By Michael Burke
The latest British GDP data are being hailed not just as the end of the recession but as the beginning of a strong recovery. These are widespread evaluations, but they are evidence-free. The actual data show that the private sector of the economy remains in recession. Instead, there is a splurge in government spending, both Consumption and Investment. This is not sustainable with current economic policies and structures, and the government’s own forecasts show they have no intention of continuing beyond the election.
The British economic situation is chiefly characterised by prolonged stagnation. This is primarily driven by weak private sector investment which is creating falling living standards on broadening horizon. Structurally weak private investment has recently been temporarily boosted by tax breaks, as will be shown. The government response in an election year is to make up the shortfall in the hope it will take it through to the election date.
The medium-term stagnation of the economy is clear from the fact that real GDP is now just 1.6% higher than the pre-pandemic peak in the 3rd quarter of 2019, 4½ years ago. At the same time, as a result of negative redistribution, from poor to rich, average living standards (GDP per head) are now 1.3% below their pre-pandemic peak. All of this is driven by weak business investment which is just 3.1% higher than its previous peak in the 3rd quarter of 2016, 7½ years ago. It is clear from these data alone that the fundamental trends in the British economy have not been altered by the latest quarterly data.
Private Sector Remains in Recession
But the contrast between the claims of recession end and an accurate analysis becomes quite stark once the data is examined in greater detail and the factual trends are revealed. Grant Fitzner, the chief economist for Office for National Statistics (ONS) was widely quoted as saying the economy is now “going gangbusters”. The reality is quite different.
In the first instance, it is impossible to examine real trends by highlighting the change in economic activity from one quarter to the next. The year-on-year date is much more useful, because more accurate in that light. On that measure, real GDP rose by just 0.2% in the 1st quarter of 2024, effectively a continuation of stagnation.
However, examining the sources of spending that comprise GDP shows a remarkable picture, completely undermining any idea that a self-sustaining recovery has begun. In effect, almost every major category of spending is contracting, the sole exception being Government spending.
Table 1 shows the changes in key components of real GDP in the 1st quarter. For completeness the changes are shown on the basis of both quarter-on-quarter and year-on-year terms.
Table 1. Changes in Real GDP and its components in 1st quarter 2024
| GDP | Household Consumption | Government Consumption | Investment (GFCF) | -of which Business Investment | Exports | Imports | |
| Q-on-Q | 0.6 | 0.2 | 0.3 | 1.4 | 0.9 | -1.0 | -2.3 |
| Year-on-Year | 0.2 | -0.4 | +3.7 | -0.3 | -0.6 | -2.1 | -2.7 |
Source: ONS National Accounts, Q1, first estimate, Table C2
In addition to its role in the economy through Consumption, the government also plays a significant role in Investment, although usually Gross Fixed Capital Investment (GFCF) is presented as a total, with Government Investment included in that total. As can be seen from Table 1, Business Investment (which accounts for the bulk of GFCF) fell faster than total GFCF in the 1st quarter.
In fact, general Government GFCF rose by 9.5% from a year ago in the 1st quarter. This magnifies the role that the public sector has played in boosting GDP. Inevitably, it also reduces further the role played by the private sector in rebound in GDP in the 1st quarter.
Chart 1. Below shows the recent trends in GDP and the main expenditure components. As can be seen, Business Investment has previously been stronger, based on tax breaks given to businesses which encouraged them to bring forward investment. This has now petered out and has become negative, along with other private sector expenditure (separately, both exports and imports are declining from a year ago). Only Government Consumption and Investment show a rising trend.
Chart 1. UK Real GDP and Expenditure Components, Q4 2022 to Q1 2024, % change y-o-y
These diametrically opposed trends in the public and private sectors becomes evident when examined in monetary terms. In year-on-year comparisons, real GDP rose by £1.169bn. The combined level of Government Consumption and Investment (GFCF) rose by £6.295bn over the same period. The private sector (including the statistically tiny non-profit sector) contracted by £5.126bn on the same basis. These are shown in Chart 2., below.
Chart 2. Real GDP and Public and Private Sector Sources, Q4 2022 to Q4 2024, change £bn
A Political Splurge of Spending
SEB has long argued for both an increase in Government Investment and Consumption as the alternative to austerity, although it has placed much more emphasis on Investment than others. That is because without an expansion in the means of production through Investment, it is not possible to sustain increases in Consumption. From ancient times farmers have understood that the greater proportion of this year’s crop preserved (Saving) for sowing next year (Investment) the greater the next crop will be, all other things being equal. Unfortunately, this is largely forgotten in modern neoliberal, and other Consumption-based economics.
But the conditions do not exist to allow this type of increase in Government spending to be sustained. First, from tax breaks to companies who respond by cutting Business Investment, to ignoring the effects of climate change, to stupid and reactionary spending on the military and deportation policies, a large proportion of the recent increase in Government Consumption is either wasteful or actually counter-productive. There is a huge misallocation of resources.
Secondly, given the acute requirement to adopt an Investment-led recovery programme which also tackles the crisis in public services, there is simply not the tax structure in the British economy to sustain this splurge in spending. The tax burden falls overwhelmingly on those who can least afford it, workers and the poor, and not on those who can, big business and the rich. This would need to be reversed to generate the tax revenues required.
Thirdly, the government itself does not intend to sustain either rising Investment or Consumption. The Office for Budget Responsibility (OBR) forecasts for government spending and its components are based on briefings from government departments about ministerial intentions. The government plans to cut both its own Consumption and Investment next year, if re-elected.
Excluding the welfare bill (which must rise because of an ageing population) the OBR estimates (pdf Table 4.4) that combined Government Consumption and Investment outlays will be cut in real terms by 7.1% by the end of the next parliament compared to the fiscal year just ended in April 2024. The government has no intention of sustaining these increases in spending and could not sustain them without a radical transformation of fiscal policy.
In 2014 and 2015 the Osborne/Cameron-led Coalition increased both government Investment and Consumption in the run-up to the 2015 election. It was a pre-election giveaway which worked, and they promptly slashed both once re-elected. Sunak and Hunt may be hoping to repeat the trick. The data certainly suggests that.
It would also be no surprise then to see the spending splurge continue all the way through to the election. But, extending unsustainable Government spending does not make it sustainable. Like any sugar rush, the comedown will only be harder the longer the binge continues.
The government is attempting to bribe its way to election victory, or least limit the scale of their losses. As this rise in spending is not sustainable, for the reasons shown above, the greater will be the next planned round of austerity after the election.
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