Everything we thought we knew about the economy is wrong
FACTS are sacred, unlike mere subjective opinions – or so most sensible people believe. In reality, as every good French philosopher would tell you, what we trust to be objective data-based truths all too often turn out to be social constructs. We are about to see a beautiful demonstration of this with the British economy, where the official statisticians will shortly entirely and drastically rewrite decades of history.
Everything we thought we knew – all the “facts” – are about to change. This is massive news for anybody who cares about the UK economy, politics and public policy; the last time a similar rewriting took place was when the UK’s economic statistics were harmonised with those of the rest of the EU many years ago.
One change will see research and development spending classified as capital expenditure; at a stroke, this will raise the level of the UK’s economic output by a cool £25bn. That’s just the beginning: overall, the statistical deckchair shuffling will boost the size of the UK economy by between 2.5 and five per cent, a shockingly large amount (and a vast range that makes it hard for outside forecasters to be able to predict exactly what the Office for National Statistics (ONS) will come up with).
Nothing real will have changed – but we will all officially be substantially richer. Hurrah – who said economic growth was hard to come by? The changes will start to come into effect this year but there is an “ongoing programme of work until 2017”; the ONS will publish various pieces of research this month and in May.
The EU’s ESA 10 rules will now require the inclusion of imputed contributions for funded (crucially, not for unfunded) defined benefit schemes – in other words, final salary pensions. At a stroke of a statistician’s pen, this will boost the UK’s savings ratio by a truly astonishing five percentage points.
We will go from being a nation of profligate, happy go lucky spenders to one of dedicated savers – even though, once gain, nothing real will have changed, and the accounting shift will come from those lucky enough to enjoy the sort of gold-plated pensions that younger private sector workers can only dream of. The rule may make a lot of sense to boffins – and may make international comparisons fairer – but in practice it will further camouflage the extent of the pensions and long-term savings crisis. If this delays tough decisions and lulls the UK into a false sense of complacency, then it will be a bad thing.
Many more changes are on the cards. There is, not entirely surprisingly, an issue with the way illegal activity is accounted for in the gross national income stats. This change alone will be worth £10bn a year. Changes to the way non-profit institutions serving households are accounted for will amount to £25bn. These are gigantic numbers; I can’t wait until the ONS tells us more next month.
Most intriguingly of all, changes to the way inventories, gross fixed capital formation and producer price deflators are calculated will impact on growth rates – in other words, the size of the economy will be larger and also the rate at which it has been growing.
Much of what we thought we knew about not just the past few years but probably even the past few decades will be swept away. Thousands of books and research papers will become obsolete, as will hundreds of thousands of news stories. Correlations and connections we thought existed will vanish, and it will be fascinating to see what exactly happened to the recession, subsequent recovery and the much-debated productivity shortfall.
It is unfortunate that the ONS is announcing the changes in such an unusual way. The short slideshow on which this column is based is available at https://storify.com/ONS/onseconomy – but I wish it had been published on the usual ONS website, accompanied by greater detail. Transparency is key when the authorities change the facts.
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