Small ticket with a big impact

Economics

A CONFESSION: for the second time since it started, I put a pound into the lottery. Bit stupid really, but at least I was in good company; and I suppose it is good to know we are all subject to the same irrational economic forces.

But what would have happened to that pound had it not gone into the lottery? Maybe I would have saved it. Perhaps I would have spent it on some "low ticket" item, such as an extra Sunday newspaper. What, in short, are the economic effects of the lottery? It is a fascinating question of practical economics, and it is one to which it is beginning to become possible to supply some (rather surprising) answers.

The best starting point is to look at the amount we are spending on gambling in general, and the impact of the lottery on that. Here the crude impact is very clear, for as shown in the left-hand graph, spending on gambling has leapt upwards in the last year, reversing a 20-year downward trend. But anyone concerned about the effect on our national morals might care to note that figures unearthed by Kleinwort Benson show gambling expenditure is still lower as a proportion both of consumption and of GDP than it was in the early 1970s, and that the late 1960s surge in gambling was duly reversed.

At some stage in the future, gambling will presumably go out of style again, though that day may be a long way off.

Meanwhile the lottery is undoubtedly distorting our pattern of spending. The annual total spent on gambling is now running at pounds 7bn, up from pounds 3.5bn. Most of that, not all, is coming out of other purchases. David Mackie, an analyst at Morgan Stanley, notes that while overall consumption in the first three quarters of last year rose by 2.4 per cent in volume terms, spending on confectionery fell 2.4 per cent, spending on other forms of entertainment 5.3 per cent, video hiring was down 3.1 per cent, and purchases of newspapers and magazines down 0.9 per cent.

That surely feels right. The lottery is a form of entertainment, and other forms of entertainment are just the sort of spending you would expect to be displaced by sales of lottery tickets. This looks like one of the none-too-frequent instances where a common-sense expectation of people's behaviour is supported by the figures. Other forms of gambling seem to have suffered a bit, but not by as much as one might expect.

This switch of spending into the lottery means that retail sales are rising more slowly than they would have done otherwise. This is charted on the right-hand graph, which adds the payments into the lottery on top of the slower rise in retail sales. JP Morgan reckons that about one third of the slowdown in the growth of retail sales last year is attributable to the lottery.

The effect on tax revenues, on the other hand, is none too marked. Sure, the Government gets revenue from its share of the proceeds, but it is losing out on VAT on other areas and - with less spending on drink and tobacco - it may be losing on excise duties too. But there is a cash-flow advantage for the Government: it not only receives its tax take but also sits on the funds until they are disbursed to charities and other beneficiaries. Were it not for that, the public sector borrowing requirement would be perhaps pounds 1bn higher than it currently is.

Now turn to the spending side. The money goes out in three ways: in administration costs, in prizes, and in payments for the various good works. The first is pretty small in relation to the economy as a whole and whatever one's views about the deal that the organisers struck, is not a significant economic factor. Prizes? Well, we really don't know much about the spending habits of the winners. Obviously the bulk of the big wins are saved and invested, and the bulk of the small ones are spent. But we do not know the balance between the two: maybe it is 50/50.

On the good causes, all spending is supposed to be on capital projects rather than running costs. There may be a little displacement - money set aside for a capital project becoming available for other expenditure - but a decent working assumption is that the whole lot goes on capital and most of that on construction.

Put all this together and what do you get? I can discern at least five effects.

The most obvious is that gambling has increased relative to other forms of entertainment and to sales of things such as sweets.

The second follows from that: retail sales understate the rise taking place in consumption.

Third, investment in the economy will rise relative to consumption. There will be a greater supply of investment funds from the big winners and more spending on investment projects by recipients of the funds.

Fourth, part of the pause in economic growth last year may be attributable to this switch: it takes a while for the money taken out of circulation to be disbursed, and a further period before it is actually spent. Expect maybe some injection of demand into the economy at the back end of this year.

Finally, the Government's own finances have been flattered by the lottery simply by its cash-flow effect: the PSBR would be declining even more slowly had the Government not had the interest-free loan it currently receives from the punters.

What happens next? As the months roll by, the initial impact of the lottery will fade and it will become a perfectly normal part of our personal and public finances. Expect the spending on gambling as a proportion of national income to level off, perhaps close to the level of the early 1970s at about 1 per cent of GDP. That surge shown in the left-hand graph is not sustainable for long, and other forms of entertainment will start to fight back more effectively. We do not know what technical developments are around the corner to capture more of our cash, but TV, phone and electronics companies are itching to sell us wonderful new goodies. As they do, the state lottery may come to seem slightly old hat.

We are also going, after a while, to reach the limits of what needs to be spent on "heritage" projects. There is a finite limit to the number of sports stadia and opera houses that we need. Because we seem to have underinvested in these projects in recent years there is a clear backlog. But pounds 1.5bn a year is a lot of money, even in these days of devalued sterling. Once the facilities are built, they have to be run and that costs money, too. The worst thing to happen would be a repeat of the 1960s when we over-invested in inappropriate state housing, which now is having to be replaced. It is very easy to waste money on grand projects that cost too much to run. After a while, expect pressure for lottery funds to be re- allocated to more pressing needs.

Finally, expect us all to feel more comfortable with the lottery. We will see the money being spent on things society would not otherwise have. It will, in the main, be money that otherwise would have been spent on small-ticket items, that do not have any lasting impact on the way we live - at least most of them don't. Please keep buying Sunday newspapers.

PROMOTED VIDEO
Life and Style
fashionHealth concerns and 'pornified' perceptions have made women more conscious at the beach
Arts and Entertainment
tv
Sport
Ojo Onaolapo celebrates winning the bronze medal
commonwealth games
Arts and Entertainment
Rock band Led Zeppelin in the early 1970s
musicLed Zeppelin to release alternative Stairway To Heaven after 43 years
Arts and Entertainment
High-flyer: Chris Pratt in 'Guardians of the Galaxy'
filmHe was homeless in Hawaii when he got his big break. Now the comic actor Chris Pratt is Hollywood's new favourite action star
Sport
Van Gaal said that his challenge in taking over Bobby Robson's Barcelona team in 1993 has been easier than the task of resurrecting the current United side
footballA colourful discussion on tactics, the merits of the English footballer and rebuilding Manchester United
Life and Style
Sainsbury's could roll the lorries out across its whole fleet if they are successful
tech
News
ebookA unique anthology of reporting and analysis of a crucial period of history
Travel
The shipping news: a typical Snoozebox construction
travelSpending the night in a shipping container doesn't sound appealing, but mobile crash pads are popping up at the summer's biggest events
Arts and Entertainment
'Old Fashioned' will be a different kind of love story to '50 Shades'
film
Arts and Entertainment
Tracey Emin's 'My Bed' is returning to the Tate more than 15 years after it first caused shockwaves at the gallery
artTracey Emin's bed returns to the Tate after record sale
Arts and Entertainment
Smart mover: Peter Bazalgette
filmHow live cinema screenings can boost arts audiences
Environment
Neil Young performing at Hyde Park, London, earlier this month
environment
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Project Manager (HR)- Bristol - Upto £400 p/day

£350 - £400 per annum + competitive: Orgtel: Project Manager (specializing in ...

Graduate / Trainee Recruitment Consultant - IT

£25000 per annum + OTE £40,000: SThree: Orgtel are seeking Graduate Trainee Re...

HR Business Partner - Banking Finance - Brentwood - £45K

£45000 per annum + Benefits: Ashdown Group: ** HR Business Partner - Senior H...

PA / Team Secretary - Wimbledon

£28000 - £32000 per annum + Benefits: Ashdown Group: PA / Team Secretary - Mat...

Day In a Page

Save the tiger: The animals bred for bones on China’s tiger farms

The animals bred for bones on China’s tiger farms

The big cats kept in captivity to perform for paying audiences and then, when dead, their bodies used to fortify wine
A former custard factory, a Midlands bog and a Leeds cemetery all included in top 50 hidden spots in the UK

A former custard factory, a Midlands bog and a Leeds cemetery

Introducing the top 50 hidden spots in Britain
Ebola epidemic: Plagued by fear

Ebola epidemic: Plagued by fear

How a disease that has claimed fewer than 2,000 victims in its history has earned a place in the darkest corner of the public's imagination
Chris Pratt: From 'Parks and Recreation' to 'Guardians of the Galaxy'

From 'Parks and Recreation' to 'Guardians of the Galaxy'

He was homeless in Hawaii when he got his big break. Now the comic actor Chris Pratt is Hollywood's new favourite action star
How live cinema screenings can boost arts audiences

How live cinema screenings can boost arts audiences

Broadcasting plays and exhibitions to cinemas is a sure-fire box office smash
Shipping container hotels: Pop-up hotels filling a niche

Pop-up hotels filling a niche

Spending the night in a shipping container doesn't sound appealing, but these mobile crash pads are popping up at the summer's biggest events
Native American headdresses are not fashion accessories

Feather dust-up

A Canadian festival has banned Native American headwear. Haven't we been here before?
Boris Johnson's war on diesel

Boris Johnson's war on diesel

11m cars here run on diesel. It's seen as a greener alternative to unleaded petrol. So why is London's mayor on a crusade against the black pump?
5 best waterproof cameras

Splash and flash: 5 best waterproof cameras

Don't let water stop you taking snaps with one of these machines that will take you from the sand to meters deep
Louis van Gaal interview: Manchester United manager discusses tactics and rebuilding after the David Moyes era

Louis van Gaal interview

Manchester United manager discusses tactics and rebuilding after the David Moyes era
Will Gore: The goodwill shown by fans towards Alastair Cook will evaporate rapidly if India win the series

Will Gore: Outside Edge

The goodwill shown by fans towards Alastair Cook will evaporate rapidly if India win the series
The children were playing in the street with toy guns. The air strikes were tragically real

The air strikes were tragically real

The children were playing in the street with toy guns
Boozy, ignorant, intolerant, but very polite – The British, as others see us

Britain as others see us

Boozy, ignorant, intolerant, but very polite
How did our legends really begin?

How did our legends really begin?

Applying the theory of evolution to the world's many mythologies
Watch out: Lambrusco is back on the menu

Lambrusco is back on the menu

Naff Seventies corner-shop staple is this year's Aperol Spritz