What does it mean to create wealth? Politicians like to talk about "growing the economy," using the metric of increases in gross domestic product (GDP). But – as Liam Fox highlighted yesterday - GDP doesn't tell the real story.
The GDP metric seriously misrepresents the economic value of government spending. Whereas the contribution of a business is assessed in terms of what it sells – by the value of what consumers have purchased from it. But the Government's contribution just based on what it spends – as if it is another consumer, not a producer.
So if the State spends more on wages – even if the staff do no work and produce no output - it has increased its contribution to GDP. If the State spends taxpayers' money on planes that don't fly, guns that don't fire, or tanks that don't exist, all of its pointless outlay counts towards GDP. Who really thinks that is economically valuable?
Moreover, Government spending is not like other consumption. The Government can only spend money that it either takes out of the people's pockets through taxation, or borrows for the people to pay back – at exorbitant interest – later on. The more the Government spends, the less individuals, families, and businesses can spend.
The Government doesn't put wealth into the economy. It takes wealth out of the economy. Yet the GDP metric allows governments to create the illusion of economic growth simply by increasing spending.
A better metric for economic growth is what Liam Fox calls gross private product (GPP): total GDP minus government spending. Looking only at private spending and investment shifts the focus to the productive sector of the economy.
For many years preceding the crash in 2007, our GDP grew while our GPP shrunk. What this shows is that the economy was not really growing during this period, whatever Gordon Brown was telling us at the time.
In fact, not only was the productive sector of the economy contracting but the unproductive sector of the economy – i.e. Government – was expanding. The financing of Government was becoming more and more unsustainable. Ever wondered how we ended up with a public sector debt crisis? That's how.
It is only by growing the productive part of our economy – the private sector – that we can both increase our prosperity and fund our essential public services. This Government pays lip service to real growth and sustainable public spending, but is still borrowing at unsustainable levels while campaigning to stay in the suffocating EU regulatory system that is holding British business back.
Only UKIP will set Britain free.
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