What Do Economic Indicators Really Tell Us?
We use countless indicators to describe the economic development and current condition of countries. Public debt, GDP, inflation, investment figures, investment indices and many other numbers regularly appear in the news. Yet we often fail to look behind these concepts or to use the indicators as part of a broader system.
Economic news frequently reports the size of public debt, changes in gross domestic product, inflation or the scale of investment. These figures are naturally compared with those of other countries, and political decision-makers are often subjected to criticism based on them.
But we often fail to ask the questions that actually matter.
We do not always examine what a particular indicator conceals, how it relates to other economic processes, or what consequences it may have in the future.
Another common mistake is to compare very short periods. Comparing one month’s inflation figure with the previous month, for example, tells us very little by itself about the longer-term condition of an economy. There is an old saying about statistics that numbers show what their creators want them to show. The problem is not necessarily the statistics themselves, but what we use them for.
The indicators describing the current condition and immediate future of the Hungarian economy are not particularly encouraging. At first sight, it appears increasingly difficult to escape the consequences of earlier policy decisions that were either mistaken or at least open to serious debate.
But this is where the really important questions begin.
The Real Cost of Public Debt
Is the level of public debt itself the most important indicator?
Or should we instead examine how much interest the debt actually costs the budget, and how much this reduces the government’s room for manoeuvre?
The size of public debt is a stock measure. Interest expenditure, by contrast, is an actual cash flow: money that the government must pay year after year.
For this reason, when a new government bond is issued, the most important question is not necessarily how much additional debt has been created. We should also know at what interest rate and for what maturity the financing was arranged, what previous debt it replaces, and how it will affect interest expenditure in the coming years.
If, for example, higher-interest debt approaching maturity is refinanced with cheaper financing, this can provide a benefit for the budget. But this is not revealed simply by the fact that a new bond has been issued. What matters is the comparison of the full life-cycle costs of the two financing arrangements.
Economic reporting would therefore be much more informative if it showed how such a transaction affects government cash flows: how much interest will have to be paid, when any savings will occur, and how the budget’s room for manoeuvre will change over the following years.
GDP Does Not Tell Us How Much Income Remains in the Country
We encounter a similar problem when using GDP.
Gross domestic product is an important indicator: it shows the value of final output produced within a country’s territory during a given period.
But how much of this ultimately becomes income retained by the national economy?
Production by foreign-owned companies operating in Hungary increases GDP. An investment may create jobs, generate tax revenues, establish supplier relationships and genuinely create significant economic value.
However, part of the income generated may subsequently leave the country in the form of profits, dividends or other income flows.
For this reason, alongside GDP, it is also worth examining how much of the economic performance generated actually remains as income within the Hungarian economy.
This does not mean that GDP or national income is inherently the “right” or “wrong” indicator. They answer different questions. The problem arises when we try to draw conclusions from a single indicator that it is not designed to provide.
Not Every Investment Creates Genuine Economic Gains
The same problem arises when evaluating foreign investment.
It is not enough to report that a company has made an investment worth billions of forints in Hungary.
We should also consider state subsidies, tax incentives, the public cost of infrastructure development, and the tax and social contribution revenues generated by the investment.
But even that is not enough.
We should examine the value added created by the investment, its domestic supplier relationships, its employment effects, its contribution to productivity growth, and the proportion of the resulting income that remains in the Hungarian economy over the long term.
An investment does not become economically successful simply because it is large. It becomes successful when, over its full life cycle, it creates more economic value than the resources required to establish and operate it.
This is particularly important when an investment is financed partly through borrowing or with substantial government support.
Rapid technological development also requires us to consider how long an investment will remain competitive. A technology that is state-of-the-art today may become obsolete within a few years. This does not necessarily mean that the investment was misguided, but it does mean that its return should be evaluated over its entire life cycle rather than at the moment the investment is completed.
Industry or Human Capital?
One of the fundamental questions of economic policy is how a country should allocate its limited resources.
The question is not simply whether we should build industry or develop human capital.
The more important question is: which investment will increase economic productivity and society’s capacity to generate income to a greater extent and for a longer period of time?
This could mean industrial investment, infrastructure, education, research and development, digitalisation or healthcare.
What matters is not the name of the sector, but the long-term value it creates.
When Is It Worth Saving a Company?
Similar questions should be asked about support schemes.
Is it always worthwhile to support a company whose business model is no longer competitive and cannot be sustainably renewed?
Saving a company may of course have social benefits: it can preserve jobs, supplier relationships and local economic capacity.
But we should also examine whether the support makes economic sense in the long term.
Perhaps the company itself does not need to be saved. What may need to be preserved are the resources it contains: the skills of its employees, its property, machinery and market relationships.
It may be that these resources would be used more efficiently in a new business operating under market conditions than in an old organisation that permanently depends on state support.
The real question, therefore, is not simply whether a company has been saved, but whether the support creates more economic value than the public money and other resources invested in it.
We Should Not Look for a Single Number
The economic indicators we commonly use are important. Without them, it would be impossible to analyse the economic performance of a country in any meaningful way.
The problem is not the indicators themselves, but the way we use them in isolation.
Alongside public debt, we need to see the interest burden and the future cost of refinancing the debt.
Alongside GDP, we need to see the income actually generated and retained within the country.
Alongside the value of investments, we need to see their subsidy costs, returns and full life-cycle effects.
And alongside corporate support, we need to ask whether the same resources could create greater value elsewhere.
An economy does not consist of a few independent numbers. Behind those numbers are cash flows, incomes, debts, investments, human capital and long-term consequences.
The problem is not that we use the wrong economic indicators. The problem is that we often try to draw conclusions from good indicators that they were never designed to support.
By: Viktor Szentkiralyi