Sex and drugs and GDP: what does Vicky Pryce think of the EU’s new economic calculations?

Transcript

Under the European Union’s new ruling for calculating GDP, which comes into effect in September, prostitution, drugs and weapons trading will all be included. But what effect is this likely to have on economies? World Finance speaks to economist Vicky Pryce to hear her views.

World Finance: Well Vicky, surely this is just a smoke screen because these, let’s call them industries, have been around for a long time, so it can’t have any effect on economies surely, other than making them look healthier on paper?

Vicky Pryce: The over-all level of GDP will be going up, because now we are going to be counting a lot more things that we weren’t counting before. It’s actually not going to make any difference to growth rates, that’s the interesting thing. What the Office of National Statistics has said is that, although there are these recalculations that are taking place, they stopped in 2009, they do in fact signify that over a ten year period GDP was probably considerably higher than we had thought before; possibly by £60bn a year. But in fact it will make no real difference to anything much at all, but what it will make a difference to is, once we have a real idea of what those activities are, we will be able to monitor them. Of course we know that particularly on prostitution and illegal drugs, there is an issue of whether we control it, whether we deregulate them, and so on. So I think the impact that trade in these areas is going to have, as a result of government activity, it is going to be a very important one for them to trace.

It’s actually not going to make any difference to growth rates

World Finance: But do you think in the end this could maybe backfire then, and almost make legal activities legitimate?

Vicky Pryce: I think most of the money that was changing hands has been spent anyway, so that is the black economy that we always calculated, which some how or other never made it into income accounts, with the result of course that one wasn’t collecting any tax in those activities. It doesn’t legitimise it at all, if anything it puts a lot more control over them, because we have a measure of what it is, and any way of trying to refine it and change what actually happens in those areas, is going to be quite an important one I think for policy makers.

World Finance: Well critics have suggested that this new way of calculating GDP is way of sugar coating sovereign debt. So do you think it is politically motivated?

Vicky Pryce: There are some things that were going on anyway, that the Office of National Statistics has been trying to sort out, which are still in line with what the European statistical accounting regulations required, which was drawn up last in 1995. So they need to be cleaned up. Some of the changes that are happening have got very little to so with any changes in the way in which things are calculated across Europe, they have to do with us doing them slightly better than before, and having things we didn’t do before adding into it. There are a number of other changes, which have nothing to do with anything to do with Europe, which have to do with a better way of how looking at how we are spending various things; for example research and development. It is really important to have a real understanding of what companies spend, particularly when they do it in-house, and that isn’t normally taken account of. So we are much more R&D orientated and innovative economies than we actually thought, and I think that is pretty good again if you are setting the type of policies which is important for growth in the economy. And then there are the ones, because of the changes in European legislation, or at least European requirements on the accounting side. If you add them all together, they account for that increase. It’s not just the little bit in terms of what happens on illegal drugs, and what happens on prostitution. Nevertheless, those two together seem to account for abou £10bn a year, That’s quite significant and is something which we didn’t have a real handle on before, I think now we’re there.

World Finance: And what sort of effect will this have for stagnant economies such as Italy, for example?

Vicky Pryce: We have always known really what the Italian black economy was like, in terms of size. Usually, I think, the estimate had been about 25 percent – it may be more. Boosting the economy doesn’t really make a huge difference. Of course everyone will be looking at, what does it mean from a comparative view point. Now if you are assuming of course that the black market was larger in some countries, then obviously they can look slightly better. So we are going to be having to watch them, and see what it means. But in many ways it should shame them, we have always known that. I think Italy had always assumed that it’s GDP that what the National Statistics said there, and the markets have always assumed it. That’s why the economy takes over when there is really no growth in Italy. If you look at current measure of GDP what we do know of course is that there is an awful lot going on that is simply not collected by those statisticians.

Some of the changes that are happening have got very little to so with any changes in the way in which things are calculated across Europe

World Finance: Well France has of course said it’s not going to include things like drugs and prostitution. Now surely if GDP is a benchmark for economies, this will weaken France internationally speaking and surely there should be a universal system to measure GDP.

Vicky Pryce: There have always been differences and that’s the reality. But of course we have Eurostat, which is trying to look across and make assessments in terms of what the difference is perhaps of calculating GDP are, and adjusting things so we have a slightly better idea of what other countries are doing. That has always been the case, it has been a big debate as to whether GDP means anything at all. The GDP is not a fantastic measure, but it is the best we’ve got.

World Finance: Well from a layman’s perspective, it does seem to make GDP calculations almost farcical, because how can you calculate how much revenue is taken from prostitution or narcotics, surely it’s just guess work?

Vicky Pryce: Well we know that there is no revenue in terms of income tax. It will be interesting to see if one could perhaps get revenue out of that. There is a big issue now of how do we look at this entire sector, and how do we make some of it perhaps more legitimate, and some of it we reduce in terms of what it does. Because in reality it’s not productive, we lose that amount every year in terms of proper productive capacity, and the economy could be doing so much better if that money were being spent in a different way.

World Finance: Well the white elephant in the room here does seem to be weapons, because this is obviously a controversial industry, it is not illegal. So surely this was counted before?

Vicky Pryce: The real thing is how you count some of the amount that is actually being spent producing them, whether it is included in capital investment or whether it just seems to be an intermediate production of anything the armed forces do. And I think that is a change that has also taken place, in terms R&D. Are we basically talking about something that just contributes to the final thing out there or is it a thing in it’s own right. And I think there has been a change in that definition, which is really why we have some things that we weren’t counting separately before, being counted now.

World Finance: Is there are concern to include weapons because, for instance, if a warship or plane was wiped out during a conflict, could that wipe off millions or even billions of the countries GDP?

Vicky Pryce: I think there is a big issue about the commissioning generally, so we are not just talking about weapons, we are talking about what do you do about energy decommissioning, nuclear and so on. What they have done here is in fact suggest that at the end of an asset’s life, you have also got to count that in as well. So you have to take into account what that means for the GDP. I think that is actually a fairer way of looking at destruction that may happen at times, if you look at what happened after the Second World War, assets were destroyed to such a considerable extent that one had to really start from scratch, in order to get back to some normality. And I think definitely not having any real view of what happens to this asset, which is finally decommissioned, is quite an important of what we were missing before. And hopefully we will have something better in the future.

World Finance: Vicky, thank you.

Vicky Pryce: Thank you.