THE SCOTTISH GOVERNMENT AND THE ABUSE OF STATISTICS
PETER SMAILL
In order of depravity, there are lies, damned lies, and statistics - and then there’s the data output of the Scottish Government.
It’s a harsh conclusion, but the fevers of the referendum and upcoming general election have provoked a series of abuses of numerical analysis which form a pattern of offending and re-offending in terms of hiding objective facts from the electorate.
Let’s take the most recent outpourings on wealth distribution. The headline take is that 2% of Scotland’s population own 20% of the wealth. (The well-trendy Lefty theatre group of the 70’s called itself 7:84 since they thought 7% owned 84%, so maybe there has been progress but the strapline is the same structure).
Looking more closely, however, almost half of total personal wealth is accounted for by private sector defined-contribution pension pots - only 7% of the private sector now has the gold standard final salary schemes.
We see nowhere in the calculations the fact, however, that nearly all state sector workers- from street cleaners to government ministers- have these highly desirable final salary pension rights. They are easily expressed as a capital amount, typically applying a multiple of 20 to 25 times to the payout level.
So council workers with two-thirds of their final year salary- let’s say a £15,000 pension, which is commonly the level as jobs for life predominate, are worth £300,000 to £375,000 - likely at the top end, what with inflation linking and other beneficial factors.
These are significant equalising sums, given that 545,000 Scots work for the State.
But no account is taken of them in this inequality study, a particular case of bias since the Ministers and civil servants who worked on the report are beneficiaries.
Since the time of Lloyd George a principal tool in the armoury against destitution is the basic State pension - no splendid bounty, but a safety net for many who skilfully balance the books each month.
At up to £113 a week, we should on established accounting principles also capitalise this to achieve intellectual consistency with those personal pots underpinning the “unjustly rich Scots” scenario played out by the Scottish government.
That gives over £100,000 as the value of the right in the hand of Scotland’s 1.2 million State pensioners. Add that in and the relative position our government statisticians are trying to get to would be consistent and less alarmist: but that is not what our politicians want.
Then there is the equalising provision of social housing, Benefiting from rents at a third of market value, local councils are obliged to write down the cost of a £120,000 house to £40,000 under fair value accounting rules.
Does the £80,000 disappear into thin air on the signing of the much-desired council tenancy papers? It is in economic terms transferred to the tenant: so not rich on that account, but with a significant financially valuable right for life (and beyond- children can succeed).
What are the physical signs of inequality? Calorific intake, a measure of true poverty in the third world, can hardly be called in aid of the leveller arguments here in the land of Rab C Nesbitt. With 92% owning mobile phones and 70% having access to a car, our housing estates bristle with satellite TV (high-definition ready in most cases). These are not signs of a highly inegalitarian nation.
Across the UK, the economist Christopher Snowdon has produced wealth data for the top decile compared to the lowest 10%, which shows that, although income inequality increased under Thatcher (due to decoupling of benefits from inflation), it has in fact been reducing since John Major.
The withdrawal of child benefits from high-rate taxpayers and the fact that the 45% top rate now exceeds the position for most of the Labour years seems to escape the egalitarians.
In Scotland, a particular statistical vice on the Left is to quote the spread of pre-tax incomes: illogical since taxation and income support mean that the only valid comparison is actual disposable income.
“Taxable incomes are … more equally distributed in Scotland” concluded the Institute for Fiscal Studies, “particularly important is that the proportion of adults paying higher rate tax is barely half the proportion in the UK as a whole.” So, if anything, we need more millionaires, not less!
In the wealth study the Scottish government fails entirely to factor in the impact of a notoriously equalising move - the 12% Property Transaction Tax on the £750,000 plus band. Not only does this undermine top-end housing values as of now, the purchaser will also see future nominal growth punished, so sharp falls in real values will occur when eventually the residential assets of the “rich” have to be sold.
BORDERS RAIL COSTINGS
In all of this the one vital check, the Audit Commission, appear to have no influence on the statistical validity of Scottish Government announcements. The Commission is becoming part of the problem. Projects such as the Commonwealth Games, M77 and Borders rail are announced as being “within budget”, by which is meant “within the last updated budget”.
Borders Rail was originally costed at £72 million; was considered marginal at £155 million; now is defended at £294 million, but after £60 million of formation costs were arbitrarily excluded, as has been the case with major civils - those are dumped onto the roads budget. But the Minister, quite recently, still claims it is “on budget” - a statement only mildly challenged by the Audit Commission evidence.
A new low was hit in terms of data manipulation when the Scottish Government asked Ernst and Young to write a report justifying the benefit to cost potential of the Borders Railway. This proved impossible, unless a wholly guesstimated number was added in for “value in non- use”. The accountants were in fact conjuring up numbers for the psychic value of having a rail service, but not using it - only a hunch, and one of six non- core “sensitivities” (the rest are negative). But the Scottish Government immediately ignored the accountants’ caveats and quoted it as the truth, the whole truth and nothing but the truth - when predicting the worth of the project to the public.
The culture of statistical abuse was shot through the White Paper. Quite apart from using outdated oil data, the whole agricultural section was dominated by the bizarre claim that Scots farms had almost the lowest subsidy in Europe - subsidy per hectare was proclaimed as the true measure.
But this is absurd. Scottish farms are large, and with huge areas like Lewis notoriously cursed with poor soil. On a per-farm basis, we are almost the most subsidised!
The real test, added value per unit of subsidy, seems to have escaped the attention of those who no doubt pleased their masters by biasing the analysis to crude land area rather than to agricultural output effects.
The simple fact is that we have no effective quality control in place on the time-appropriateness, value-effectiveness or objectivity of the statistical output of the Scottish government.
It is asserted to be of high quality. But there is no conduit for challenge given the dominance of the ruling party. All is sacrificed to the twin aims of equality of outcome and empowerment: the state as enabler of public goods.
In so doing, a philosophical as well as statistical problem emerges. If we drive towards equality of outcome, then there will be inequality of effort, initiative and acumen: the best will have and hold much the same as the rest, but did far more to get there.
The current pretext for outcome fixations is that equal nations grow faster than poorer.
But this also is based on highly selective datasets. Hong Kong, London, Singapore - unequal place but fast growing; Japan - egalitarian and stagnating.
EASTERN EUROPE EXPERIENCE FORGOTTEN
Generalisations like those of economist Stieglitz and Picketty appeal to the pre-existing agendas of the levellers, but are the classic confusion - the muddling of correlation with causation. Folk have seemingly forgotten the former economies of Eastern Europe, which were strong on equality but useless as regards growth or human dignity.
Needless to say, the Scottish government does not analyse these models or why they failed.
What is the optimum level of inequality? The philosopher John Rawls opted for equality except where inequality disadvantaged the least well off.
That’s hard to measure and implement, but we could start also by acknowledging that there is natural variability in wealth and incomes. As a career and its related knowledge progresses, salaries and substance grows. So at 40 we will be paid double the rate for a 25 year old; and at 60 wealth may be five times the average, having saved up for the next 25 comparatively lean years.
Nowhere does lifecycle inequality receive its statistical due, yet it is undeniably a valid concept.
The egalitarians have no problems with the wealth (£26 million plus) of an Andy Murray, nor does the governing party object to the £162 million lottery winnings of their supporters.
So not only are the numbers dodgy, but the outlook of the levellers is selective and philosophically unformed. You might as well call for a world in which everyone is paid more than the average!
Peter Smaill is a former director of investment management at Fairfax plc
Robert McDowell
March 31, 2015 at 10:42 am
The political misrepresentation of economics data in the examples above is only the tip of the proverbial iceberg.
In Scotland’s referendum-politics the biggest deliberate errors were in Scottish GDP, a figure that is never empirically calculated by The Treasury and the Office of National Statistics. The number is merely assumed on a population share of UK GDP tweaked for the fact that Scotland has slightly more old people and fewer children than the UK average (without a fully-calculated external account, especially trade balance and capital flows with rest of UK). The oft-quoted figures are a wholly artificial, most generous guess - not at all reliable for assuming what tan independent Scotland’s GDP or GNP would be, and assuming no dramatic change. The oft-quoted figure of £130-£155bn is too high for a realistic prediction, too high by probably 40%, as most macro-economists would agree if asked.
The debate about the distribution of wealth confuse wealth and income and tend to ignore public sector and taxes. The Public sector as a share of GDP is really only about 20%, but when it suits politicians and voters the impression is often manufactured that it absorbs two to three times this by simply pretending the government budget is over 40% of GDP when this is only a ratio and when half is technically not part of GDP but transfers. Government also possesses huge off-balance sheet resources.
A quarter of the population has substantial net wealth, another quarter marginal wealth (after subtracting debt), another quarter is in balance and a quarter has no property or financial assets. There are many reasons why a quarter of the population is poor, many of them only temporarily so because they are starting out in life or new to the labour force or because of temporary conditions such as recessions. A third of the total poor are poor pensioners and another third are variously incapacitated, some permanently so.
In general there is great variety that can be analysed in different ways. Just as capitalist society is very much about generating losses and not only profits, and most companies do not survive even half a human lifetime, among those who are the wealthiest as among those who are the poorest, many are only temporarily so.
Generally, the banking sector, by congregating deposits from the many to lend to the few, is responsible for wealth concentration. It is the job of government and the tax & spending system to compensate for this by transferring resources from the wealthy to the needy poor to thereby maintain economic and political sustainability. Any study of the increase or decrease in wealth and income concentration would have to compare and contrast domestic banking with domestic government and take account of the mixed bag effectiveness of each. Crude snapshots in time that confuse income and wealth without rigorous accounting and seeing the dynamics of change including cross-border trade and capital flows will not come close to a realistic picture.
Much of the debate is no surprise and income and wealth inequality is worldwide. Even the very richest countries in average per capita income or GDP per person all have about 20% of their resident population on or below the poverty line. It is impossible in a free-flowing world for any country to do more than marginally improve on this. Where the debate is correct is where it questions what the public sector especially, and also the private sector variously, are doing to redress extreme imbalances in order to keep societies economically and politically viable and to do so internationally and not just domestically.