“Total UK Government debt has reached £2.72 trillion as of the end of 2023.”
This is the kind of economic statistic you may see in the news.
Politicians of all parties and some members of the media play around with economic statistics to support their policies.
Learning economics equips you with the skills to understand these statistics and put them in context.
So, how do politicians (mis)use economic statistics? How can you better understand economic statistics?
1) Debt as a percentage of what? Consider the denominator
Debt figures on their own may not be as useful.
To get some sense of whether government debt is large or small, we need to compare it to something.
For governments, we usually measure the debt-to-GDP ratio. The denominator or base here is GDP.
GDP, gross domestic product, captures the value of all goods and services produced within an economy in a given time period.
GDP gives a sense of the output or income that is available to be taxed, from which the government can raise revenue to pay off debt interest or principal.
By comparing government debt to GDP, we get a sense of whether the government debt compares to the total output of the country.
At the start of the Covid-19 pandemic in 2020, the Government debt to GDP ratio increased. It has remained at an elevated level since. Specifically the UK’s Government debt to GDP ratio reached 97.6% of GDP in 2023.
Even this may not be enough information to know whether the Government’s debt to GDP ratio is large or small. How does it compare to previous years or internationally? These are key comparisons to consider when interpreting statistics too.
Another example is measuring increases in government spending or staff numbers.
A government could claim that the number of NHS doctors is increasing in the UK. Well with population growth, one may expect the number of doctors to increase.
This is because of both increasing supply and greater demand for healthcare. So, a more useful measure may be the number of NHS doctors relative to the total population.
Moreover this applies to spending on government departments. Suppose the government claims to be spending more on education in total.
What does that mean for government spending per student? Or as a percentage of GDP?
2) Not distinguishing between nominal and real
Do figures take into account inflation (real) or not (nominal)?
Often politicians won’t state if their figures are nominal.
Consider wage negotiations between the UK Government and public sector workers. With inflation reaching above 11% following energy price rises, a nominal pay rise of say 6% would make some public sector workers worse off in real terms.
Another example we’ve discussed before is the income tax freeze.
For instance, the minimum income required before paying income tax, the personal allowance, has been frozen at £12,570 for the tax year.
This freeze has been in place from March 2021 and is likely to continue to 2028-29.
Suppose incomes rise in line with inflation. This means more people will earn above the personal allowance threshold, dragging more people into paying tax.
3) Relying on a central figure hides distribution
Energy and food prices contributed to the CPI inflation high of 11.1% in October 2022.
One of the weaknesses of relying on CPI is that different households have different budgets.
So, households that spend a greater proportion of their income on energy and food may see an even greater worsening in purchasing power, compared to other households.
This is particularly likely to affect poorer households, where food and energy spend make up a greater proportion of total spending.
Using economics terminology, these kinds of necessities are likely to have an income elasticity of demand between zero and one.
As income rises, spending on food and energy rises but only to a small extent – everyone needs food and energy.
Central figures can be helpful. They enable people to understand the economy and enable targets to be set, including inflation targets for the central bank.
The focus on central figures, often by economists as well as politicians, has downsides. Not just in inflation but in other matters, like real wage growth (we’ll save this for another article).
4) Percentage change and levels both matter
The CPI inflation rate is now 2.3% in the year to April 2024 in the UK. Inflation is back within its target range of 2% plus or minus 1 percentage point.
Nevertheless, what if we compare the UK’s CPI price level in May 2024 to that in January 2021? Then on that measure, the price level has risen by 22.8%.
To some extent, this reverses point 1 – the level matters, as well as the percentage change.
Conversely, another way to phrase it is that we are simply adjusting the base year to pre-pandemic.
The base still matters as a reference point, but which base we pick also matters.
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