Another Budget – another torrent of numbers twisted to suit the arguments of all varieties of politicians. So here’s a simple ‘bluffers guide’ to how to understand some of the figures, and how they can be “massaged”.
Let’s start with a few definitions.
NOMINAL SPENDING
This is actual amounts of money being spent. Cold, hard, cash. Simple, you would think. But as we’ll see it isn’t.
REAL-TERMS SPENDING
This is nominal spending adjusted for inflation. So £100 spent last year is not the same as £100 spent this year, if in-between inflation has been 3%. Now you would need to spend £103 to buy the same as you did last year.
This is where the fun starts.
The first dodge is used when the Government wants to claim they have ‘protected’ spending on something. So the Minister claims “we have fully protected spending on public loos, we have spent exactly the same amount as last year”. Of course, if there has been any inflation in the cost of public loos then they are not buying the same amount this year as last, because they would need to spend more to do that, not just the same.
This is why spending figures are reported in both nominal and real-terms. You need real-terms figures to make a judgement of whether more, or less, or the same is being spent year-on-year.
The second dodge is claim “we are spending record amounts on ‘X’” when nominal spending has gone up. Of course they are – inflation is almost always with us, so nominal numbers almost always go up – even when spending is not really keeping up with inflation.
The ‘record amounts’ ploy can be used by both proponents and opponents of extra spending. Either side can claim that record amounts are being spent, and claim this is a good or bad thing, when actually in real-terms less is being spent.
TIME AFTER TIME
The next important dodge to look out for the Dr Who trick – messing about with time.
Here’s an example. Let’s pretend a government is planning the following spending on Health, in real-terms:
Year 1 £100bn
Year 2 £105bn
Year 3 £110bn
Year 4 £115bn
Year 5 £120bn
Now the Minister, who thinks the public want extra spending on Health, makes two claims:
“We are going to spend £20bn a year extra on Health.”
“We are going to put an extra £50bn into Health.”
Both of these statements are ‘true’, but misleading exaggerations. They are going to spend £20bn extra but only in year five. They are going to spend £50bn extra but over five years. By playing about with time, it’s possible to make spending look bigger (or smaller) than it really is. And you don’t need a TARDIS to do it.
(Media reporting often compounds the confusion by not making clear what ‘headline’ numbers mean by saying clearly what time periods they are talking about.)
Again, both Left and Right can use these sorts of arguments to exaggerate extra spending to suit their cause.
SPENDING AND GDP
One of the statistics that creates a lot of confusion is when spending is reported “as a percentage of GDP”. It is actually one of the most useful, but also most misunderstood, public finance measures.
Part of the confusion stems from a lack of understanding about what GDP – Gross Domestic Product – is, and isn’t.
It’s quite common to see statements like this: “How Apple became so successful that its total revenue is bigger than the GDP of some countries” (Independent, 28 Jan 2015). You’d be forgiven for thinking Apple is bigger than some countries.
Well, maybe Lichtenstein, or Tuvalu, but not many others. This is because GDP is an attempt to measure how much extra value an economy creates (in a year). It is not the same as the revenues (or turnover) of a corporation. So, if anything, it’s closer to the profitability of a company than its turnover – obviously profit is a much smaller number than turnover.
The second confusion comes from statements like “we spend 8% of our GDP on health”. We don’t ‘spend’ GDP at all – we just measure spending against GDP as a way of comparing spending trends – either over time in the same country or between countries by using GDP as a measure of the value being generated in a country.
This is the most common comparative measure used by Governments and analysts because it’s the most useful.
Public spending as a percentage of GDP has draw-backs. Short-term fluctuations in GDP due to booms or busts can distort the public spending/GDP numbers. GDP is itself a problematic measurement, as my colleague Diane Coyle has pointed out. But in the long-term, and for international comparisons, it remains a useful ratio to compare public spending to GDP.
These are just a few examples of how our politicians (and others) can be ‘naughty with numbers’. They will never stop doing it – which is why citizen’s need to be aware and vigilant for the spin.
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