A tax on economic growth

Pete

 

446 million euro. That is what the Netherlands has to pay extra to the European Union because Dutch Gross Domestic Product (GDP) turned out to be higher than earlier estimated. This is the consequence of a clear and fair rule. Every EU country finances the EU budget with an amount that is proportional with its GDP. If the estimate of a country’s GDP is then revised upward, that country should pay more. To be sure, the Dutch don’t have to be afraid that next year’s 5 billion tax reduction will be withdrawn. Finance minister Dijsselbloem had already anticipated that Brussels would be calling and set some money apart.

the Netherlands is being penalized for its higher than expected rate of economic growth

Still, it is a little annoying. There are a lot of things you can do with 446 million euro. It is a little sour, too. Because economic growth in the Netherlands is higher than expected, we should pay more to Brussels than expected. So the Netherlands is being penalized for its higher than expected rate of economic growth. And there is not so much it can do about it. Unlike what is sometimes suggested, a country like the Netherlands does not have a handle it can use to simply change the rate of economic growth a little when it feels like it. Economic growth depends in a large part on developments on which the Dutch government does not have a direct impact. In particular in the short run, the rate of growth is to a large extent a given. Actually, there is only one way to lower our GDP at short notice: revise the definition of GDP!

GDP is invented to measure something different, namely a country’s productive capacity

On October 7, the Second Chamber installed the so-called commission Broad Welfare Concept. The task of this commission will be to investigate what is and what is not being measured by a country’s GDP and to analyse whether welfare of society is adequately reflected in its GDP. As regards the latter, the conclusion looks obvious from the start. GDP is invented to measure something different, namely a country’s productive capacity. This is interesting in itself and also because it bears a relationship with things as consumption and unemployment. Other things, like environmental damage, income and wealth inequality, internal and external safety and solidarity are not included in the calculation of GDP. The same holds true for the amount of leisure, life expectancy and the physical and psychic health of the population. GDP measures only part of a nation’s welfare and can therefore not be regarded a welfare concept.

Another question is how more attention can be paid to other factors. One can monitor all the factors that are an element of social welfare, so that it is clear at each point in time how these factors develop over time. Obviously, this does not ensure that attention will be paid to them. Indeed, some factors are already being monitored, but still economic growth, the growth of GDP, continues to attract the most interest. Alternatively, one can come up with a new definition of GDP, a GDP 2.0 or GDW (Gross Domestic Welfare). This enforces, so to speak, that people will pay attention to other factors than GDP, although it would be easy to calculate GDP yourself by combining the constituent components (consumption, investment, exports, imports).

This latter approach is by no means new. In the past, environmental economists have already constructed a so-called Green GDP by subtracting from GDP the loss of environmental quality. They calculated that the Green GDP is a lot smaller than the traditional GDP. US economists Charles Jones and Peter Klenow published a study a few years ago in which they monitored for several countries not only GDP, but also leisure, life expectancy and consumption inequality. They found that the ranking of Western Europe relative to the US is better in terms of welfare than in terms of GDP: life expectancy and leisure are higher and consumption inequality is lower in Western Europe.

But that does not say that these and possibly new approaches are free from practical problems. First of all, for which factors should GDP be corrected? Should GDP be corrected only for the damage to the environment, or also for other factors like inequality and unemployment? Second is the measurement problem. In order to include different factors into one concept, all factors have to be brought on an equal footing. But what is the money value of inequality and environmental quality to name a few? These questions are not so easy to answer. Thirdly, if one wants to compare different countries with each other, all countries will have to make the same adjustments to their GDP measures. This is easier said than done.

I think the installation of the commission Broad Welfare Concept is a good initiative, but I don’t think that GDP will be replaced with something like Green GDP, GDP 2.or GDW in due time. And what about lower payments of the Netherlands to the EU? You better not count on it.