There were two recent examples in the national press of how wrongheaded the analysis of figures can be. On 30th August, the Sunday Times carried an article about how the growth in the number of homes will increase the demand for water, according to research commissioned by the World Wide Fund for Nature. But how so? Do people who move into new homes wash themselves more often? The demand for water depends on the number of people, not on the number of homes. If a couple live with their parents because of a housing shortage, this does not save water. A rise in the number of new homes is unlikely to have much impact on water consumption.
The second item, published in the Independent on 27th August, concerned the VAT cut. A survey of 2,000 consumers by the accountancy firm PricewaterhouseCoopers appeared to indicate that the temporary 2.5 per cent cut in VAT that took effect in December had almost no effect on shoppers. Critics of the cut immediately hailed this as proof it had been a costly failure as an economic stimulus.
In fact, if the survey respondents were telling the truth, it proved the opposite. According to the survey, 88 per cent of respondents said the cut had had no impact on their spending. But, if the prices of goods and services purchased were lower than they otherwise would have been because of the VAT cut, and spending was unchanged, then the quantity of goods and services purchased must have gone up. Some half of all goods and services consumed are subject to VAT. Therefore the VAT cut amounted to an average cut of 1.25 per cent on the prices of all goods and services purchased. With unchanged spending, the total quantity of goods and services purchased must have risen by 1.25 per cent. In effect, the survey shows that the VAT cut had a positive impact on real expenditure.
Of course, the ability of respondents to discriminate between unchanged expenditure and a fall in expenditure of 1 per cent, say, when answering survey questions, is another matter. But if you take the results at face value then the evidence is that the VAT cut did precisely what it set out to do.
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Comments (2):
Shame on you, Stephen! You’ve got your sums wrong. If the price was cut by 1.25% but spending remained the same, the quantity of goods bought rose by 1.266%.
Explanation:
If the price of a fixed unit of goods was 100 before the cut, after the cut the reduced price bought 98.75 units (100-1.25). But spending remained the same, so it rose by 1.25: a percentage increase of 1.25/98.75 * 100, or 1.266%.
Better work on your number crunching.
READER’S LETTER:
It was a delight to read Stephen Nickell’s shaft of light on the temporary VAT cut. As he explained, if most people have not changed their spending habits, while tax has fallen, this will have left more of their money in the real economy, with the desired reflationary effect. Although the point seems self-evident, amazingly few professional economists and economic journalists have bothered to make it during months of criticism of the cut’s alleged ineffectiveness. This has left a clear run to George Osborne and others, such as the “senior tax partner” who fronted the Pricewaterhousecoopers report Nickell cites, to pursue their economically illiterate critique of the Government’s measure.
Still, there is a silver lining. Presumably all the politicians and pundits who have argued that the temporary cut has had no effect will, by the same token, be just as keen to argue that the return to 17.5% in January will do no deflationary damage.
David Griffiths