Britain has finally turned the corner – the rate of growth in average wages is exceeding the rise in the cost of living for the first time in six years. The good news, that people on average are becoming better off in money terms, came from Britain's national statistical office with another pat on the back for the government. The rate of unemployment has fallen to 6.9 per cent, the lowest level for five years and below the original 7 per cent target at which Mark Carney, the governor of the Bank of England had said interest rates might need to be increased.
Other than the semi-official cheerleaders, including the Spectator magazine which in rampant I-told-you-so mode hailed the government stats ("It's official; smaller state and welfare reform leads to jobs record"), Britons are not celebrating. The Labour shadow chancellor continues to point to the years of real wage decline, a loss of spending power in the workforce which may not be restored for another two years. And on Monday, the official house price inflation rate for the U.K. was set at 9 per cent for the year to February while the surge in London home values was clocked by the Office of National Statistics at almost 18 per cent. So few any longer believe that house price inflation is a sign of real wealth accumulation that the subject has vanished from middle-class dinner party chit-chat, except in terms of foreboding.
Even statisticians can sometimes be moved by the national mood, and it may explain why the ONS has published a paper asking whether we need an official index of national well-being to read alongside the usual GDP indicator of national output and income. As the U.K. government's number-crunchers point out, GDP growth is nothing more than an aggregation of a number of measures of economic activity While Britain's economy has expanded over the past four years, income per head or GDP per capita has barely changed, thanks to population growth. Still, we don't quite know what we should be measuring to determine whether we are better or worse off or just coasting.
To add fuel to the debate, the ONS has decided to review the way it adds up the national accounts and present this Autumn new figures for Britain's GDP in 2012. Like the exercise conducted by the U.S. last year, the reassessment is expected to show that Britain has a larger economy than expected, that it suffered a smaller recession than we imagined and that Britons save as much as 10 per cent of their income, twice the rate expected. Another change, the statistical rejig is expected to show is a sharp increase in spending, not shown in the national accounts. If this were true, it would boost 2012 GDP and eliminate the brief technical recession recorded in that year.
In other words, there may be more of the U.K. economy than expected and it may be more buoyant than we thought. If that is true, the question is, where is this hidden economy? The whispered word is the grey economy, the cash economy and it can be seen in the surge in the ranks of the self-employed – the sole traders, the consultants and the part-timers who kept on working when official employment stopped. The drop in the U.K. unemployment rate below 7 per cent is in large part attributable to a surge in self-employment. While the numbers in employment have increased by 3 per cent over the past two years, those who are recorded as self-employed have risen by 9 per cent.
When the fizz begins to die in the Chancellor's champagne glass, he will want to look at these numbers again and begin to worry. If the ONS is right and there is a lot more economy out there, the question is why it doesn't show up readily in tax receipts, both at the personal income level and at point of sale. Despite the recovery, income tax receipts were weaker in January this year, the biggest collection month. At a time when all the indicators are positive, the Tory government will want to show government revenues are rising. If they are not, it must be because the new army of self-employed are working, at least in part, in a separate, unrecorded economy. The only way such people can be easily persuaded back into official channels will be to reduce their tax burden but without more cuts to public spending, this U.K. chancellor has no room for tax giveaways.
Carl Mortished