For generations, the economy’s progress has been measured by a single figure: gross domestic product (GDP). But the UK’s official number cruncher, the Office for National Statistics (ONS), is developing an alternative way of judging what constitutes economic growth, with a view to declaring whether the way we are doing business is more or less sustainable than the previous year.
The rival metric to GDP supplements all the money transactions in the economy with everything from housework to renewable energy’s knock-on environmental benefits, according to the ONS.
It has pulled together figures going back to 2005 that provide an alternative to GDP called “inclusive income” and last week added natural capital to its list of measures of inclusive wealth.
While GDP measures monetary transactions in the economy to arrive at a total figure, the inclusive income methodology estimates the impact of other things people do that they are not paid for and the positive or negative effects.
Parents who take their children to events in their own car rather than a taxi, home-cooked meals and voluntary childcare and care of older relatives are among the non-monetary factors that are added to GDP to create a measure of inclusive income.
Gross inclusive income (GII) per person grew by 2.8% in 2022, after the same rise of 2.8% in 2021, the ONS says in its latest figures.
Net inclusive income (NII) per person has proved more volatile since 2005. It grew more strongly than GDP before the pandemic, largely because of renewable energy’s positive impact on carbon emissions and pollution. However, it crashed by more than GDP in the pandemic once the negative effect of wear and tear on household goods was added to the drop in business and consumer spending already included in GDP.
NII increased by 5% in 2022, after a rise of 9% in 2021, and might have been more in each year without a rise in carbon emissions, offsetting the UK’s increased use of renewable energy. GDP grew by 8.6% and 4.6% in 2021 and 2022 respectively.
The growth in windfarms, hydroelectric plants and solar panels means more income is created without destroying the environment or increasing carbon emissions, allowing the UK to grow in a more sustainable fashion.
A new calculation of intangible assets on business balance sheets, such as the value of corporate brands, has also played a part, the ONS says. The rise and fall in the value of many intangible assets is excluded from the internationally agreed measure of GDP. Its inclusion benefits the UK, which hosts many companies that have a high value based on their intangible assets.
“It is pioneering work,” says Diane Coyle, a University of Cambridge economist and a longtime critic of GDP as an adequate measure of the nation’s economic health.
To illustrate how the wider ramifications of the pandemic and the cost of living crisis have hit the UK’s overall score, the ONS says GII per person remains slightly below its pre-pandemic level after measured declines in the standard of nutrition, family car use and the quality of adult care since 2019. Meanwhile, GDP edged above its pre-pandemic level.
Coyle is hopeful that other countries will copy the new methods of calculating economic growth so they can be published and be compared by major institutions such as the International Monetary Fund and the Organisation for Economic Co-operation and Development.
She says GDP measures all monetary transactions, even when they destroy the environment or do much to undermine the mental health of millions of people.
“For a long time there has been a desire to measure the economic benefits that haven’t been priced before and how they either enhance the wealth of the nation or destroy it,” she said. “There is a paradox that GDP will increase after a natural disaster because it counts the cost of the clear-up and the rebuilding as extra GDP, but there is no accounting for the destruction.”
According to a standard measure of net wealth in Great Britain, each household has an average wealth of £302,500, including their part-ownership of all public assets. A measure of inclusive wealth that adds the natural environment and the stock of wealth in people – their skills and mental health – put the average at £592,298.
Inclusive wealth fell by 0.4% in 2022, after a fall of 0.2% in 2021, largely because the UK is depleting the wellbeing of households and the natural environment in order to produce a larger annual income.
The ONS cites a review for the Treasury by another Cambridge economist, Sir Partha Dasgupta, as providing the building blocks for its latest effort at calculating inclusive wealth.
The 360-page Dasgupta review recommended that the ONS add natural capital and human capital to the existing calculations of largely physical capital and financial assets.
“The atmosphere provides a service and carbon emissions degrade its usefulness because there is a less livable space to operate in,” an ONS spokesperson says, adding that the figures it uses are based on research about the impact of rising temperatures and pollution on households and businesses.
Officials at the ONS are hopeful that statistics bureaus in other countries will recognise GII and NII as robust measures of broader economic activity and begin to adopt them in their own publications, alongside GDP. However, it is expected GDP will remain the main economic benchmark for several years before international agreement based on a fresh standard can be reached.
