In September 2014 George Osborne will pull a rabbit from the hat, and increase the UK’s GDP by 4%, thanks to new accounting procedures announced by the EU today (15th January 2014).

One of the stated goals of the EU is to harmonise standards and level the trade-based playing field.  There is a lot to be said for that, and would remain a pivot for any UKIP inspired bilateral agreements.  Some of it is pretty basic and easy to interpret, for example for it to be a car the thing has to have four wheels, and for it to be an orange it has to be, well, orange.  Certainly it gets tricky when applying harmonious standards to pharmaceuticals, but the harmonisation can depend upon the outcomes of clinical trials and the survival rate of mice, and so on.  It is not easy, but it can be done.  The key here is to eradicate legislative arbitrage, and mostly I would say it is a pretty good thing.  However, one of the by-products of this harmonisation can be political advantage.

In order to harmonise the Single Market, the EU has looked to harmonise the accounting principles of the member states.  The intention is that when a member releases its economic data it is consistent with methodologies used by the other countries, and therefore stands up to relative scrutiny.

The European System of National and Regional Accounts (ESA) sets down the harmonised methodology which must be used for the production of national accounts data in the EU. It is crucial to have such a methodological rulebook in the EU, in order to ensure that statistics on Member States’ economies are compiled in a consistent, comparable, reliable and up-to-date way.

ESA 1995 is set for reform this year (September) to take into account new methodologies, and will be applied across the board.  This data will provide new, but harmonised, Gross Domestic Production (GDP) data, for example.  All 28 member states will release consistent statistics about the health of their economies.  The changes to ESA will include changes to how Research and Development budgets, weapons’ expenditure, export goods for processing, insurance services and pensions schemes are all evaluated as components of GDP.

More complete balance sheet data will be available, also more quarterly variables, with improved timeliness and seasonal adjustment, and a complete new set of data on potential obligations of government.

If anyone is still reading, then I expect the reaction to be ‘so what’, or ‘well that’s got to be good’, or even ‘how the heck does that affect me?’  The key is the impact that this new accounting process will have on EU 28 reported GDPs.

Here is the preliminary estimate of GDP impact as produced by the European Commission:

GDP Increase per Country EU

The UK’s reported GDP will increase by between three and four percent as a result of the new methodology.  That does not mean that there will be a 3-4% growth in the economy overnight, there will be no new money appearing as if by magic, but it will hand George Osborne, no stranger to using accountancy sleights of hand to make his books look healthier, a golden political opportunity to claim:

  • Britain’s economy is much stronger than it really is and
  • Britain’s tax to GDP ratio is lower than it is, leaving him with a great opportunity to nibble into the ‘new money’
  • Britain’s borrowing and deficit as a proportion of GDP are lower tomorrow than it is today

With that in mind, we can expect Q4 2014 and H2 2015 papers hailing Osborne as a great Chancellor as the EU helps him fudge the books.

Print Friendly, PDF & Email