Supplementary memorandum by the West Midlands
New Economics Group (RRD 14(a))
Our original memorandum was published by the
Select Committee on the Office of the Deputy Prime Minister on
3 March 2003 as EVE. 14 (HC 492-II Session 2002-03).
1. This further memorandum has been prepared
after reading the transcript of evidence (uncorrected) of the
committee hearing of 1 April 2003. We wish to particularly comment
on the issue of target economic indicators which were raised with
the witnesses from the Office of National Statistics (ONS) and
with Professor Peter Gripaios of the South West Economy Centre
(eg transcript references 356, 376 and 389).
2. We are pleased that the evidence session
explored the conclusion that a range of target indicators would
be more appropriate for assessing regional disparities rather
than relying on GDP per head, which the Treasury's Public Service
Agreement with the ODPM and subordinate Regional Development Agency
targets consequently do.
3. However, we are concerned about the alternative
measures and indicators that were talked about. We note that poverty
measures were not mentioned for example and "household disposable
income" is mentioned by both Mr John McGinty of the ONS and
Professor Gripaios in terms as might suggest that it is significantly
better than GDP per head as a target indicator.
4. We believe that "household disposable
income", as it is set out as a national indicator on the
ONS website[32],
suffers from the same most important flaw that we would argue
flaws the GDP growth figure. We will explain this below.
MEASURING A
GROWTH IN
PROSPERITY
5. In our original memorandum we said that
the government places a misguided emphasis on the economic "growth"
rates. We still do not believe these regional growth rates are
the appropriate focus for regional policy.
6. In paragraph 7 of our original statement
we pointed out how in the years since Margaret Thatcher's second
government, we are often told that the UK has been the beneficiary
of many years of "impressive" GDP growth. The generation
setting up home in the 1990s were allegedly living in more prosperous
times than their parental generation setting up home in the 1960s
and 1970s. In our West Midlands region however, to achieve comparable
forms of housing tenure, the norm now is for households to need
the income of two adult earners where previously one adult earner
(or one earner and a bit) could support a household in that comparable
tenure in the 1960s and 1970s.
8. We went on to say that the falling real
price of cars, computers and foreign holidays can, for some of
the time, distract people from the basic fact that the household
has to devote more of their lives to paid work to fulfil the most
basic need of keeping a roof over one's head. On this basis real
wages in our part of the UK have fallen by maybe as much as a
half since the mid-1970s. We note how the London Development Agency
did also pick-up on some of the elements of this argument (Ev
59). We said in our memorandum that people in London and the south-east
could make a similar or more dramatic calculation. Much of the
country could claim that we are now, on average, poorer than we
were in the mid-1970s; and that is without bringing the unpredictability
of tomorrow's pensions into the equation. GDP growth figures just
seem to contradict what most families know in their bones.
9. For such reasons we could not see GDP,
GDP per capita, and GDP per capita growth as meaningful economic
indicators for peoples' welfare, we find it seriously inappropriate
that such indicators are anybody's benchmark in assessing regional
policies and initiatives. However, the ONS's "household disposable
income" tells the same bogus story about increasing prosperity.
IF YOU
GET THE
INFLATION WRONG,
YOU GET
ANY "GROWTH"
WRONG
10. Household disposable income like all
such national statistics rely upon the flawed inflation statistics
to identify whether there has been real income growth or contraction.
In the jargon one would say that the flaw is in the "deflator"
that is assumed in making these calculations. None of the official
inflation indexes or deflators make any credible attempt to bring
the real full cost of housing into their estimation of inflation.
11. Take for example the Retail Prices Index.
This is often said to be based on a "basked" of purchases.
The term basket often gives people to understand that it is in
some respects representative of somebody's shopping or spending.
However, if you look at the technical manual for the RPI on the
ONS website[33]
you will see that the ONS makes clear that the RPI "basket"
is not based on shopper's purchasing. That would, according to
Chapter 6, Section 2 (6.2) of the manual, be a "democratic"
basket. Instead the RPI is based on what that section of the manual
calls a "plutocratic" basket. It reflects expenditure
in the whole of the UK money economy.
12. Does this serve to explain why rents
are only 4.7% of the RPI basket according to the current weightings
assigned back in 1997? The only mortgage payments included in
the RPI remain just 3.9% of this basket, while alcohol is a more
substantial 8.0% of the basket (Beer alone being 5.0%). Given
that this "basket" is commonly taken to be representative
of a consumer, it is illuminating to consider just what sort of
consumer it would be. None of us know any independent adult whose
costs and expenditure in any way resembles this. Frankly, it is
a rather "adolescent" pattern of expenditure if it were
ever incarnated.
13. While we are told that the RPI is not
used as the "deflator" that gauges whether the change
in the national income is growth or not, the elements that make
up the various deflator calculations are even more "adolescent"—in
that what mortgage costs that are included in the RPI are taken
out of the "basket" used for a deflator. One must here
even add, that this is also the case with the deflator used by
the ONS in calculating the growth of "Household Disposable
Income". This must be born in mind when assessing the story,
that "households" have become more prosperous since
1971, which one finds on the ONS web page for this indicator.
1
14. One might therefore conclude that had
a less "adolescent" calculation of inflation already
been adopted, commentators today would be analysing how we had
become a poorer people since the 1970s. They would be lamenting
how in the intervening period or governments, while appearing
to win a number of intense battles against inflation, lost the
war. They would probably be exploring how inflation could have
been and can be addressed with a greater diversity of strategies
than the "monetary" policies that proved such failures
under the UK's successive monetarist governments. They would even
be wondering why despite Lord Lawson's desire to reform what he
called the "ludicrous RPI"—detailed in his memoirs—nothing
was ever done about it.[34]
15. So we argue that a break must be made
with such adolescent inflation calculations in developing a new
generation of credible economic indicators. We note that the Chancellor
has recently announced that he wants to see regional inflation
indexes established. Such indexes could serve a variety of purposes,
some of which would be very useful. However, should these regional
indexes merely register inflation on the rather "adolescent"
basis that has previously been the norm, these indexes will serve
no other purpose than to be a crude and clumsy tool for driving
down wages in the more northern regions in the UK. Should this
happen, regionalism in this country would then definitely alienate
most ordinary people.
16. Such "new" regional indicators
will on this basis prove even less sustainable than the current
generation of indicators, which we suspect are themselves part
of the much discussed malaise of British democracy. Current concern
about people becoming disengaged from the established democratic
procedures is certainly well merited. Is not however, one of the
things that would have been alienating voters, the fact that politicians
of both main parties recite a story of "growth"? A story
that from the standards of living they see around them, too many
voters find unconvincing to say the least.
17. It remains for us only to remind this
committee that we would support policies and targets aimed at
addressing disparities in employment, employment opportunities,
and employment growth. We would further emphasise as target concerns
the disparities of poverty, and the different migratory pressures
that bedevil most regions—instead of the targets of which
we have been so critical here.
32 Household disposable income details are at http://www.statistics.gov.uk/STATBASE/ssdataset.asp?vlnk=4927&More+Y. Back
33
See http://www.statistics.gov.uk/statbase/Product.asp?vlnk=2328&More=N. Back
34
Nigel Lawson. The View from Number 11. (1992) p 849. Back
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