Pre-Budget Report 1998

Annex C: Living standards and sustainable development

This annex discusses the measurement of economic activity, standards of living and the sustainability of development.

The Government is promoting the development of a wide range of indicators to be used alongside GDP. The Office for National Statistics is developing household and environmental accounts, including an estimate of the value of unpaid care work; and the Government will shortly publish its new proposals for Indicators of Sustainable Development.

C1. Gross domestic product (GDP) and GDP per head are widely used as summary indicators of living standards. GDP is an indicator of market traded production or economic activity. The level of production determines the quantity of goods and services a country can afford to consume, which is one of the most important factors influencing living standards.

C2. There are, however, statistical and conceptual problems with GDP as a measure of production. The output of much of the services sector can only be measured indirectly through the value of sales and price indices need to adjust for technological advance which leads to quality improvements and new products. Household and other voluntary work is excluded from conventional measures of GDP, whereas the inclusion of collective defensive expenditures such as law and order and national security is arguable.

C3. GDP is not intended to embrace distributional and environmental changes or other quality of life indicators. As an aggregate measure, GDP pays no regard to the incidence of poverty, deprivation and social exclusion. The interpretation of and weight attached to inequality is inevitably highly subjective. Harmful by-products of economic activity such as pollution - for example of air and water quality - can be difficult to value. The depletion of resources such as forests and fish stocks can impact on the sustainability of growth. A host of other factors, such as hours worked, travel times, public safety, and the quality of public services such as health and education, also impact directly on living standards.

C4. In view of the limitations to GDP, the Government is promoting the development of a wider range of measures, to underpin sound policy making for current and future generations.

C5. A key part of this agenda is the work that the Office for National Statistics (ONS) is taking forward to develop satellite accounts, which are conceptually related to the main national accounts. Household accounts estimate the value of time use in unpaid housework, care work and voluntary work for charities and other organisations. Environmental accounts deal substantially in physical quantities which may be difficult to value in monetary terms. The ONS work is further advanced than that of many other statistical bodies: ONS published a report on UK Environmental Accounts in May 1998, and estimates for the value of time use in household work were published in an article in October 1997 Economic Trends.

Box C1 - Taking account of unpaid work

Household accounts can be used to measure the value of unpaid production in the household sector. In the UK such production is estimated as ranging from 40 to 120 per cent of GDP, depending on the method of evaluation. The ONS is carrying out research to develop this area of the UK's accounts, and intends to construct a ìsatelliteî account to the national accounts for unpaid household production.

It is likely that, in time, household satellite accounts will enable a more effective analysis of policy issues where significant amounts of unpaid time need to be taken into account (for example, where policy changes might affect the balance between the formal and the informal economy). The value of unpaid care of adults and children in the home has been estimated at anywhere between 4 per cent and 9 per cent of GDP, depending on the method of evaluation. This could be doubled if unpaid care as a secondary activity or outside the home is also taken into account.

C6. The Government will shortly publish its new proposals for headline indicators of sustainable development, which consider social and environmental information alongside economic data. These will inform policy decisions and help business and individuals to understand how their own actions might contribute to a more sustainable future.

C7. Comparisons of GDP may still be good indicators of some aspects of relative welfare. As we have grown richer, many aspects of our quality of life have improved. For example, hours worked have fallen and standards of health and education have improved, as economies have grown richer. However, the global deterioration of key environmental resources - water, soil, forests, fish stocks and biodiversity - and the growth in pollution and waste by-products raises important issues for the future sustainability of development.

C8. Sustainable development means meeting the needs of the present generation without compromising those of future generations. This means ensuring that adequate resources - physical, human and natural - must be available for the future. Government policies therefore aim at economic growth whilst respecting the environment and promoting fairness and opportunity for all.