The British Economy: Statistics and food for thought
We hear a lot of spin from the government, politicians and economists all with different ideological viewpoints and motives on the shape of the economy. In this article, I am not going to take any side of the argument but present a few statistics that I think have been either overlooked or not mentioned in the discussion. I have linked the numbers to the sites for your information as well as showing transparency on my data collecting in trying to keep neutral in this article. I leave it up to the reader to assess what the shape of the economy is.
How big is the economy?
There are two distinct hidden parts of the economy. The grey economy is the 'cash in hand' and undeclared legal activities that businesses engage in. Estimates suggest that the economy is 12.5% bigger than official GDP figures suggest. In monetary terms, this is £200 billion. Assuming an average tax rate of 37% (what tax to GDP is), the government is missing out on £70 billion of tax revenue.
The black economy on the other hand is illegal business such as prostitution and drugs. Relative to current GDP, this could be as big as 7%. Just as a note, these figures are estimates and may overlap each other. However what we can see is that the UK economy could be up to 20% bigger if all activities were declared. This suggests some individuals have far higher incomes than the official figures show.
What is the true inflation rate?
The two main indexes are the Consumer Price Index and the Retail Price Index. Inflation rates were respectfully 4.2% (Dec 2011) and 4.8% (Dec 2011). One needs to be wary of what inflation index uses, as it is made up with different baskets of goods, services and weights assigned to them. In addition it is an average and does not take into account individual preferences for goods and services.
The SIlver Price Index, created by Age UK on inflation for pensioners currently stands at 18% (measured from 2008 to 2011)
The Producer Price index PPI, the total input index was 17.1% and for output was 3.8% (Jan 2011 - Sept 2011).
According to the Age UK pensioners are facing a huge squeezes on their incomes and for firms, according to the statistics are passing costs onto products of around 4 to 5 percent (using CPI and RPI). In effect, they are taking a 12 to 13 percent hit for their input prices.
These figures suggest that inflation for different individuals within society are much higher than the official government inflation statistics of CPI and RPI.
The size and types of sovereign debt
The state issues bonds with different maturity dates and since the 1980s issues index linked debt, which is tied to the rate of inflation. The idea behind this is that government will not 'inflate its way out' by increasing the money supply as the repayment on the bond is directly locked in to CPI.
Currently, public debt stands at 60% of GDP and is set to continue to rise, even with spending cuts and projected growth targets. Of this debt, 30% is index linked bonds so 18% of national debt cannot be eroded away by inflation.
Total government liabilities stand at 392% of GDP and this includes all promised spending into the future such as government pension schemes. In monetary terms, this is around £5 trillion.
Public debt is not all time highs as in the past. When there is war, debt explodes and shown by the graph, fell very quickly in the post-war periods. This is due to two factors; high growth and inflation. If the economy grows, the relative size of the debt becomes smaller and if there is greater inflation, the real debt (nominal debt - inflation) also becomes smaller.
Where growth is going to come from to make the debt relatively smaller is the big question, and we may see higher than usual inflation for sometime even if the Central Bank is declaring that the rate of inflation is slowing down to erode away nominal debt. Investors may run into index-linked debt if this is the case that acts as a restraint on inflation.
The Savings Ratio is the amount of a household saves in proportion to income. This has fallen for many years and to lows below 2%. Usually this moves with the boom and bust cycle, where individuals spend in the boom times and save in recessions. Since 1986 when the deregulation of the credit markets took place, credit has become much easily available and this has led to higher private debt levels.
Size and Types of Private Debt
Not all debt is bad if a household can service it, and if debt is backed by an asset (collateral). People borrow to invest in order to pay off their debts to achieve higher incomes in the future. If debt is unbacked by collateral, this can be seen as toxic as if an individuals did default on their commitment, a bank or a lender cannot take an asset that it can sell on to recover parts of the debt (or in other words, debt write downs). In total, private household debt accounts for 500% in proportion to GDP.
Mortgage debt accounts for £1.2 trillion and is secured. However if the asset price starts to fall (in other words, a Housing Market crash) due to the central bank reducing the rate of money supply into the economy, interest rates rise or a general negative demand shock, many households will fall into negative equity. Some of this debt will then become unsecured if the liability is greater than the asset price.
Unsecured debt accounts for £207 billion. What is alarming is how this is distributed across society; some on the lowest incomes have unsecured debts and arrears that are very high, due to the high cost of living. 2% of low-income households have debts above £30,000 (This is a figure from the Joseph Rowntree Foundation that I remember but I can't find the link to the paper.)
Statistics can be found here on private debt.
How many people are either unemployed or underemployed?
Official unemployment statistics are based on the claimant count (those on Job Seekers' Allowance). Currently, there are 2.67 million individuals in this category. However can we actively trust this one statistic?
Underemployment is when an individual is either overqualified for a job, or in part-time employment, and looking for a full-time job but cannot find one. According to the TUC, 1.3 million people are in this situation.
In addition, this statistic does not include those who have not looked for work in over 6 weeks. They fall off the official claimant count and this could add 2.2 million on the unemployment figures. The TUC says therefore, over 6 million people are either out of work, or in work that is not to their skills or desired employments.
But it does not end here; successive governments of either political stripes have moved people away from seeking work onto disability benefit. 7% of working age individuals claim this benefit and highest in areas of high structural unemployment. In comparison to Europe, this is very high, with France and Germany having far lower rates of disability claimants of around 2 to 4 percent of the working age population. Trials of the new Work Capability Scheme to assess disability claimants has found or is finding a number of people who are fit for some sort of work. (See The Welfare State We're In, Bartholomew, 2004)
Those who are economically inactive account for working age people is 26.7% of the population. This includes students and others in training.
The question to ask however is the 'true' unemployment rate (those who are able to work) really a lot higher than what the government uses?
Statistics; our friends when we want them to be
I do not doubt that some of these statistics are exaggerated for political purposes (such as the TUC on unemployment or Bartholomew on the extent of disability claimants), but they do paint a story that the official statistics maybe hiding something else. There are also many others statistics that many of us will never hear about unless we do our own research and dig deep to find other bits of information.
This brings us to the saying 'lies, damned lies and statistics'. Some numbers can be missed out in the debate as we just want to ignore them or we manipulate them for our benefit. Can we trust the statistics used by our politicians, academics and journalists? It is up to you on how to interpret the information infront of you.
If anyone wishes to share any other figures or data that you feel has been missed out in this article, feel free to share in the comment section below.