The Office for National Statistics admitted yesterday that it thinks it has made a serious mistake in its accounting for UK national income. It has now significantly revised its estimates of UK GDP as a result of adopting new methodologies, about which it says the following:
- Revisions from 1997 to 2019 are generally small, however there are larger revisions to 2020 and 2021, although the quarterly and monthly profile through the years is relatively little changed.
- Annual current price gross domestic product (GDP) growth in 2021 is revised up 0.9 percentage points to an 8.5% increase; this follows an unrevised fall of 5.8% in 2020.
- Annual volume GDP growth in 2021 is revised up 1.1 percentage points to an 8.7% increase; this follows an upwardly revised 10.4% fall in 2020 (previously an 11% fall).
- Upward revisions to annual volume GDP growth in 2020 and 2021 mean that GDP is now estimated to be 0.6% above pre-coronavirus (COVID-19) pandemic levels in Quarter 4 (Oct to Dec) 2021; previously this was estimated as 1.2% below.
- These revisions are mainly because we have richer data from our annual surveys and administrative data, we are now able to measure costs incurred by businesses (intermediate consumption) directly and we can adjust for prices (deflation) at a far more detailed level.
The reality of all this is that, as the FT reports, is that these figures have been revised upwards because instead of UK companies selling off their stocks of unsold goods in 2020 and 2021, as the ONS thought they were doing, they were, in fact, increasing those stocks. That's all that really needs to be known about this restatement, and to claim that the UK was better off as a result can, as accounting claims go, be filed in the category that is politely referred to as complete codswallop (other words are available).
As any decent accountant will tell you, the movement in stocks of goods held for sale during the course of the period does not actually change the record of income arising during the course of that period. There is good reason for that. Goods held for sale are an asset, or stock. They are not items sold or consumed, which is a flow. And the ONS is clearly incapable of spotting the difference. As a result, it is claiming an increase in assets is income when no one has actually seen the benefit in their consumption. That's a pretty big claim to make because by common understandings of what makes up income, that's just wrong.
One day we might, I hope, have UK national income data that makes accounting sense. Right now, we have to suffer from data produced by economists who have no understanding of what income really is and who undertake their work without any consideration of double-entry bookkeeping, which is the fundamental control that is necessary to make sure that accounting data is both verifiable and reliable whilst also appropriately distinguishing stocks of assets from flows of income. The information that the ONS produces does not need this basic standard, and for that reason, this restatement of national income by the ONS is ludicrous and simply wrong.
Meanwhile, the upward revision should not be celebrated too strongly by politicians: it makes the likelihood that current levels of acticity will look like a recession much more probable. But I doubt they will understand that.
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Is this the same news from the ONS/Treasury: “Revised growth statistics show the UK economy was 0.6% larger than pre-pandemic levels by Q4 2021. That means we had the 3rd fastest recovery in the G7, just behind the US & Canada.”
Am I right in thinking that “the 3rd fastest recovery” is a growth rate, that says nothing about the absolute growth?
If Britain’s economy grew from 1 to 3 (a 3-fold increase), and Germany’s grew from 10 to 15 (a 50% increase), then Germany’s economy is still stronger, and grew more. Or am I reading too much into it?
You are right
And the data is being spun for all it is worth
There are lies, domed lies and…..you know the rest.
You’re not comparing like for like. Saying change from 1 to 3 is a three fold increase would mean the German increase from 10 to 15 was a one and a half fold increase.
You can’t compare a “fold” increase with % increase. If you choose to use % increases then 1 to 3 would be a 200% increase while 10 to 15 would be a 50% increase.
Accepted
My family are farmers. In 2021, we increased our stocks of fertiliser and chemical sprays significantly because the supply of those products had become extremely unpredictable, difficult and uncertain and we feared (correctly) that we would not be able to obtain what we needed at the time we needed it.
As far as the suppliers of those products were concerned, their sales were genuinely higher. Our stock was higher than normal and our cash reserves lower than normal as a consequence. Our higher stock position will probably unwind over the course of 2023 / 2024, so I would suggest the ONS was correct to record extra sales in 2021 due to stock build, but corresponding sales of the same products in 2023 / 2024 are likely to be lower than would otherwise be the case due to stock release.
With the supply disruptions that were occuring across multiple industries in 2021, it would not be at all surprising to find that many other businesses did the same as we did. These were genuine sales from the supplier’s perspective and definitely should be part of GDP I would suggest, despite your assertion that you think they shouldn’t.
But you sold no more.
And national income should be based on end, nit intermediate consumption.
How do you separate intermediate and end consumption? I am in the habit of buying tools or books that I think may be useful or interesting. I sometimes don’t use them for years. I have even been known to take them unused to the Oxfam shop because I need the space.
“The statisticians [..] must make many decisions about what to include and what to exclude. While the decisions are not arbitrary, it is important to recognise that they are conventions. In other words, there is nothing sacrosanct about them, and the conventions could be changed by international agreement. [..] GDP also excludes the black market, grey market, and much of the production in the informal sector.” — Macroeconomics, William Mitchell, L. Randall Wray and Martin Watts (2019) https://amzn.eu/d/cI1a2Fp
GDP does not exclude those sectors. That claim is wrong. But it does seriously underestimate them.
But where would creative accountants be without the ability to value Stock & WIP however it happens to suit them this year?
Does the ONS calculate our GDP in the same way as other European countries?
I only ask because nearly thirty years ago I had occasion to look at Unemployment figures in various European countries and found that there was great variance in how these figures were measured and therefore the resulting percentages of people officially unemployed.
The most glaring difference being between Spain and the UK. At the time Spain had very high unemployment and the UK had relatively low unemployment. (That is relatively low ever since the advent of Thatcherism but high compared with the years of the post war consensus.}
However when you measured UK unemployment by the Spanish method the UK unemployment percentage was approximately the same as the Spanish.
When New Labour came in it started to address this problem, but since 2010 and the growth of the gig economy, and probably the illegal economy, I still regard UK unemployment figures with a great deal of scepticism.
They try to prepare them in the same way
But I know from Eurostat that there are big variations
My sources said they did not trust Spanish data much – and their tax tax gap figures always look ‘odd’
I am sure your sources know far more about Spanish unemployment statistics than I do but in the light of the 1979-1997 Tory Government that made 18 “alterations” that all lowered the UK unemployment percentage I think scepticism can be the only response to an “alteration” in the GDP measurement that transforms our relative international performance.
However, perhaps such “alterations” are what the Tories mean by a Brexit benefit.
‘As a result, it is claiming an increase in assets is income when no one has actually seen the benefit in their consumption. That’s a pretty big claim to make because by common understandings of what makes up income, that’s just wrong.’
OMG?
You know what this thinking is don’t you?
It’s how the rich individuals measure themselves!!
All the ONS are doing is using the metrics of acquisition not distribution. Given how skewed wealth distribution is in this country, we may conflating the increasing wealth if the rich with the country as a whole, giving us a totally misleading picture.
Are they doing this on purpose? This is potentially very dangerous and misleading, potentially cutting us off from the real damage to the economy being made clear.
This is economics for you…..
Whatever the merits or demerits of GDP and growth when used as measures of economic well being are, I have serious problems with them being used as targets. Using measures as targets can lead to serious distortions. Two examples spring to mind; I’m sure readers of this blog can think of more:
Thirty years ago — I’m not sure if it still happens — much of the funding in Further Education was determined by the number of students on a course on certain census days. Increasing these numbers became a target for management. Various tricks were made to boost them such as fast-track schemes to enable people to join courses half way through to suggesting to students who wanted to leave that it was a good idea to make a hasty decision and it was a good idea to give the course another week or so before deciding what to do.
Another example with more serious consequences was the measure used to try to boost Chinese rice production, namely the number of rice plants per square metre, during the great leap forward. This lead to collective farms stealing rice plants from one another and putting them between those growing in paddy fields to meet their quotas. In other cases collective farms collaborated with each other and the same rice plants were counted by officials several times. As a result there was lower not higher rice production. It is said that the reason for Deng Xiaoping falling out with Mao Zedong was that he warned Mao that the country was heading for a famine. Mao, who had only seen glowing reports about the volume of rice production, thought that they were heading for a record harvest. He was so confident that he commissioned a song and dance routing called Feng Shou Wu or The Bumper Harvest Dance that to be taught to all primary school pupils.
If growth is a target, then there is a lot of choice about how that target can be reached, not all equally beneficial for society. Depending on how this is done not all sections of society will benefit equally and some sections may be disadvantaged. So even if GDP valued everything fairly there would still be plenty of scope for a government to unfairly favour its cronies.
Thanks