No growth, low growth or local growth?

Can anyone help with a conundrum that has been bothering me?

We are, notoriously, living through an extended period of low or no growth as measured in terms of GDP (gross domestic product). Commentators are falling over themselves to debate whether we are now in a depression rather than simply a recession and there is on-going speculation about a triple dip and a sense that as a country we will remain well below the trend rate of growth for many years.

On the other hand, when one looks at the figures for the growth in GVA (gross value added) at local authority level right across the country the picture looks very different. Growth rates of 7% or more over the last two years are not uncommon.

Can these both be right? And if they are, what is the explanation for the apparent difference between a flat lining national economy and what would seem to be significant growth rates in the value of goods and services in local economies across the country?

In simple terms the relationship between the two is that GDP is equal to GVA plus taxes on products (such as VAT or excise duties) less subsidies on products. GDP can only be calculated at national level given these adjustments. There are also some important measurement issues to consider; for example GVA is estimated on a nominal basis (so there is no adjustment for the price of goods and services across the country) and GDP is at market prices. Nominal prices would serve to explain differences between different parts of the country but not to explain differences between GVA and GDP when the tax and subsidy adjustments are taken into account.

My initial hypothesis, however, picking up the last point, was that the difference between aggregate GVA and GDP might be explained by movements in those taxes and subsidies. For example, taxes may be down due to the recession (although GDP does not include business taxes such as corporation tax which we know has seen a substantial drop over the last year). Subsidies on products may have increased. In that scenario the combination of reduced tax and higher subsidy might explain the wider difference.

Another possibility is that the explanation lies in shifts in terms of the performance of different sectors. However, all other things being equal one might expect that such differential performance would be reflected in both measures although there will be a different balance between production, taxes and subsidies for each.

Yet enquiries to the Office for National Statistics (ONS) suggest that the movement in taxes and subsidies is not generally considered to have a significant effect although there have been increases in tax rates (most notably VAT) which would have an impact at the time at which the changes took place. An increase in rates does not translate automatically into an increase in tax take but the trend on VAT take has been upwards since 2009 and is forecast to rise further.

The ONS has also suggested that the significantly greater GVA growth compared to GDP is not a consistent phenomenon and that ‘since the beginning of 2008 GDP growth has been higher in four quarters, GVA in five quarters and level in the remainder’. I will admit to finding those figures quite surprising.

So can someone settle this once and for all and provide an explanation for the apparent divergence which otherwise seems to suggest relatively healthy growth in many parts of the country but a flat lining economy when considered nationally; they can’t both be right, can they?

I now prepare to be embarrassed by a statement of blinding simplicity which will put me to shame and send me scurrying away with my tail between my legs.


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Steve Horscroft
Steve Horscroft
11 years ago

Kevin, I think part of the answer is in terms of the component measurement of economic indicators. The elements that drag down national and local economies include areas such as construction, financial services and energy production which have all been hit by recession. Local factors will have some recompense in terms of sectors which are growing and bucking an apparent trend and therefore showing some relatively local healthy economies. Those regions which have traditionally relied on those above mentioned sectors that are in trouble are also traditionally seen as the bulwark for UK Plc. Perhaps that is where the change lies and the dire national economic statistics are perhaps a factor towards regional and local rebalancing which the Government is after.

Kevin Lloyd
Kevin Lloyd
11 years ago

Thank you. The vicissitudes of different sectors was one of the things that we considered and I can see the argument but the problem is that GVA is going up pretty much across the country. I had initially expected to find that there were regional ups and downs and that overall the downs were larger than the ups. But that doesn’t seem to be the case and indeed the largest (English) regional or county economies all seem to be going up. I have mused about whether there is a big hit from energy production some of which might not be showing up in the English figures and also whether some of the sectors that have been hardest hit might not be all be showing up in local measures due to some arcane attribution issues in the calculation.

But I can’t get away from the problem that unless there are some major sectors, perhaps particularly in services, which are not being fully reflected in the local measures why should the downturns that seem evident from the national data not also be heavily influencing the local figures?

Andy Bywater
Andy Bywater
11 years ago

Perhaps the divergence could be due to the Solo Effect. That is the notion that, the output effects of IT appear everywhere apart from in the productivity statistics.

Kevin Lloyd
Kevin Lloyd
11 years ago

Thank you. I am no expert on the Solow residual but my understanding is that what it shows is that there is a contribution to overall growth which can be attributed to things other than the application of capital and labour; in other words some allowance for innovation and in particular for the effects of technology. I am less clear how in itself that would influence the apparent divergence in measurement of output at sub national and national level. Could you say more about that?

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