GDP, incomes and austerity
Paul Johnson
© Institute for Fiscal Studies
Since 2008...
• Following a long period of growth, GDP has fallen
dramatically and failed to recover
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GDP has nowhere near recovered pre-crisis
levels
115
2007Q1–2014Q1
Peak = 100
110
105
100
95
Quarters from peak
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24
22
20
18
16
14
12
10
8
6
4
2
0
-2
-4
90
A completely different story than previous
recessions
115
2007Q1–2014Q1
1989Q2–1996Q2
110
Peak = 100
1978Q4–1985Q4
105
100
95
Quarters from peak
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24
22
20
18
16
14
12
10
8
6
4
2
0
-2
-4
90
Last quarter’s good news doesn’t change the pattern:
GDP flat for two years
110
105
100
95
90
85
80
75
70
Since 2008...
• GDP has fallen dramatically and failed to recover
• Trend output is now expected to be 13% smaller in
2016 than had been forecast in Budget 2008
– The economy will be about £200 billion smaller than
expected
• This is expected to be a permanent loss
– Depends on uncertain estimates of the “output gap”
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Trend GDP revised down as successive
outturns for actual GDP weaker than expected
Level of GDP
(Index, actual 2009-10 GDP = 100)
Comparison of forecasts for real GDP growth and trend GDP
150
Nov 10 - Actual
Nov 10 - Trend
Nov 11 - Actual
Nov 11 - Trend
140
Mar 08 - Trend
130
120
110
100
90
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Source: Author’s calculations, Office for Budget Responsibility, HM Treasury.
13% loss
of trend
output
But GDP isn’t everything
• Incomes matter most to most people
– They were rising much more slowly than GDP pre-recession
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Living Standards since 2002-03
Quarter 2 2002 = 100
120
115
110
105
100
95
90
Source: ONS series IHXW and Family Resources Survey, various years
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GDP per capita 2002-03 to 2007-08
120
Quarter 2 2002 = 100
115
110
105
100
95
90
GDP per capita
Source: ONS series IHXW and Family Resources Survey, various years
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Slow income growth before the recession
120
Quarter 2 2002 = 100
115
110
105
100
95
90
GDP per capita
Mean income
Median income
Source: ONS series IHXW and Family Resources Survey, various years
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But GDP isn’t everything
• Incomes matter most to most people
– They were rising much more slowly than GDP pre-recession
– Stood up well during the recession
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Sharp fall in GDP per capita in recession...
120
Quarter 2 2002 = 100
115
110
105
100
95
90
GDP per capita
Mean income
Median income
Source: ONS series IHXW and Family Resources Survey, various years
© Institute for Fiscal Studies
Peak to trough
fall in GDP per
capita of 7.9%
...But average incomes continue to rise
120
Quarter 2 2002 = 100
115
110
105
100
95
90
GDP per capita
Mean income
Median income
Source: ONS series IHXW and Family Resources Survey, various years
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But GDP isn’t everything
• Incomes matter most to most people
– They were rising much more slowly than GDP pre-recession
– Stood up well during the recession
– But took a dive in 2010-11
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Weak macroeconomic recovery in 2010-11
120
Quarter 2 2002 = 100
115
110
105
100
95
90
GDP per capita
Mean income
Median income
Source: ONS series IHXW and Family Resources Survey, various years
© Institute for Fiscal Studies
GDP per capita
grew 1.4% in
2010-11
Large falls in average income in 2010-11
120
Quarter 2 2002 = 100
115
110
105
100
95
90
GDP per capita
Mean income
Median income
Source: ONS series IHXW and Family Resources Survey, various years
• Median income fell 3.1% to reach £ 419 per week
• Mean income fell 5.7% to reach £511 per week
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We don’t expect a swift recovery
Median net household income (indexed to
2009=100)
100
99
98
97
96
95
94
93
92
91
90
2009-10
2010-11
2011-12
2012-13
2013-14
2014-15
Sources: Department for Work and Pensions’ HBAI series; IFS calculations and projections using Family Resources Survey.
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2015-16
But GDP isn’t everything
• Incomes matter most to most people
– They were rising much more slowly than GDP pre-recession
– Stood up well during the recession
– But took a dive in 2010-11
– With the rich hardest hit
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2010-11 saw rich lose most
4%
2%
Annual income change
0%
10
20
30
40
50
60
70
80
90
-2%
-4%
-6%
10th percentile: 1.1% fall
-8%
Median: 3.1% fall
-10%
90th percentile: 5.1% fall
-12%
-14%
Percentile point
Source: Figure 3.3 of Living Standards, Poverty and Inequality: 2012
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In contrast to previous period
4%
Average annual income gain
Income growth: 1996–97 to 2009–10
3%
2%
1%
0%
10
20
30
40
50
60
Percentile point
70
80
-1%
-2%
Source: Figure 3.5 of Living Standards, Poverty and Inequality: 2012
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90
Income growth since 1996-97 (GB)
4%
Average annual income gain
Income growth: 1996–97 to 2009–10
3%
Income growth: 1996–97 to 2010–11
2%
1%
0%
10
20
30
40
50
60
Percentile point
70
80
-1%
-2%
Source: Figure 3.5 of Living Standards, Poverty and Inequality: 2012
© Institute for Fiscal Studies
90
And very different from period from 1979-96
4%
Average annual income gain
Income growth: 1996–97 to 2009–10
3%
Income growth: 1979 to 1996–97
Income growth: 1996–97 to 2010–11
2%
1%
0%
10
20
30
40
50
60
Percentile point
70
80
-1%
-2%
Source: Figure 3.5 of Living Standards, Poverty and Inequality: 2012
© Institute for Fiscal Studies
90
But GDP isn’t everything
• Incomes matter most to most people
– They were rising much more slowly than GDP pre-recession
– Stood up well during the recession
– But took a dive in 2010-11
– With the rich hardest hit
• Employment rates look strong
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Employment rates are remarkably high
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But GDP isn’t everything
• Incomes matter most to most people
– They were rising much more slowly than GDP pre-recession
– Stood up well during the recession
– But too a dive in 2010-11
– With the rich hardest hit
• Employment rates look strong
– And unemployment much less high than you’d expect
© Institute for Fiscal Studies
Unemployment rate lower than past recessions
(unemployment as percent of economically active population)
14
12
10
8
6
4
2
0
But GDP isn’t everything
• Incomes matter most to most people
– They were rising much more slowly than GDP pre-recession
– Stood up well during the recession
– But too a dive in 2010-11
– With the rich hardest hit
• Employment rates look strong
– And unemployment much less high than you’d expect
– Though that implies a productivity problem
© Institute for Fiscal Studies
Productivity (output per hour) has taken a dive
© Institute for Fiscal Studies
But GDP isn’t everything
• Incomes matter most to most people
– They were rising much more slowly than GDP pre-recession
– Stood up well during the recession
– But too a dive in 2010-11
– With the rich hardest hit
• Employment rates look strong
– And unemployment much less high than you’d expect
– Though that implies a productivity problem
• We also don’t have the repossession rates of the early 1990s
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Repossession rates lower than early 1990s
(as a percentage of total number of mortgages)
0.90
0.80
0.70
0.60
0.50
0.40
0.30
0.20
0.10
0.00
Properties
repossessed
But GDP isn’t everything
• Incomes matter most to most people
– They were rising much more slowly than GDP pre-recession
– Stood up well during the recession
– But too a dive in 2010-11
– With the rich hardest hit
• Employment rates look strong
– And unemployment much less high than you’d expect
– Though that implies a productivity problem
• We also don’t have the repossession rates of the early 1990s
• GDP obviously does not tell the whole story
– But falling GDP did create a massive fiscal problem
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This has created a hole in the public finances
Percentage of national income
55.0
Total spending (Budget 2008)
Total spending (no action)
Permanent
damage =
7.5% of GDP
(£114bn)
Receipts (Budget 2008)
Receipts (no action)
50.0
45.0
40.0
35.0
© Institute for Fiscal Studies
Notes and sources: see Figure 3.6 of The IFS Green Budget: February 2012.
2016–17
2015–16
2014–15
2013–14
2012–13
2011–12
2010–11
2009–10
2008–09
2007–08
2006–07
2005–06
2004–05
2003–04
2002–03
2001–02
2000–01
1999–00
1998–99
1997–98
1996–97
30.0
Debt: Budget 2008
Debt: No policy action
1994–95
1998–99
2002–03
2006–07
2010–11
2014–15
2018–19
2022–23
2026–27
2030–31
2034–35
2038–39
2042–43
2046–47
2050–51
200
180
160
140
120
100
80
60
40
20
0
1974–75
1978–79
1982–83
1986–87
1990–91
Percentage of national income
Which has to be dealt with
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Notes and sources: see Figure 3.3 of The IFS Green Budget: February 2012.
The government plans to do that over 7 years
(original plan to do so over 5 years)
Nov 2011: 7.5% national income (£114bn) hole in public finances
Percentage of national income
9
Other current spend
Debt interest
Benefits
Investment
Tax increases
8
7
6
5
80%
4
3
2
1
20%
0
2010–11 2011–12 2012–13 2013–14 2014–15 2015–16 2016–17
© Institute for Fiscal Studies
Notes and sources: see Figure 3.5 of The IFS Green Budget: February 2012.
Which just leads to fiscal mandate being met..
Percentage of national income
55.0
Total spending (Budget 2008)
Receipts (Budget 2008)
Receipts (no action)
Total spending (no action)
50.0
45.0
40.0
35.0
© Institute for Fiscal Studies
Notes and sources: see Figure 3.6 of The IFS Green Budget: February 2012.
2016–17
2015–16
2014–15
2013–14
2012–13
2011–12
2010–11
2009–10
2008–09
2007–08
2006–07
2005–06
2004–05
2003–04
2002–03
2001–02
2000–01
1999–00
1998–99
1997–98
1996–97
30.0
Debt back on a more sustainable path
200
180
160
140
120
100
80
60
40
20
0
Debt: Budget 2008
Debt: No policy action
Debt: Current policy
Debt: Current policy – incl. estimated impact of ageing
1974–75
1977–78
1980–81
1983–84
1986–87
1989–90
1992–93
1995–96
1998–99
2001–02
2004–05
2007–08
2010–11
2013–14
2016–17
2019–20
2022–23
2025–26
2028–29
2031–32
2034–35
2037–38
2040–41
Percentage of national income
- but to remain above pre-crisis levels for a generation
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Notes and sources: see Figure 3.3 of The IFS Green Budget: February 2012.
7-year squeeze on public service spending
16.2% cut
over 7 years
9.3% cut
over 7 years
10
5
0
ConLib
Historic
1980–81
Labour
1970–71
-5
7 year moving average
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Note: Figure shows total public spending less spending on welfare
benefits and debt interest.
2015–16
2010–11
2005–06
2000–01
1995–96
1990–91
1985–86
1975–76
1965–66
1960–61
1955–56
-10
1950–51
Annual percentage real increase
15
Summary
• The loss of output following the crisis has been deep and
prolonged
• With a consequent reduction in household incomes
– Though in many ways this really has been an equitable recession
• A dramatic worsening of the public finances
• Government’s fiscal consolidation is most dramatic in 60 years
– But still leaves debt above pre-crisis levels for a generation or more
• More bad news likely in the Autumn Statement
© Institute for Fiscal Studies
Summary
• The loss of output following the crisis has been deep and
prolonged
• With a consequent reduction in household incomes
– Though in many ways this really has been an equitable recession
• A dramatic worsening of the public finances
• Government’s fiscal consolidation is most dramatic in 60 years
– But still leaves debt above pre-crisis levels for a generation or more
• More bad news likely in the Autumn Statement
• No sunny uplands around the corner
© Institute for Fiscal Studies