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It’s good the government will report GDP per capita, but it shouldn’t stop there

David Leyonhjelm negotiated for the numbers in the budget to be reported in per capita terms. AAP/Mick Tsikas

It’s good the government will report GDP per capita, but it shouldn’t stop there

The government’s horse trading over legislation with the senate will have a profound effect on the way the government reports economic data.

Part of the government’s agreement with Senator Leyonhjelm to support the reinstatement of the Australian Building and Construction Commission was that many government budget numbers be reported in per capita (i.e. per person) terms.

So rather than reporting economic growth as one monolithic number, the government will take that number and divide it by the total population. Doing so will enable us to better see how much an average Australian has gained or lost. But we shouldn’t stop there.

There’s a lot more to improve in the way we talk about numbers.

Why we measure GDP

Every year the federal budget is split into a number of sections, with the first containing projections for the Australian economy and budget outcomes over the next four years. For example, “real GDP” is projected to grow by 2.5% in 2016-17. Real GDP is the size of all the goods and services produced by firms and government – everything from haircuts to new houses and submarines, taking into account inflation.

It is worth knowing how big GDP is because GDP represents income. It is only an approximation of income, albeit a pretty good one, because some of the income generated goes to overseas owners of capital and vice versa – we earn income from GDP produced by other countries that use our resources. But we want to know whether our income as a nation is going up and by how much. So GDP gives us one partial measure of our national economic performance and can be compared over time and with other countries.

Why per capita is better

According to critics of this approach, just saying that Australian real GDP is growing by 2.5% is misleading. It does not take into account population growth, which for Australia is projected to be 1.7% over 2016-17. When the population also increases, real GDP alone does not provide an accurate representation of how much our income has gone up.

What if the population were to increase by more or less than 1.7%?

If the population were to increase by 2.5% then an increase in real GDP of 2.5% would leave each person on average no better off. If the population were to fall, as is happening in Japan, growth in GDP per capita would actually exceed growth in real GDP. This implies that each person on average would be better off than simple GDP growth would suggest.

GDP is forecast to growth by only 1% in Japan next year, but their population is also falling slightly. This means that their GDP per capita will grow more than 1%. Simply reporting real GDP growth for Japan is understating what is happening.

Measuring GDP in per capita terms, therefore, is useful because we want to know whether each of us on average is becoming better off and by how much.

Numbers are meaningless without reference points

But it’s not just growth numbers that will be improved by reporting them in per capita terms. The so-called “backpacker tax,” for example, would raise A$540 million over three years at a rate of 32.5%, according to Assistant Treasurer Kelly O’Dwyer. But this can be framed differently depending on the reference points you choose.

On a per capita basis it is about A$22 per person over three years. But adding up these numbers over several years might also be misleading – the A$22 is of course only A$7 per year. The difference between a rate of 32.5% and 13%, the rate proposed by key cross benchers, would amount to about A$4 per person per year.

Putting these figures in per capita annual terms calls into question the time spent by the Parliament and media on this issue.

Let’s not stop at per capita

In fairness, the Australian Treasury provides its key budget aggregates for revenue, spending, the deficit, government debt in percentage change terms and adjusted for inflation, both of which are more meaningful than simply the current dollar figures. But it does not present them in per capita terms and this would be an improvement.

But why stop there? The budget deficit is subject to much scrutiny and attention in the media and Parliament. The reason is that it represents the increase in government indebtedness, which puts pressure on the country’s credit rating and increases future tax liabilities. However, like any business or household the source of the increase in indebtedness is crucial – in particular the distinction between recurring and capital spending.

If recurrent spending, which includes things like welfare and public servants’ salaries, exceeds total revenue the deficit is a burden on taxpayers in the future. But if the deficit is entirely explained by capital expenditure, such as on a new road or school, then there may not be a burden on future taxpayers provided we can be confident the capital expenditure will generate future income.

So Senator Leyonhjelm could have usefully demanded the distinction between recurrent expenditure and capital expenditure in reporting of budget aggregates. Nevertheless his foray into budget reporting is to be welcomed.

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