government actually wanted to improve the economy – and it shows every sign of wishing to follow an astoundingly… unsound… ideological path that leads to a net reduction of income for the majority of the country – it would have to _increase_ capital spending. It produces short term increases in employment, and long term increases in GDP.

  12. BobE
    Posted May 26, 2012 at 10:16 pm | Permalink

    John, you and your party are fools, you know you will lose next time, You do nothing to change it. Your pension will be ok I assume. 2.5 years till a labour win.

  13. Lindsay McDougall
    Posted May 27, 2012 at 4:06 am | Permalink

    Other things that have not prevented a downturn are ultra-low interest rates, QE and their consequence, high inflation. They stimulate real GDP only for about a year; thereafter their effect on GDP is negative. We are well past that first year now.

    Meanwhile, banks don’t lend enough. There are two reasons. The first is that people and businesses are reluctant to borrow because at long last they are frightened of debt and they know that ultra-low interest rates are not sustainable. The second is that there is no confidence in banks because the Government has not forced full disclosure of toxic assets. It should. Remember that banks have to publish balance sheets; if they deliberately overstate the value of an asset, that’s fraud.

  14. Lindsay McDougall
    Posted May 27, 2012 at 4:25 am | Permalink

    “More students educated and more patients treated by the state”

    The first occurs because the government prefers to have young people in education rather than adding to the unemployment count. Given that in many cases the degrees are pretty sub-standard and the student motivation is poor, the benefits of this investment are marginal at best.

    The second occurs because most health care is provided free at the point of consumption, because people are living longer and because the elderly receive various perks which include free prescriptions.

    Recently, the medical profession – and most people – rejoiced in the fact that were better treatments in the pipeline for prostrate cancer. This is mainly a disease of elderly males, some of whom will go on to live to age 85, when they will have a 1 in 5 chance of becoming a dementia sufferer. This will not only render them useless but place a huge burden on their carers, often reducing the carer’s economic output. Investing in yesterday is just plain stupid.

  15. Steven Whitfield
    Posted May 27, 2012 at 9:35 am | Permalink

    The whole system seems to be geared towards increasing spending – the media’s eyes seem to be only on the growth figures with public spending hardly getting a mention.
    Few commentators have the savvy to work out the difference between usefull and the paying people to dig holes and fill them in again type of growth.

    A political regime with integrity would do the right thing and ignore the headlines…but our leaders mostly do not have integrity.
    Uncontrolled Immigration has been quietly allowed as it adds to GDP growth.
    Mr Redwood must wonder why he remains in a party that seems diametrically opposed to everything he stands for.

  16. norman
    Posted May 27, 2012 at 10:03 am | Permalink

    Government is at an inherent advantage when it comes to borrowing, which has been the main driver of GDP growth for at least 15 years. If government did not borrow such huge sums would they still be invested in the UK? If the answer is yes, then how should we be investing that money, public or private sector, for long term growth? If the answer is no, why not? Because government can print any amount it wants so investors know that even if UK Plc is a terrible investment, and it is, they’ll at least get something back.

    This is where our GDP growth is coming from, not only is it unsustainable it’s actually damaging. Too late now of course, as GDP is the be all and end all of economic performance, but we need to concentrate less on the arbitrary number that is GDP and more on building a successful economy. At the moment the two are at loggerheads.

  17. Derek Emery
    Posted May 28, 2012 at 11:32 am | Permalink

    Is GDP growth the thing to monitor if it increases with increased public spending. The UK lives on debt so this increase in GDP is bought by increased debt. Presumably we could have an even higher GDP is we borrowed even more. Wasn’t this New Labour economics?

    Public spending does not produce trade-able goods and services. I think a more complex measure is needed that includes the debt side of the equation is needed.

  18. Terry
    Posted May 28, 2012 at 1:30 pm | Permalink

    Just what comprises GDP? Apparently, much is how much is spent by HMG. How stupid is that for guide to the prosperity of a Nation to be based on how much its Government spends? North Korea must have the best GDP in the world then but they never release their figures to prove it. Basing our prosperity on our GDP is worse than the old gauge of Balance of Payments which at least told us how well we were doing in the export markets. However, neither of them took into account the borrowings and the cost to service those borrowings. If we are to see exactly where we stand then we really need a proper balance sheet including the P/L account and the ROC figures. Anything else is a cover up.

  19. Tony Brannigan
    Posted June 20, 2012 at 10:37 pm | Permalink

    Hi John

    There is a simple reason that high levels of borrowing haven’t resulted in growth.

    Government borrowing doesn’t increase GDP, increasing government borrowing increases GDP.

    Imagine GBP has been flat for a year (for example at £10), and just before year end the government wants to show some growth, so they borrow £1 and spend it, increasing GDP to £11, and showing 10% growth(!).

    If everything else stays flat for another year, then they have to borrow and spend another £1 to keep GDP at £11. Otherwise it would drop back to £10 and we’d have negative growth(!!).

    So to maintain £11 they have to borrow £1, and to grow it again by 10% they have to borrow and spend an additional £1.1, which will increase GDP to £12.10 and deliver the growth.

    If they stop increasing borrowing then GDP flatlines, if they pay down borrowing GDP will fall.

    Borrow and spend contributes to GDP, but to grow GDP to have to keep increasing the borrowing.

    The fact that borrowing is rocketing and GDP isn’t is rather worrying.

    Kind regards.

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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