Providing a better basis for policy making

Economists at King’s Business School have contributed to better policy-decision making by helping the national statistics bodies in the UK and Ireland improve their data on a number of important areas including income inequality, human capital, immigration and productivity.

Timely, accurate official data is essential to our understanding of the economy and informs the decisions of policy makers and analysts in local and national government, as well as by businesses and individuals. For example, the UK National Accounts are used by the Monetary Policy Committee of the Bank of England when setting interest rates and by the Office for Budget Responsibility in forecasting the public finances.

Understanding how income is distributed in the UK

Historically, the National Accounts produced by the Office of National Statistics (ONS) have provided aggregate figures for the UK but told us less about the financial well-being of individual households.

Research by Professor Martin Weale of King’s Business School with Dr Andrew Aitken formerly of the National Institute of Economic and Social Research, and now at the OECD, will help the ONS to address that gap. They have shown how to supplement GDP figures with additional information including components of income, such as employers’ pension contributions, which do not appear in conventional measures of household income.

The new figures make it possible to produce aggregates which reflect the average of each individual household’s experience of income growth, rather than the growth in ‘mean’ household income, which gives more weight to the growth experience of high-income households. The new approach also provides further insights into changes in the distribution of income between low- and high-earning households.

The ONS is currently looking at how best to take this approach forward.

Understanding human capital

Professor Mary O’ Mahony has worked with the ONS to develop better ways to measure the UK’s human capital – the combined total of skills and knowledge across the whole workforce that determine collective productivity.

As a result, the ONS has included new factors, such as health, in its measures of ‘Human Capital Services’, and is looking at including regional mobility.

The team have also developed a framework that will help ensure that human capital is better accounted for in our national accounts and in the key measurement of GDP. The new method treats education and its impact on students’ lifetime earnings both as an output of the education sector, and as an intangible investment in the UK’s human capital, with implications for GDP. It produced a more robust estimate of the effect of education on GDP by classing the education of foreign students as an export, rather than as an investment in the UK’s own human capital.

GDP and VAT turnover

Alongside inflation, GDP is the most widely used economic statistic. It affects the basis on which key policy decisions are made. By 2016, fewer and fewer businesses were filling in the paper-based surveys used by the ONS to produce short term estimates of GDP growth. On the advice of a review led by a former Deputy Governor of the Bank of England, the ONS started to work on deriving the estimates directly from businesses VAT returns.

However, this switch posed significant technical challenges, because of the mismatch between VAT returns, which cover rolling three-month periods and the calendar month basis of GDP calculations. The mathematical model developed by Professor Martin Weale and King’s Business School PhD student Paul Labonne will help the ONS to address this by breaking the aggregated data down into separate data points that correspond with the time periods needed. Their model captures the various inputs and seasonal variations that affect businesses’ turnover and VAT reporting, so that robust, seasonally adjusted estimates can be generated in real time.   This work has the potential to reduce the reporting burden on small and medium-sized businesses in particular.