Fred-sizing the economy

http://news.bbc.co.uk/go/rss/-/1/hi/magazine/8037500.stm

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The size of Britain's economy can be hard to get your head around - but what if you were to shrink it to human scale? In a video edition of his regular column, Michael Blastland introduces Fred - a one man British economy.

Watched the video? I made a few assumptions in calculating Fred-sized spending and borrowing - here's my working.

First, it's important not to think of the £300 as the extra tax bill Fred might face. In practice, tax is progressive - weighted to the higher earners. The figures in the video are simply intended to show roughly how the sums would feel in a one-person economy on a person-sized income, rather than in terms of the billions and trillions used in the national accounts.

Fred's £15,000 income is intended to correspond to national income or GDP, which I've rounded up to about £1,500 billion (£1.5 trillion), making the calculation easy. £15,000 also happens to be not very far off UK modal income. I could have used other incomes but since it's easy to scale up from Fred's, this is as good as any.

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Accordingly, £1 billion compared to a national income of about £1500 billion is in the same proportions as £10 to Fred's income of £15,000.

The interest rate assumed on new debt is 2 per cent, which on £10 equals 20p. This is not far off the rates currently paid on short-term gilts, but is unlikely to remain so low for long. Hence the assumption that total debt is charged at a variety of rates, on average higher than 2 per cent.

The recession cost to Fred in extra debt interest assumes that national debt interest will increase by about 2 per cent of national income, very roughly in line with forecasts, hence 2 per cent of Fred's income: 15,000 x 0.02 = £300.

On spending, I have roughly divided the £250m example among the UK population and then divided this over five years, without adjusting for income, to produce a figure of just under £1 per head per year.

There are a variety of other assumptions we could reasonably make on all these numbers but the outcome would tend to be in the same ballpark, which, after all, is the aim of the exercise, not to be precise since precision would be illusory but to give a rough feel for the orders of magnitude.