Last week the Office for National Statistics released their indicative estimates of the impact of the Blue Book revisions to GDP figures. The actual physical book bound in a blue cover is long gone, but the exercise remains, and it’s an annual attempt at compiling a set of consistent national accounts for the UK. It’s also the time of the year when the ONS introduce important methodological changes and when they revise the historical headline series on the basis of the latest methodology. Subsequent releases throughout the year maintain consistency with this methodology.

The 2023 edition of the Blue Book isn’t out until 31 October, but as is usual practice, the ONS have released an indicative series of the expected level of revisions to GDP in advance of it. This allows both official institutions (e.g. the Office for Budget Responsibility) and commentators to work on a basis that is very near to the final numbers rather than relying on what will soon be out-of-date numbers.

What has happened to GDP?

The ONS have revised the level of real UK GDP up significantly in 2020 and 2021 relative to their view of it in the 2022 Blue Book – by 0.6% and 1.6%, respectively. This reduces their view of severity of the fall of output during the first phase of the pandemic and improves their view of the speed of the recovery in quarter 2 of 2021.

Of course, revisions are to be expected over time, although these are relatively large. But they are not that surprising given the difficulty in measuring economic activity during the pandemic. The ONS had to rely on surveys whose representativeness was not as good as usual during that time, and extrapolating from changes in survey results in the face of large changes is a difficult business.

Chart: UK Real GDP since 2019 in successive iterations of the Blue Book

Source: ONS, FAI calculations. Shaded lines are extrapolated figures based on the latest Quarterly National Accounts growth rates

The chart above illustrates that difficulty, but also puts the size of the revisions in context. In the 2021 edition of the Blue Book, the ONS estimated that the real economy was much larger than they do now. This was revised down in last year’s Blue Book by around 4.5%. This year’s revision leaves GDP still 2.9% lower than it would have been using the 2021 Blue Book.

While this means that the ONS now believe the UK economy was larger in quarter 2 of 2023 than prior to the pandemic, that’s only the case by 1.5% rather than the 3.7% that the 2021 vintage of data would have implied. 1.5% is not nothing, but it’s hardly spectacular growth.

Much has been made of where the UK now sits in the G7 “league table” of recoveries, but that is essentially noise rather than information. There are international comparability issues with the data, but perhaps more importantly, the UK is not the only country who will revise its data – this is a process done by all official statistics producers at regular intervals, and so we are likely to see revisions to other countries’ data as well.

Why have there been revisions?

Nominal GDP – the total value of transactions in the economy – is little changed in the 2023 Blue Book, as the chart below shows. The main source of revisions since last year has instead been the implied GDP deflator – basically a measure of the generalised level of prices across the whole UK economy, and which also reflects the level of provision of public services.

This is because many of the costs (particularly staff costs) of public services are less variable than output. The ONS have over time moved towards measuring more and more public sector output directly. Health is one of the areas where more activity is directly measured, and where the implicit price increased dramatically during the pandemic as fewer procedures and appointments took place.

But new detailed industry-by-industry data showed that public service activity in 2021, while down on pre-pandemic levels, was revised up by 5% relative to the 2022 Blue Book, with health output in particular being revised up by 19%. Some sectors of non-governmental activities were also revised up though, with telecommunications being noteworthy for a 28% upward revision in output.

Chart: UK nominal GDP since 2019 in successive iterations of the Blue Book

Source: ONS, FAI calculations. Shaded lines are extrapolated figures based on the latest Quarterly National Accounts growth rates

What does this mean for the UK economic and fiscal outlook?

On one level, these are welcome news: the UK economy is in a better position than previously thought, and has grown since 2019, unlike previously thought. But that doesn’t mean there is a massive windfall coming for the Chancellor in the Autumn.

Nominal GDP, not real GDP, is the main driver of the outlook for the public finances. That’s because taxes are paid on nominal income, and government spending is also set in cash terms. So the fact that nominal GDP is little changed means that the OBR’s forecast will not feed this through directly into higher medium-term growth. In many ways, the revisions are about the pandemic days, and don’t necessarily tell us much about what will happen going forward.

The main fiscal rule set by the Treasury is for debt to be falling 5 years ahead at the time of the forecast, and small revisions to nominal GDP in 2020 and 2021 essentially tell us nothing about what will happen then – rather, it will depend on how much nominal growth is expected throughout the forecast period. The one thing that could change the outlook significantly would be if the OBR assumed higher medium-term supply potential of the economy because productivity growth was higher than previously thought in those years.

But with many other headwinds in the coming years, including higher interest rates, this is but one positive indicator, and likely not enough to move the dial for the OBR. We shouldn’t expect there to be much room for the Chancellor to change the direction of policy on the basis of this data.

How effective are the decisions made by the Scottish Government?

Over the Summer, the Finance and Public Administration Committee published their inquiry into Effective Scottish Government Decision Making. The report has now received responses from the Deputy First Minister and the Permanent Secretary.

In the report, the committee sought to define what makes a government effective, noting that defining effectiveness is challenging and subjective. They acknowledged that the pace of decision-making has quickened in an increasingly polarized political environment.

The report discussed the difference between the idealised cycle of policy making and the reality. It also includes one of our favourite graphics to illustrate this:

Source: Cairney, P. (2017b) ‘5 images of the policy process’, Paul Cairney: Politics & Public Policy

Transparency was a prominent theme of the report. The Committee found it challenging to discern key decision-making processes from public sources, and felt this obscurity could exclude many from understanding or contributing to these processes. Hence, they recommended that the Civil Service and the Scottish Government should be more clear about their process for making decisions: including the consideration of revealing more about cabinet decisions.

Issues around human capital are also discussed in the report. There’s recognition of the benefits of civil servants switching roles within the government, but frequent moves can erode institutional memory, skills development, and stakeholder relationships.

In the Permanent Secretary’s letter, he commits to a number of measures to address the committee’s concerns.

For example, the Scottish Government will now publish longer-term insight reports and continuously review the fiscal sustainability analyses of the Scottish Fiscal Commission. The Scottish Government is also working to better define ‘job families’, aiming to address issues like the negative impacts of churn.

The Committee will be considering these responses as they decide what to do next with their inquiry. More broadly, many will be keen that they see an improved decision-making process feed through to better designed policy which considers all consequences, both intended and unintended. For example, a recent Audit Scotland report found that SG does not routinely assess the carbon impact of spending plans, or the costs of Net Zero policies. This must be addressed, as we discussed earlier in the year.