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New Estimates of Regional GDP in the UK
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Julian Gough, World Economics, June 2017
Real GDP is estimated by applying a price-level estimate or deflator to nominal GDP, but GDP levels in the UK’s 12 inhabited regions are only reported at nominal prices with no allowance for differences in regional prices. A purchasing power parity (PPP) rate for the £ in each region, measuring how much a typical bundle of goods and services would cost, is required to create an accurate index to apply to nominal GDP in order to get real regional values. A solution lies in creating an expenditure-based, weighted, regional price index for consumers’ expenditure, government spending, investment and exports, to adjust nominal data to real price levels. Using imperfect public data, creating an expenditure-based index makes a significant difference to the size of each regional economy and to GDP per capita. In real terms, the London economy shrinks by 12%, the South-East contracts by 2% and all other regions increase in size.
Discount Rate Set Too High
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Angus Hanton, World Economics, September 2012
The size of government liabilities is only now becoming apparent, but the choice of discount rate is crucial in estimating these. Historically this has been set using Green Book methods and FRS17 accounting standards, but now government is moving to using a rate based on hoped-for economic growth of 3% plus inflation. The more prudent rate to use would be the much lower gilt rate of under 1% – the government’s long-term index-linked cost of borrowing. Use of the 1% rate would show liabilities more than £2 trillion higher, and these will increase as the effects of using the higher discount rate ‘unwind’. Furthermore, the overoptimism from using a high discount rate can lead to poor policy decisions in pensions, government spending and strategic planning.

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