Why good news for GDP isn't necessarily good news for the Chancellor

The output gap is a strange and unpredictable beast, writes Nida Broughton.

The Coalition came into Government in 2010 with a plan to repair the public finances and set itself a target to eliminate the structural deficit. The ONS today published figures showing that GDP in the second quarter of this year is even higher than we thought, rising by 0.7 per cent rather than 0.6 per cent. But it isn’t clear if this is good or bad news for the Chancellor’s deficit strategy, because the structural deficit – and therefore the billions of cuts that George Osborne is pencilling in – is determined by small changes in a very slippery measure of the state of the economy: the output gap.

The Government’s structural deficit target is carefully worded to take into account the fact that part of the deficit – the “cyclical” part – will automatically disappear as the economy recovers. From a theoretical point of view, this makes sense: there is little point on focusing efforts on areas of spending that are going to fall anyway. The non-cyclical, “structural” part of the deficit – the part that will remain even when the economy is back on track is surely the part to be concerned about. 

So since 2010, the Office for Budget Responsibility (OBR), whose remit is to report on Government’s performance against its fiscal targets, has set about trying to measure the “output gap” – a measure of how far the economy has to recover.  The output gap is the difference between actual GDP and “potential” GDP. Potential GDP is the level of GDP that the economy could achieve if it were operating at “full capacity”.

But it has become increasingly clear that in practice, the output gap is just too difficult to measure. The OBR’s twice-yearly reports always show a comparison of the OBR’s estimate of the output gap against those made by other forecasters – including banks and independent forecasting houses. This provides a useful sense-check of the OBR’s figures. 

The last OBR report in March, showed, as it always has done, the huge range that different forecasters have come up with in measuring the output gap – ranging from -7.3 per cent to -0.9 per cent for 2013. To put this into context, just a two percentage point difference in the output gap estimate is enough to change the forecast structural deficit in the Government’s target year of 2018 by around £28bn – no small amount when the Government is looking to cut around £33bn after the election.

Earlier this month, the Bank of England, searching for a way to measure the state of the economy as part of its Forward Guidance, decided against the output gap, saying that:

“The output gap is unobservable and difficult to explain, and any estimate would be subject to substantial uncertainty.”

Instead, it plumped for unemployment as a measure. And now even as the economy is showing some signs of life, independent forecasters still can’t agree among themselves on what the positive growth figures mean for the output gap, as shown in the chart below. Of those releasing estimates after July’s surprise good news on growth from the ONS, two thought this meant the economy was now closer to potential. One thought that it was now further away – presumably taking the good news on GDP to be a sign of underlying productivity improvements that mean that the economy’s potential has expanded. And two kept their output gap estimate unchanged. 

Chart: Forecasts of the output gap in 2013

HM Treasury, Forecasts for the UK economy: a comparison of independent forecasts, August 2013

The question has to be asked: how useful is a public spending target that depends on such an uncertain measure of the economy? Perhaps recognising this, or perhaps because it made for a better statistic, George Osborne omitted to mention the “structural deficit” at all in his last Spending Review speech in June, referring instead to the overall deficit. And even though the structural deficit – on OBR forecasts - is due to go into surplus by 2016-17, George Osborne’s planned cuts stretch out to 2018. So does the Chancellor himself still believe in the usefulness of his target?

The Chancellor. Photograph: Getty Images

Nida Broughton is Senior Economist at the Social Market Foundation.

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The view from Google Earth is magnificent - but there's a problem

Google Earth is spectacular - but it can give a misleading impression of the planet and the threats we face from climate change. 

 

Google Earth wants you to “get lost” in its updated interactive map. Collaborations with new media partners mean you can now climb Mount Everest, swim with sharks or visit Afghanistan with Zari the purple muppet. No, really:


Source: Google Earth

Yet as Trump slashes support for the science behind satellite imaging, is Google’s emphasis on spectacle leading us down the wrong path?

Google Earth's new look all starts well enough. Opening the new site on your browser takes you to an image of a blue earth floating through the blackness of space. Back in the 1970s, similar images taken from the Apollo space missions helped kickstart the modern environmental movement. As the astronomer Sir Fred Hoyle put it: “Once a photograph of the Earth, taken from the outside, is available, a new idea as powerful as any in history will be let loose.”


Source: GETTY and Google Earth

And it gets better. Enter a destination in the search bar and you are greeted with the option to link directly out to the Wikipedia page: nerds of the world, rejoice! 

A guided tour from NASAearth is also on hand for anyone whose nerdery is in need of a prompt: “Geostationary satellites in geosynchronous orbits. Greenhouse gases and global warming. Glaciers... going, going, gone,” says the Bob Dylan-esque entry on its "ABCs from Space".

You can then choose to orbit your landmark of choice in 3D. And let’s face it - who doesn’t want to glide around the top of Mont Blanc, pretending to be an eagle? It’s almost as good as the BBC’s actual eagle-cam

But then it hits you. This is no soaring eagle, buffeted by wind currents and having to constantly adjust its flightpath in the face of real-world obstacles. This is a world surveyed at a safe and sanitising distance. Tourism for the Trump age – focused on providing “a consumption experience”. Certainly it is the opposite of “getting lost”.

In fact if anything has been lost or downplayed, it is the principles of scientific enquiry. The program is littered with human choices. Local versions of Google Maps, for instance, have shown different national borders depending on where in the world you log in. And while new, open-data imagery from America's Landsat 8 program is helping bring many regions up to date, other high-resolution imagery comes from commercial providers, such as Digital Globe. And as this Google 'help' page implies, there are issues of time-lag to face. 

You can’t even be sure what you’re looking at still exists. In 2015, Bolivia’s second largest lake vanished - a combination of climate change, El Nino, and irrigation withdrawal caused 2,700 square kilometres of water to evaporate into a dry salt pan. (It has not recovered, and seems unlikely to do so.) Yet on the new version of Google Earth the lake is still a healthy green:


Source: GoogleEarth

The much lauded film clips from the BBC’s Planet Earth II are similarly short on context. As I've argued before, David Attenborough's latest TV series did little to explain the stories behind the spectacle – there was no mention, for instance, of the arctic anthrax outbreak which caused thousands of reindeer to be culled, nor the role of climate change in worsening locust swarms. 

Finally, the new update actually shows you less of the world than it did before. Gone is the “Historical Imagery” tool that allowed you to see how a place had changed through time. Now, the Citadel of Aleppo in Syria is only visible as a bombed-out ruin. A surreal street-view reveals two women cheerily taking a selfie – with debris all around and their legs spliced out of shot:


Source: GoogleEarth

So why do these omissions matter? Because they take users further away from the evidence-based approach of earth science. It turns out that satellite images on their own are of limited use when it comes to quantifying change. Instead researchers must turn the raw pixels into numbers, which can then variously represent everything from forests to cities, glaciers and farms.

As Dr France Gerard at the UK’s Centre for Hydrology and Ecology explains, this process enables us to live in a better managed environment – be that by measuring air pollution or the impact of fertiliser on soil. The centre's landcover map, for instance, has been mapping British land use since 1990. Similar methods allow Sam Lavender’s company to provide Ugandans with a Drought and Flood Mitigation service, as part of the UK Space Agency’s International Partnership Programme.

Sadly, the need for public engagement has never been more urgent. Brexit and austerity have cast doubt over important projects in the UK. While in Donald Trump’s America, funds for earth monitoring are set to be slashed. Two missions already under the knife are PACE, a spacecraft set to track global ocean health, and CLARREO, which would have produced highly accurate climate records. Trump has also called for the earth-viewing instruments on the DSCOVR satellite to be turned off. Phil Larson, a former space advisor to President Obama, describes this decision as “baffling”.

So what can be done to reverse this trend? Experts I spoke to believe that collaboration is key. With government programs being squeezed, the earth monitoring industry may come to rely increasingly on the trend towards smaller, commercial satellites. These are great for increasing the quantity of data available but their accuracy needs to be constantly checked against the data from the larger and more reliable state-launched equipment.

There’s also still more data out there to share. As Bronwyn Agrios from Astro Digital points out, many countries have been gathering region-specific data – which could, in future, be made open source. “The neat thing about space is that there’s no border,” she concludes.

To help this process, Google Earth could do far more to raise public awareness of the science behind its special effects. Yet at least in one way it is already on the right path: its own new range of collaborations is impressively large. As well as the BBC, you can take interactive tours with The Ocean Agency, the Wildscreen Arkive, and the Jane Goodall Institute – all of whom put conservation up front. The Goodall journey to Tanzania’s Gombe National Park even describes the use of satellite imagery to measure conservation success.

 

More links with other citizen science projects around the world could turn the program into something truly ground-breaking. If it can incorporate these, then desktop-tourism may yet save the planet from Trump. 

India Bourke is an environment writer and editorial assistant at the New Statesman.

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