Temppic at English Wikipedia, Public domain, via Wikimedia Commons
References to ‘GDP’ proliferate in the business press and news. Perhaps it’s worth considering what it means.
The letters stand for ‘Gross Domestic Product’, intending to signify the entire output of the economy of a country: the outputs of all individual businesses in the private sector of the economy should equate to the nation’s GDP. The output of the individual business is therefore the most basic component of GDP.
This is how it is calculated at the level of the individual business:
1 – Begin with total Sales Revenue achieved by our business in a specified period (say, a month, Quarter, or Year);
2 – From the total Sales, deduct the cost of goods and services we have bought infrom other firms, because these costs represent their Sales. This step therefore avoids double-counting. The net result is the “value added” by our own business during the period in question. We can think of this as its “product”, and a comparison with other periods or businesses will reveal relative productivity. Simple enough.
The curse of statistics
Although the GDP number is supposed to represent the output of the entire economy, government statisticians compute it in three district ways. Although these should theoretically add up to exactly the same number, in fact they produce different results and hence allow for different interpretations of the same underlying data, so that it is possible to “read into the data” an interpretation that accords with the reader’s own persuasion – which is what happens when statisticians get involved in national finances.
Forgive the diversion, but perhaps we recall the words of Jack Cade in Shakespeare’s Henry VI Part 2: “The first thing we do, we kill all the lawyers” – a sentiment that brings to mind the words of John Cowperthwaite (Financial Secretary of Hong Kong from 1951 to 1971) — concerning statisticians rather than lawyers. When asked to name the key thing that poor countries should do to improve their growth, he replied: “They should abolish the Office of National Statistics”. Statistics were his bête noire! Cowperthwaite deserves the credit for the rise of Hong Kong as a global economic powerhouse – no modern country has come as close to Adam Smith’s ideal. Cowperthwaite steadfastly refused to allow anyone to collect GDP statistics, arguing that such data was not useful to managing an economy and “some damn fool would only try to do something with them”. The success of Cowperthwaite’s principled insistence on small government, sound money and free markets is evident in any metric you care to apply to Hong Kong.
Managing a debt-besieged economy
If government expenditure exceeds the amount raised in taxes, borrowing is unavoidable. In its upside-down collectivist thinking our present government’s priority is spending without careful consideration of the basic discipline of affordability. No wonder, therefore, that Britain is now in thrall to lenders in the market for funds, including that ultimate bailout service: the International Monetary Fund (IMF), which saved Britain’s bust economy in 1976.
Of course, the Treasury and the central bank could, in extremis, resort to “money-printing” through a devious practice sometimes referred to as “Quantitative Easing”. Although this sounds more like a laxative, it’s actually just plain “counterfeiting” – a serious crime if carried out by you or me. Assuming, however, the government decides to fund the shortfall between available resources and its committed expenditure by borrowing in the market, this would be done by issuing gilt-edged securities (“gilts”), which, when first issued to fund war with France the certificates were decorated with gilded edges. The gilts are also described as “bonds” (so-called because the borrower is bound by the terms of their issue), while the rate of interest payable is often referred to as the “coupon”. The rate of interest attached to any loan will basically depend on the respective “time-preferences” of lender and borrower – or, (i) how soon the borrower needs possession of the money, and (ii) how soon the lender wants it returned – also taking account of the respective ‘bargaining strength” of the parties, factoring in their reputations, strength of their domestic economies and the ratings allotted to them by the recognised independent agencies (Moody’s, Standard & Poors, and Fitch).
Borrowing has a positive side
There is nothing intrinsically wrong with borrowing. Recourse to borrowing has historically helped to build schools, railways, hospitals, roads and runways, modernising the nation, which we can think of as infrastructure investment. But today the government is borrowing not to invest, but to keep its creditors at bay.
These agencies rate nations as well as businesses, and right now, the Chancellor and Prime Minister are fearful of a downgrade. With this in mind, when you hear that “bond yields have shot up” this means that the holders of those bonds (the lenders) require a rate of interest on the loan that compensates them for the risk of default by the borrower.
In Britain’s case, that risk appears to be rising by the day, and the evidence is all about us. The country is increasingly being governed by the unions rather than elected representatives. Just look about you. London’s underground workers are on strike, despite having been awarded above-inflation pay rises immediately following last year’s election victory by Labour. The latest demand isn’t just for more money – it’s about having free travel, free food, length of the working week, which the “workers” say should be reduced from 35 hours to 32. And so on. Since the Tory government’s horrendous mismanagement of the nation’s response to the pandemic, “working from home” has elided from a response to national emergency into a “right”. Few are required to actually attend their offices any more, and our Chancellor wonders why “growth” (remember it?) has gone into reverse. Inevitably, borrowing terms will be unaffordable. In the last fiscal year the interest cost alone, at £105 billion, was more than two-thirds of the sum borrowed (£148 bn). These structural costs feed into prices, which is why price inflation continues to afflict the nation’s cost of living. Nor do reports from the Bank of England hold out hope of a reduction in interest rates soon.
The only sound response to a fiscal crunch is economic growth, but rather than bring spending under control, Labour’s hard-wired instinct is to raise taxes – which is precisely what will happen in November’s budget. Numerous surveys highlight the fall in employment levels since the sharp rise in employers’ NIC in April. We stand at the tipping point at which further tax rises will actually cause a fall in total tax revenues, as the nation’s taxable capacity is exceeded.
Basically, Reeves is an economic illiterate. Earlier this year she promised that amounts lavished on the NHS and infrastructure projects (“that will create thousands of jobs”) will be subject to insistence on higher productivity. No one has pointed out that money chucked at the public sector can never achieve higher productivity because the public sector doesn’t have a product! Efficiency maybe, but what’s the product of Town Hall minions writing minutes of council meetings? Yet their number rises despite the fact that they contribute no tax revenue. How could they? They are paid out of taxes.
It’s no longer enough merely to attack waste or point out that there are now 700,000 more public sector employees than before the pandemic, and 2.4 million more people on out-of-work-benefits – their total now exceeding 6.5 million.
The only positive way out of this intractable mess is for politicians (and voters!)to start thinking like John Cowperthwaite and to start asking the key libertarian question of what the state should, and shouldn’t, do.
© Emile Woolf September 2025 (website)
