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Why Are We Still Failing To Reduce The Deficit? Telegraph Article

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This is a link to an article in today's Telegraph with the title "Why are we still failing to reduce the deficit?"

http://www.telegraph.co.uk/finance/11168941/Why-are-we-still-failing-to-reduce-the-deficit.html

It states:

When assessing the state of the national finances, growth in our "nominal GDP" is a much more significant measure than "real GDP", according to the OBR.

Rather than adding up the total volume of goods and services we produce (real GDP), a nominal measure tells us about the total cash value of income and spending in the economy and bears a direct relationship with the government's borrowing.

Data from the OBR shows that despite strong real GDP growth since 2013, the cash value of the economy hasn't grown in line with overall output (the blue line below).

In fact, from 2010 nominal GDP has been around 6pc weaker than the OBR expected.

I'm masively confused. I thought real GDP was simply nominal GDP adjusted for inflation?

I hadn't realised there was a fundamental difference.

Could anyone please explain it for me simply? Thanks!!

EDIT: graph

NominalGDP_3076250c.jpg

Edited by oldsport

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Can't say I'm very clear, either.

There's an explanation on the ONS website

Gross domestic product (GDP) is a measure of economic activity which captures the value of goods and services that the UK produces during a given period. GDP can be expressed in nominal or real terms. Nominal GDP reflects the value of all the goods and services which are produced in the UK during a given period, using their price at the time of production. Real GDP also reflects the value of produced goods and services, but it uses constant consumer and producer price indices to remove the effects of rising price levels (inflation). Periods of real GDP growth are thought to enhance the welfare of individuals as economic growth allows average incomes to rise, supporting a higher level of consumption. Periods of negative real GDP growth are associated with lower incomes, lower consumption and consequently a lower standard of living.

It says "Periods of real GDP growth are thought to enhance the welfare of individuals as economic growth allows average incomes to rise, supporting a higher level of consumption."

I reckon this "thinking" is now wrong. I'm of the opinion that currently real GDP growth isn't leading to a rise in average income and a higher level of consumption, because vast swathes of the population have been finding their incomes stagnant or falling (no pay rises, loss of hours, loss of jobs, increasing rates of badly-paid self-employment). So of course the "total cash value of income and spending" isn't as high as expected.

I think this is particulary true of discretionary spending, as people with falling incomes are also facing rises in their unavoidable outgoings (utilities, housing, travel, food until recently), therefore are consuming less of the discretionary stuff.

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Can't say I'm very clear, either.

There's an explanation on the ONS website

It says "Periods of real GDP growth are thought to enhance the welfare of individuals as economic growth allows average incomes to rise, supporting a higher level of consumption."

I reckon this "thinking" is now wrong. I'm of the opinion that currently real GDP growth isn't leading to a rise in average income and a higher level of consumption, because vast swathes of the population have been finding their incomes stagnant or falling (no pay rises, loss of hours, loss of jobs, increasing rates of badly-paid self-employment). So of course the "total cash value of income and spending" isn't as high as expected.

I think this is particulary true of discretionary spending, as people with falling incomes are also facing rises in their unavoidable outgoings (utilities, housing, travel, food until recently), therefore are consuming less of the discretionary stuff.

Yes, it's certainly confusing.

I'm also beginning to think that maybe the author is just wrong?

Mehreen Khan joined The Telegraph after stints at Press Association and Birmingham Mail. She has a particular interest in sport and finance.

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Yes, it's certainly confusing.

I'm also beginning to think that maybe the author is just wrong?

Maybe if wages were going up at the same rate as inflation it would work out. But because they aren't people have less money to spend.

I may have to think about that one a bit more.

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Maybe if wages were going up at the same rate as inflation it would work out. But because they aren't people have less money to spend.

I may have to think about that one a bit more.

....but it is not only people with less spending less, it is many more people spending less generally...... Far too much uncertainty about at the moment, people are trying to build up a buffer...0% interest or not.......anyway far too much tat about, stuff not needed or not worth it.....a cash Christmas this year?

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Maybe if wages were going up at the same rate as inflation it would work out. But because they aren't people have less money to spend.

I may have to think about that one a bit more.

Simple explanation? The accelerating debt isn't being used to finance entrepreneurial activity but speculation in asset bubbles and rent extraction through hpi.

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This is a link to an article in today's Telegraph with the title "Why are we still failing to reduce the deficit?"

http://www.telegraph.co.uk/finance/11168941/Why-are-we-still-failing-to-reduce-the-deficit.html

It states:

I'm masively confused. I thought real GDP was simply nominal GDP adjusted for inflation?

I hadn't realised there was a fundamental difference.

Could anyone please explain it for me simply? Thanks!!

EDIT: graph

NominalGDP_3076250c.jpg

lets try manufacturing and actually producing stuff fallen from 20% of the economy to 11% of the economy in the last 30 years.

way too much empasis on :

a) consumer spending

b)EU as the route to prosperity..only one manufacturing powerhouse there and that's germany....they don't like competition much either.

a balanced country would have between 20-30 % baased on manufacturing.

empires work pretty much the same the world over.

75 years mercantile(like germany now after it got blown to bits)

75 years military(USA presently but due to change)

75 years social( like us after we got fed up with ww2 and decided to try to care for everybody)

75 years in pasture after everything has been wrecked, and we need to find our feet again for being too nice and accomodating to the world and his wife..culminating in getting blown to bits and starting again like germany did after ww2.

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Can't say I'm very clear, either.

There's an explanation on the ONS website

It says "Periods of real GDP growth are thought to enhance the welfare of individuals as economic growth allows average incomes to rise, supporting a higher level of consumption."

I reckon this "thinking" is now wrong. I'm of the opinion that currently real GDP growth isn't leading to a rise in average income and a higher level of consumption, because vast swathes of the population have been finding their incomes stagnant or falling (no pay rises, loss of hours, loss of jobs, increasing rates of badly-paid self-employment). So of course the "total cash value of income and spending" isn't as high as expected.

I think this is particulary true of discretionary spending, as people with falling incomes are also facing rises in their unavoidable outgoings (utilities, housing, travel, food until recently), therefore are consuming less of the discretionary stuff.

Also if people don't have security either in their job or in their housing, then they tend not to spend, saving for that rainy day they can see coming. Thats how they can get away with interest rates near zero, people just keep on saving anyway.

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GDP

GDP = private consumption + gross investment + government spending + (exports - imports)

Both red and blue are being pumped up by debt; the latter also being helped by QE. Lots of fiddling the figures going on - a bit like the miracle employment figures.

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I'm masively confused. I thought real GDP was simply nominal GDP adjusted for inflation?

I hadn't realised there was a fundamental difference.

Could anyone please explain it for me simply? Thanks!!

I share your confusion. Like you I assume Nominal GDP is simply GDP measured in any one particular year, Real GDP is after adjusting for inflation from a base year. I wonder if the article is trying to look at the economy applying the same distinction that an accountant uses between cash flow and profits?

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Weird chart.

But it's the Telegraph so their underlying message will be that govt. needs to cut spending more.

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Also since 2009 imputed rent has gone form 7.8% of GDP to 10.2% in 2013, so an increase of 30% ... but some how I don't see those bricks working 30% harder producing anything of 'value' (OK shelter has some value but this overall massive increase in 'value' is actually an increase in the level of debt) but in GDP terms they have produced a massive increase in wealth.

Bingo. The deflators used for some quantities making up the GDP figures bear little resemblance to any relevant measure of inflation.

This is a thread ripe for FreeTrader's insight.

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I think everyone's understanding of real and nominal GDP is correct.

Confusingly the graph is an error chart - cumulative errors in the June 2010 GDP forecast (Chart 2.5 from the OBR Forecasting Evaluation Report of Oct 2014). Basically inflation has been much weaker than the OBR predicted, so nominal GDP has been much lower (below forecast) as a result.

Debtors often rely on inflation to inflate their debts away and UK plc is no exception. We can guess much of the rest without even reading the Telegraph article - fiscal drag hasn't brought in as much tax as they hoped as inflation has stayed down and wages haven't increased. Wages are taxed at a higher rate than most economic activity. The article even quotes the OBR telling us we get more tax from fewer workers in high paying jobs than more people in work, but earning lower wages! Who'd have guessed? Cameron sees his role in life as getting as many people into work as possible, almost regardless of what they earn.

It is a pity they didn't also look at population growth, which is around 0.5-0.7% per annum. Sadly politicians, with megalomaniac tendencies are preoccupied with being the biggest, or growing their economy faster then Frank or Angela at No.20. More people means more public services, and the current and increasingly unrealistic expectation is for these to be of a 'first-world' calibre. However 'second-world' wages and productivity are becoming entrenched, thanks to an unregulated EU labour market and government subsidies for low pay through in-work welfare.

The OBR is working to a yardstick of Osborne's promised 'balanced' budget in 18/19 - it won't be of course because he can't keep cutting real terms wages for nurses and subsistence level benefits, while people wait for weeks to see their doctor and there are elections to win through bribing people with costly cash withdrawals made on their own credit card. Long before then, spending will ramp up, and like Brown, his much talked about, but little seen, fiscal responsibility will be pushed another 5 years into Narnia.

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Simple explanation? The accelerating debt isn't being used to finance entrepreneurial activity but speculation in asset bubbles and rent extraction through hpi.

That's what supported the bubble a decade ago.

An illusory level of debt-fuelled prosperity. A level of national wealth that never really existed, based on homeowners borrowing and spending money that never really existed. But a level of public spending that assumed all the HPI wealth was real and could be spent by government. And since about 2004/5 when HPI faltered and the government stared into a big bust, a dose of Ballsian stimulus with Brown explaining that his rules only really applied "across the economic cycle" and that he was spending more until the economy recovered :wacko:

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why is my credit card balance rising?

FFS. there are three possible answers

1. I bought more stuff

2. Interest rates have risen beyond my monthly repayment

3. Im not making the repayments.

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I think everyone's understanding of real and nominal GDP is correct.

Confusingly the graph is an error chart - cumulative errors in the June 2010 GDP forecast (Chart 2.5 from the OBR Forecasting Evaluation Report of Oct 2014). Basically inflation has been much weaker than the OBR predicted, so nominal GDP has been much lower (below forecast) as a result.

Debtors often rely on inflation to inflate their debts away and UK plc is no exception. We can guess much of the rest without even reading the Telegraph article - fiscal drag hasn't brought in as much tax as they hoped as inflation has stayed down and wages haven't increased. Wages are taxed at a higher rate than most economic activity. The article even quotes the OBR telling us we get more tax from fewer workers in high paying jobs than more people in work, but earning lower wages! Who'd have guessed? Cameron sees his role in life as getting as many people into work as possible, almost regardless of what they earn.

It is a pity they didn't also look at population growth, which is around 0.5-0.7% per annum. Sadly politicians, with megalomaniac tendencies are preoccupied with being the biggest, or growing their economy faster then Frank or Angela at No.20. More people means more public services, and the current and increasingly unrealistic expectation is for these to be of a 'first-world' calibre. However 'second-world' wages and productivity are becoming entrenched, thanks to an unregulated EU labour market and government subsidies for low pay through in-work welfare.

The OBR is working to a yardstick of Osborne's promised 'balanced' budget in 18/19 - it won't be of course because he can't keep cutting real terms wages for nurses and subsistence level benefits, while people wait for weeks to see their doctor and there are elections to win through bribing people with costly cash withdrawals made on their own credit card. Long before then, spending will ramp up, and like Brown, his much talked about, but little seen, fiscal responsibility will be pushed another 5 years into Narnia.

Except there's no way out. No secret escape to ever-lasting prosperity. Either Osborne keeps borrowing and printing to maintain nominal GDP, forcing the UK into a runaway debt spiral. Or he stops borrowing and printing and the UK succumbs once again to the debt de-leveraging depression postponed from 2008.

Edited by zugzwang

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So we got the public sector workers rallies at the weekend over that 1% pay rise...in some cases no pay rise if incremental rises allowed.

I think they will have to get used to it.....guess what outside the public sector we have millions on zero hours contacts and a growing army of self employed..average income in this combined group £6,000 pa.

Raising of minimum wage will not have any impact on this group's ability to pay tax...so you have average salaries in the public sector at £30,000 plus £15,000 attaching in gold plated retirement benefits to be funded from soaking those in the private sector most of whom earn absolutely nothing and pay no tax.

The only other big earners are quasi public sector such as railways, pharmaceuticals etc. Basically the exchequer looks completely f**ked going forward.

Edited by crashmonitor

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So we got the public sector workers rallies at the weekend over that 1% pay rise...in some cases no pay rise if incremental rises allowed.

I think they will have to get used to it.....guess what outside the public sector we have millions on zero hours contacts and a growing army of self employed..average income in this combined group £6,000 pa.

Raising of minimum wage will not have any impact on this group's ability to pay tax...so you have average salaries in the public sector at £30,000 plus £15,000 attaching in gold plated retirement benefits to be funded from soaking those in the private sector most of whom earn absolutely nothing and pay no tax.

The only other big earners are quasi public sector such as railways, pharmaceuticals etc. Basically the exchequer looks completely f**ked going forward.

I think you will find that there are many people doing public sector jobs now, today are working Zero hour contracts. ;)

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I think you will find that there are many people doing public sector jobs now, today are working Zero hour contracts. ;)

Indeed for those not lucky enough to be placed on the public sector establishment permanently and for those on ''hobby'' self employment it's a good job they also have the option of playing the Markets and flipping houses because in a country where nothing is produced we still have the virtual playground of Planet Ponzi.

Meanwhile it isn't going to pay our way; and the elephant in the room, the UK debt, will just keep rising.

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