Two and a half years ago I posted on the subject of "curing the GDP Fetish", which was all about politicians avoiding the temptation to make their economic decisions revolve around the measure of Gross Domestic Product, and rather insightful I thought it was too.
As it turned out, so did Joseph Stiglitz and he also called it a fetish six months later, and just to prove it was no flash in the pan, so did Nicolas Sarkozy. Oh what an influential thinker I must be.
But the same logic still persists in the UK, and George Osborne should not be swayed by the fact that there has only been 0.2% growth in GDP in the last quarter.
The simple fact was that under the last government, GDP was not a measure of the value of economic activity but of money flowing in the economy. Every year the Scottish chncellor would come to the House of Commons and announce that GDP had risen by ... 3%. How did he do that? Simple, when the real economy was flat-lining he would put his foot on the economic gas pedal, and pump out some extra spending.
At first it was easy to pay for more computers in schools and more doctors, but as the trick was repeated we didn't need more of them, we just paid more for the same, hence the "NHS inflation" that ran at 8% rather than the 3% of RPI
Eventually this meant that a substantial part of government spending was simply overspending, perhaps electoral bribes, that was unneeded and more importantly, wasn't funded by taxes but by borrowing.
So what the current Chancellor needs to do is to cut spending, not by buying fewer goods and services but by paying less for the same goods and services, essentially putting us back to where we were nearly 10 years ago, and drive out the wasteful spending funded by borrowing. Sure that means that GDP will drop. But the real value of economic activity will be just the same.
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