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6 October 2017

A Mathematics problem (2)

Tag(s): Politics & Economics
A few years ago my stock broker gave a lunch at which Gus O’Donnell was the speaker. He had just taken over as Cabinet Secretary, the highest position in the British Civil Service. I found myself sitting next to him and I had the temerity to ask him why the government could not do a better job in measuring the statistics in the economy. He agreed with me that it was a major problem but offered no solution. I blogged earlier this year about forecasts and observed that the one certain thing about forecasts is that they would be wrong. Nevertheless policy makers persist in relying on them to make policy and the media persist in reporting them as if they were facts.

But at least you would hope that policy makers would be able to get accurate historical data based on which they might make decisions. Not so. Just as forecasts are always wrong, the one certainty about economic statistics is they will be wrong, and the only question is whether they are out by a little or a lot. Thus the quarterly growth figures for the economy as expressed by Gross Domestic Product are subject to extensive revision in the following two years as more data comes in.

The Office of National Statistics (ONS) recently announced a whole raft of revisions relating to most aspects of the economy. It turns out we had a much greater trade deficit in 2015 revised from £80 billion to a whopping £98 billion. On the other hand growth in incomes that year was 5.3% not the 3.5% originally recorded.

It is perhaps worth trying to see behind this and understand why it happens. Britain has for many decades had a problem with maths. It is taught badly and businessmen routinely complain of their younger staff being unable to perform simple calculations. I blogged on this aspect of the problem of mathematics in 2014.[i] But it goes beyond a failure in education and is deep rooted in society. For decades there was an ethos that gentlemen should be generalists, rather than specialists. There is a preference to hand control of numbers and statistics to a tiny handful of people with toxic consequences for our personal and national finances.

The Civil Service is hopeless at managing money. While Francis Maude and others in recent years claimed to have achieved efficiency savings their colleagues continue to spend vast sums on failed IT systems and obsolete defence kit. The Ministry of Defence took until 2009 to appoint a finance director with actual financial training.

But there are even worse problems in finance. As the novelist John Lanchester wrote in Whoops!, his superb account of the banking crisis, “many, bright, literate people have no idea about all sorts of economic basics, of a type that financial insiders take as elementary facts about how the world works.” The investment banks placed their faith in the hands of the most talented physicists and mathematicians they could find and let them play merry hell. The banks as Lanchester says “sucked up all the mathematically able.” Peter Riddell, former director of the Institute for Government, observed that this deprived not just Whitehall but also the nation’s classrooms of gifted mathematicians.

In Westminster, this vacuum was filled by the scowling figure of Gordon Brown. Through sheer force of will he assumed an unquestioned authority. He followed two key strategies. First, to make his initiatives, particularly tax credits, as complex as possible. And second, to stretch the statistics until they were bust. He abolished the economic cycle so that he could continue to spend. Crime statistics were reconfigured so they could not be compared to previous numbers. Immigration figures were just made up. In the end the Government was forced to set up an independent UK Statistics Authority, so tarnished were its own figures.

Look at pensions. In the wake of the recession, the Government lowered the “discount rate” (i.e. the amount by which it expects stock markets and savings to grow over the years) by 1.4%. The effect was to load an extra £300 billion on to the cost of public pensions. Meanwhile private pensions are systematically raided over the years by finance companies. Once you take into account initial deposits, annual charges, third party costs and trading fees, a reasonable estimate is 1.5% of the pension’s value every year. During the average lifetime, that will cut the pension’s value by a third.

Few people understand such issues and so governments and businesses continue to get away with daylight robbery. Throughout his time as Chancellor George Osborne constantly talked about “paying down the deficit”. The vast majority of people thought this meant the Coalition was cutting the national debt. All it meant was that it was reducing the rate at which it increased. The national debt rose by 60% during the coalition government. Official UK Government debt to private institutions is heading for £2 trillion, over £30,000 per capita, but in real terms it is probably double that when all off-balance sheet items are taken into account, like public sector pensions and PFI initiatives.

The result of all this is that our public officials in Government, the Civil Service and the Bank of England are flying blind. They don’t really know what is going on. Gross Domestic Product as I have often commented is a flawed way of measuring the economy. But even if we take it as it is the Office of National Statistics is only measuring through survey a cross section of the economy. Their sample is based on historical assessments and is unlikely to reflect some of the rapid changes in the economy. In 1995 manufacturing represented 17% of GDP; just 20 years later it was down to 9.7%. The service economy is growing fast with many new types of business in fintech, in blockchain, in artificial intelligence, in developing apps etc. It is unlikely that the Office of National Statistics (ONS) can keep pace with all this disruption. And of course these are all fast growing while manufacturing is in long term decline.

Another area of misunderstanding is in the area of job creation. If most of the jobs are on PAYE then it is relatively easy for the ONS to keep tabs. But as more and more people work in the so-called gig economy their tax returns are not due until January of the following year. Politicians and media are obsessed by trends in Average Weekly Earnings. If this goes down they interpret that to mean that the average worker is losing income and with prices rising is being squeezed. But that is simply not the case. The aggregate average is declining but that is due to massive job creation on low wages. The mix of jobs is changing fast. Those who are in continuous employment are doing fine.

The long term trend in self-employment got a huge tailwind in 1966 when the then Labour Chancellor Roy Jenkins introduced an extraordinary measure called Selective Employment Tax. The public finances were in a mess after two years of a Labour Government and in a rash attempt to plug one of the holes in a very leaky bucket Jenkins argued that the country needed more people in so-called productive work like manufacturing and construction and fewer in so-called non-productive work like professional services.

My father was a partner in a firm of Quantity Surveyors. Quantity Surveying is a necessary support function to the construction industry just as architects are. Without accurate costing of bills of materials and measures like time to build, projects will overrun both time and money and firms may go bust. Jenkins’ uniquely twisted logic had the effect of being an extra personal tax on my father as he and his partners paid this additional tax on their employees. Only Labour could come up with the idea of taxing work.

But many firms found a way round it. On Friday they fired all their staff. On Monday they rehired them as self-employed contractors. So not only did Jenkins not collect that additional tax on employment; it was also many months later that he collected the income tax through self-assessment instead of PAYE.

The UK Statistics Authority has even waded into the debate over Brexit and managed to get it wrong. In the Brexit campaign some Brexiteers made the claim that on leaving the EU the UK would be able to reclaim the £350 million we pay into the EU every week and spend it on the NHS. That has been criticised for being misleading and indeed it is. But there is a truth in it and it is how it is explained that matters.

Actually Britain pays a gross £367 million a week to the EU. But after taking account of the rebate, the net figure is £283 million. After taking account of EU payments to UK state entities, it falls to a net net £190 million. Add in EU payments to private sector UK bodies it comes down to a net net net £137 million, still £7 billion a year.

Recently Boris Johnson wrote in the Daily Telegraph “once we have settled our accounts, we will take back control of roughly £350 million per week. It would be a fine thing …if a lot of that money went on the NHS “.

Sir David Norgrove, chairman of the UK Statistics Authority decided to rebuke Boris in a public letter saying “I am surprised and disappointed that you have chosen to repeat the figure of £350 million per week, in connection with the amount that might be available for extra spending when we leave the European Union.”

But that is not what Boris said. He said correctly that we would have control of the £350 million; in other words we will decide how it’s spent, not the two thirds of it that the EU decides how to spend, measuring its priorities across its pan-European agenda.

So with numbers it’s not just the numbers that matter but also the words used with them.

[i] A Mathematics Problem  29th November, 2014

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