Scrutiny needed on the UK’s double-dip statistics

There was much excitement on April 26 when it was announced that the UK had fallen back into the technical definition of a recession – two quarters of falling output.

Worse still, this was regarded as a “double-dip” recession since the previous downturn was so recent.

It is worth remembering, however, how difficult it is to estimate economic output in an economy the size of the UK’s. In its initial estimate, the Office for National Statistics reported a decline of 0.2 per cent. The average revision to the data is plus or minus 0.3 percentage points. The difference between official recession status and the doldrums is pretty small. Would it really have meant that much if the economy had met the consensus forecast of an increase of 0.1 per cent?

Recession or not, the UK economy is clearly flat. In terms of the cause for these doldrums, you pay your money and take your – largely political – choice. From the Labour point of view, it is the reckless pace of the government’s fiscal austerity programme. From the coalition government’s point of view, it is down to the weak European economy or high oil prices.

It is always worth examining the data. The budget deficit for the fiscal year 2011-12 was £126bn, or 8.3 per cent of GDP. Had you told economists five years ago that Britain would be running a deficit on such a scale, they would have marvelled at the extent of the Keynesian stimulus. Of course, the deficit has come down from the 11.2 per cent of GDP recorded in 2009-10, so that counts as a tightening. But it is a genuine dilemma for the government: it cannot hope to borrow 8 per cent plus of GDP forever, but too quick an application of the fiscal brakes could cause an accident.

A closer look at the numbers shows that in the year 2011-12, the government spent £617bn, while in the previous financial year it spent £604.8bn. So where are the cuts? If you strip out interest payments and benefits, which have increased in line with unemployment, current expenditure fell from £388.9bn to £388.4bn. It is very, very hard to cut spending.

The biggest factor in cutting the deficit was the £20bn rise in tax revenues. Income tax receipts were actually down on the year, thanks to the slowing economy, but national insurance payments rose roughly £5bn and VAT a whacking £15bn. To that extent, government policy clearly did have a negative impact.

But the government has a point as well. Roughly half of all UK exports go to the EU, which grew just 0.7 per cent last year and is set to shrink, according to consensus forecasts, by 0.5 per cent this year. It is hard to grow your economy rapidly when your main customer isn’t spending any more. The UK could have aimed for a domestic consumption spree but that hardly seems appropriate.