Deep dive

The use of GDP in public policy

Trebeck and Smith (2024) describe the different ways in which GDP is used to inform public policy [1].

Media and political opponents hold incumbent governments accountable for economic growth more so than for other outcomes, often framing changes in GDP as indicative of a government’s competence.
The perceived problem of a country’s debt is determined by its magnitude compared to GDP.
GDP is integral to cross-country comparisons and country rankings, which in turn feeds into decision-making (and even: entry to) various international groupings, such as the G7, as well as judgements about economies’ level of development.

International accounting standards and fiscal rules within governments reinforce the influence of GDP. The UN System of National Accounts has a strong focus on production and GDP as a headline indicator, even though one of its early creators, Simon Kuznets, highlighted already in 1934 that 'the welfare of a nation can scarcely be inferred from a measure of national income' [2].
GDP is used to calculate or determine various goals or qualifications, from credit ratings to interest rates in international loans and qualification for international aid. The International Monetary Fund, for instance, uses GDP to determine how stable national economies are, and the World Bank uses GDP to decide the size and interest rate of loans.
The EU Stability and Growth Pact (the ‘Maastricht Treaty’) permits government spending on public goods in relation to GDP growth, retained in the new Fiscal Compact that requires fixed ratios of GDP to public deficits and debt (the ‘golden rule’).

Government spending is often justified as contributing to GDP growth. For example, a particular sector or government initiative is argued to merit support because it contributes a certain percentage of GDP. Or the bigger the contribution to GDP, the more likely that an industry will have political sway.

GDP also informs estimates of tax take, providing a sense of the ‘fiscal envelope’ and therefore the policies which ‘can be paid for’.
Falls in GDP tend to drive efforts by the government to ‘get back to growth’ and to ‘stimulate the economy’. While other goals exist, they rarely have the same level of influence on government and when GDP falters, other goals are often deprioritised and even forgone in efforts to boost GDP.