The government has reclassified software spending to bring the UK’s economic indicators closer in line with the reality of the knowledge economy, according to business groups.

The purchase and development of software will now be measured as investment rather than consumption, adding one per cent to gross domestic product from the 1970s to 2005, says the Office of National Statistics.

The change will help make the UK’s economic metrics relevant to a 21st century, service-based, technology-enabled economy, says Graeme Leach, chief economist at business group the Institute of Directors (IoD).

‘The current measures are very manufacturing-orientated – all about buildings and machinery – which is a very old economy view of the world,’ he said.

But this week’s change is only the first step, says Leach.

‘To do this properly we need to go to the next stage and capture the human capital investment tied to IT – such as software training,’ he said.

The new figures will help inform policy-making, says Beatrice Rogers, senior programme manager at supplier body Intellect.

‘There has been a sea change and people now understand that to make good policy we need the right measurements,’ said Rogers.

But reforms need continued financial backing, and Intellect says the Treasury should build commitment into the departmental budgeting round.

‘The concern is that people only pay lip service and it does not become a reality,’ said Rogers.

‘Within the Spending Review we would hope there is some space for funding evidence-based policy,’ she said.

Establishing how to measure productivity in a service economy is also a challenge in assessing progress on the Lisbon

Agenda development targets, for Europe to be the most competitive knowledge economy by 2010.

A report on Lisbon published by the Centre for European Reform (CER) this week ranks the UK fourth. But measurable productivity is hard to find, says CER chief economist Katinka Barysch.

‘The biggest shortcoming in the UK is that productivity levels are still startlingly low,’ said Barysch. ‘But the UK has a very large services sector and it is difficult to measure productivity.

‘The kind of investment the City of London does for example, using new software, is not being shown in the figures,’ she said.

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