IT's economic value too low

Software investment figures would add two per cent to UK output

Existing figures ignoring software are skewing Bank of England sums

Treating software spending as an investment rather than a cost could add the equivalent of a year’s growth to the UK economy and affect the Bank of England’s interest rate calculations, say economists.

Research published by London’s Queen Mary University (QMU) this week puts private sector software spending at £22bn in 2004, a fifth of the amount spent on traditional tangible assets such as machinery.

Software investment has only been measured by the Office of National Statistics since March, with the first figures to be published later this month.

But the QMU paper suggests up to two per cent could be added to UK gross domestic product (GDP), at a time when annual growth is between two and 2.5 per cent.

Measurement of software investment as an intangible asset is a reflection of the UK’s changing environment, says QMU professor of economics Jonathan Haskel.

‘We have moved from an economy dominated by investment in machines to one dominated by knowledge,’ he said. ‘If investment is being under-recorded, then GDP will be under-recorded as well.’

Haskel says the implications could be huge.

The Bank of England sets interest rates on the basis of inflation, calculated using the gap between demand in the economy and its ability to supply. Skewed supply-side figures could see the Bank applying the brakes too early.

‘Investment levels determine supply-side potential, so if more investment is going in than we thought then the supply-side potential is also higher and the economy could be allowed to grow faster,’ said Haskel.

Capitalising software investment is a start, but a bigger shift will involve doing the same with people and processes, says the Institute of Directors’ senior policy advisor Jim Norton.

‘If we could measure what goes into getting the productivity benefit from software investment, the figure would be two or three times as high again,’ he said.

Employers body the CBI says traditional research and development (R&D) measurement needs a similar rethink.

‘Our economy is underpinned by service sectors that do not necessarily need high volumes of R&D, but are hugely innovative in terms of the development and use of software,’ said CBI head of innovation Tim Bradshaw.