Oh what a tangled web we weave, when first we practise to deceive. I'm not sure the Office for National Statistics can be accused of deliberately setting out to deceive the British public with its analysis of how much tax relief the Government gives to the pensions industry, but its miscalculations have certainly been a part of the hopeless mess our pensions industry finds itself in today.
Now, more than two and a half years after David Willetts, the shadow work and pensions secretary, first drew attention to the problem, the ONS has admitted the full extent of its statistical howler. This was not, mind you, the press released mea culpa you might have expected. Rather, it was snuck out as part of a routine release of approved pension scheme data. It took an eagle eyed Stephen Yeo, a senior consultant at the consulting actuaries Watson Wyatt, to spot the correction.
The amount of tax relief the Government gives the pensions industry on contributions and other exemptions is not, as previously stated, £13bn a year, but just £10bn. This is the second time the ONS has been forced to eat humble pie on the issue. When challenged on its first correction, the ONS insisted that the revised figures were correct. It now transpires that the ONS had still managed to get them wrong.
Correct figures shouldn't logically be terribly difficult to establish. After all, it is the Inland Revenue that gives the reliefs, and simply by adding them all up, the statisticians ought to have been able to come up with an accurate number. Unfortunately, the ONS chose to approach the problem from the other end of the telescope. Instead it asked the industry what its contributions were and calculated from that how much relief pension funds would have been entitled to.
The potential for error is obvious. Many asset transfers were counted as new contributions, thus causing a high degree of double accounting. No sooner had one form of double accounting been discounted than it was discovered that another form of it was taking place somewhere else. The significance of this cock-up is that it has led the Government into an unduly complacent view of the amount of support it has been giving to the long-term savings industry. The ONS gave ministers the answers they wanted to hear.
Much criticised for abolishing the tax credit on dividends, depriving the pensions industry of a key form of tax relief, the Government was able to point to ONS statistics which seemed to show that the Treasury was being more than generous in the other reliefs that were routinely being doled out. The effect was to give a distorted view of the amount being saved and allow the Government to be more sanguine about the pensions crisis than was warranted.
Since the errors came to light, two major pieces of pensions legislation have been enacted, both of them founded on statistical data which now turns out to have been hopelessly overstated. If it wasn't so serious, it would be laughable.Housing crash?
Another day, another house price survey. They've multiplied like rabbits in recent years, and little good have they done any of us either in helping to fuel a largely unwanted speculative boom in property prices. Now, perhaps, the process will begin to work in reverse. They've all been singing from broadly the same hymn sheet over the last few months in pointing to a marked slowdown. Unless you live in the North of England or Wales, the housing market is cooling at speed. The latest Nationwide survey finds that prices rose just 0.2 per cent in September, after only 0.1 per cent in August. This is still a staggering 17.8 per cent up on a year ago, but it annualises at virtually nothing at all.
Five interest rate rises in a row, raising borrowing costs by about a third since their cyclical low point a year ago, seems to have done the trick in taking the heat out of the housing market. The big question is where they head from here. Has the Bank of England pushed too hard on the brakes, causing prices abruptly to correct, or has it achieved the desired soft landing?
When the Bank of England began to tighten policy, much use was made by commentators of the analogy of the "boiled frog". This refers to the contention, possible apocryphal, that if you put a frog into a pot of boiling water, it will immediately leap out to escape the scalding heat. But if you put the frog in a kettle of cool water and then gradually heat it until boiling, it won't notice it is being cooked. The Bank, it was said, hoped to achieve the same effect with its gradualist approach to raising interest rates.
The flaw in the analogy is that in the first instance, the frog stands some chance of survival. In the second, it ends up dead. This cannot surely be the Bank's intention with the housing market. Nor is it in any case an exact parallel, for the whole point of the frog story is to illustrate that slow changes in the environment are often just as dangerous as the sudden shocks. Most threats are obvious and therefore avoidable. It is the slowly developing ones that are the real killers. On this analysis, what the Bank of England should have done was pre-emptively to whack up interest rates long ago. The gradualist approach might ultimately be more damaging.
In its economic outlook published on Wednesday, the International Monetary Fund cited the possibility of "an abrupt adjustment" in the housing market as the biggest threat to the UK economy. This is very much conventional wisdom among economists, and I must admit to having peddled it quite frequently myself. Yet I'm beginning to think it suspect. I know of virtually no one who thinks the recent hyper inflation in house prices desirable or in any way a good thing. Most people would positively welcome a substantial correction, as it would make all housing more affordable.
High house prices are only of real benefit to those looking to exit the housing market completely, trade down, or with limited equity in their houses. For the rest of us, a fall in house prices would be very welcome, as we then don't have to borrow as much to buy or trade up. More debatable is the macroeconomic effect of falling house prices. Would a housing crash cause us to cut consumption by making us feel less wealthy?
Again, the answer is less obvious than it might seem. Higher interest rates plainly do affect consumption by reducing disposable income. But it is not at all clear that lower house prices would have a similar effect. A recent Bank of England study found that only a quarter of equity withdrawal is spent on immediate consumption, and most of that is on home improvements. Most of the rest is used to pay off other forms of debt or for saving. What's more, it would take a very substantial fall in house prices before the equity cushion that most householders possess is entirely wiped out. In summary, a house price crash may not be as bad a thing as the IMF suggests.Broadcast review
Everyone's a winner in Ofcom's Review of Public Service Broadcasting (PSB), assuming the Government goes along with it, that is. The BBC gains a solid underpinning for the licence fee, there's to be an additional £300m of taxpayers' money for Channel Four and others to bid for in providing alternative forms of PSB, and ITV is relieved of some of its PSB obligations, in particular the requirement to produce non-news regional programming.
ITV's continued ability to extract concessions out of the Government and its agencies is a wonder to all, given the hash it made of ITV Digital. Some ministers thought the commercial broadcaster should be allowed to go hang after such spectacular mismanagement, but since then there's been the decision to allow the formation of a single ITV and now this. The way things are going, Charles Allen, the chief executive, must begin to believe it is only a matter of time before he's relieved of paying the franchise fee as well. He could scarcely have hoped for such an enlightened approach.Reuse content