U.S. Commerce Secretary Howard Lutnick recently announced plans to remove government spending from the GDP report, aiming to make it more transparent. Lutnick criticized the historical practice of including government spending as part of GDP, describing it as distorting the economic picture. He emphasized the need to separate these two components, suggesting that government spending, such as paying people to plan purchases, should not be considered part of GDP growth. While he offered no clear timeline for the change, he dismissed concerns about a potential recession linked to government policies.
Lutnick’s comments come amid economic concerns, with some data suggesting a slowdown. Business and consumer sentiment have taken a hit, and there are growing fears that the economy could contract in the first quarter of 2025. The U.S. economy saw 2.3% growth in the fourth quarter of 2024, with government spending, including defense, contributing about 0.25 percentage points to that growth. Lutnick’s stance reflects a broader effort to shrink the government through cuts and layoffs, exemplified by Elon Musk’s initiative to reduce what the White House labels as waste.
Economists, however, have raised concerns about the implications of removing government spending from GDP. They warn that such a move could make the data more volatile and obscure a clear picture of the economy’s health. Critics argue that it would make it difficult to compare the U.S. economy with global peers and could distort economic growth figures. In times of recession, when government spending typically increases, removing it from the GDP calculation could create misleading economic indicators.
Some experts emphasize the importance of maintaining the current system, which allows for long-term comparisons and analysis of economic performance over time. Economists like Sung Won Sohn argue that keeping government spending in GDP calculations provides a fuller picture of national productivity and economic growth, as it helps gauge how well the economy is doing in relation to past years. Removing government spending, they warn, could introduce significant uncertainty into economic assessments.
SOURCE: REUTERS