Wales is rich in self delusion if nothing else: how best to measure wealth and poverty in the Principality

By , Monday, 30 April 2012, 1 Comment

This is beginning to get me angry. Someone from the Welsh Government is obviously briefing the Welsh media that in some sense Wales is doing better economically than is apparent. So I read that the disposable income of Welsh households rose at the fastest rate in the UK in 2010, according to new figures. I note that the ‘new figures’ relate to 2010 before the public sector cuts kicked in ,by the way. Given Wales’s extraordinary reliance on the public sector for its GDP, I would expect those cuts to have a disproportionate effect on Welsh income levels from this point on: to be watched.


Be that as it may , Wales’s increase in gross domestic household income in 2010 remains consistent with the research finding that Wales in 2010 was the poorest part of the UK with a Gross Value Added per head equivalent to only 74% of the UK average. This is a poor place – with the odd well-off town or enclave -whatever indices you use. Not so, say the Welsh Government.

Wales Online says this: ‘There has long been a debate as to which is the best measure of the wealth of Wales. The Welsh Government has previously said that it prefers GDHI because it is a better aggregate measure of living standards than GVA, which doesn’t include some components of income.’ No wonder then that the Welsh Government welcomed the latest GDHI figures.

As a spokesperson from the Welsh Government said:’Despite the challenging economic circumstances, and the real impacts felt by people and businesses across Wales, the regional GDHI figures released yesterday show that relative living standards in Wales have improved and signal that some of the longer-term challenges are also being addressed,”

“Since devolution, Wales has seen the third largest percentage increase in GDHI per head out of the UK countries and English regions. However much still needs to be done as there is room for considerable improvement and the Welsh Government will continue to use all the economic levers at its disposal to try to ensure these figures continue to improve’.

This is the stuff that makes me angry. It combines disingenuousness with complacency. It borders on lying and helps no-one in Wales apart from a few deluded people in Cardiff Bay.

There is a serious debate about how to measure wealth and it boils down to the relative importance of financial as contrasted with asset wealth. Economists disagree on the merits of the different approaches and even on the facts. For example, some economists think that asset wealth in housing has had only a small impact on personal consumption by house-holders. The majority think differently. I’m with the latter crowd.

What this means in terms of GDHI in Wales is actually that rising disposable income can be consistent with falling asset wealth. Indeed, Wales’s  GDHI is as it is probably because house prices and costs are so low in UK terms while a high proportion of public sector workers in Wales have salaries , linked to UK wide public sector pay levels, which are closer to the UK average. Having a higher disposable income might just mean that housing costs are lower in Wales. To put it in context for a UK or international reader, a nurse renting my father’s house in the lower part of the Valleys only 12 miles from Cardiff would be earning roughly the same as a nurse in any other part of the National Health Service but can occupy the three bed-roomed house for about 450 sterling a month. In the south-east of England they would pay three times this.

Moreover, the gap between Welsh housing costs and English costs widened in the decade in which Welsh HDHI rose by comparison with the UK average (2000 to 2010). They both rose but overall the gap widened while Wales got closer to UK average GDHI levels. There is a link.

Another part of the debate is whether rising house prices is really associated with a knock on wealth effect. The majority academic position is ‘yes’ with some estimating that house price inflation and the leverage associated with it raised income thus consumption amongst householders in the UK in the first decade of the century by around 5%. The wealth effect was more obvious amongst those with higher house-price values. Essentially this leverage added unofficial wealth to the formal GDHI figures. This means that the ‘wealth index’ preferred by the Welsh Government doesn’t count in the extra consumption available from leveraging housing wealth. That is to miss the big economic story of the 2000-2010 period and to favour an inadequate measure of the wealth (or lack of it )of the Welsh.

That measure also misses the point about primary Welsh incomes being so dependent on public sector ,thus UK level, salaries. These rose significantly higher than private incomes between 1997 and 2010 and obviously contributed to Welsh GDHI. These salaries held up well in the first stage of the recession but are now experiencing downward pressures and few believe we will see the public sector boom years return. At the same time house prices in Wales have not risen as much as UK prices have since 2008 and indeed they declined in 2011. Both these factors impact GDHI in contradictory ways though neither is good for the Welsh economy.

Conclusion? GDHI is not actually an accurate measure of household consumption let alone wealth. Its rising in Wales probably shows how low property values are and those values are a better measure of the nation’s wealth or poverty than GDHI. If they drop further,if public sector employment and wage levels were to hold up, Wales’s GDHI would rise while the nation actually got relatively poorer in reality. GDHI is a fig leaf to cover the Welsh Government’s embarrassment. Using it rather than GVA is an attempt to move the goal posts. It is a version of the old joke that the patient’s operation went perfectly well and they had the best of care by international standards. But they died. The Welsh Government needs to move away from self-serving flexibility around the facts to a real recognition of the poverty trap we are in – and of how much worse it is going to get unless we base our policies on reality not phoney indices.

  • Christopher Bamber

    Er, not quite …

    1. GDHI measures what people have to spend. If it goes up, that means they are better off. Fact.
    2. GVA, on the other hand, is a policy wonk’s measure of ‘wealth’ which matters only in macroeconomic terms. Some low wage industries produce high GVA and vice versa. (I used to work in a county where failure to qualify for ERDF funding was a grievance because, although our GVA was too high to qualify, household income levels were actually among the lowest in the country).
    3. House prices being lower in Wales is not a relevant point since the WAG is talking about change over time, and house prices have always been lower in Wales. Your point is valid only if prices were rising more slowly in Wales than nationally (they were, but not substantially).
    4. Wales does not benefit disproportionately from higher public sector wage inflation becasue this has been concentrated in particular sectors – e.g teachers, nurses, doctors – who are not over-represented in Wales. Your average local government officer, or more germanely, clerical/admin civil servant in Swansea, Newport or Cardiff, has not done so well.

    On what ‘reality’ should Wales base its policy? That might be worth articulating. To my mind the best likely stimulus is fiscal creativity, such as tax breaks for inward investors, which worked well for Ireland. But it is stymied, devolution notwithstanding, by the Treasury. In the absence of that, public sector dependency – shifting more jobs out of London – may in ‘relaity’ be the least bad option, as it may comparbaly be in North East England. Or do you have a better idea? If so, let’s hear it – who knows, you might get something going!

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