My Lords, I can see by the size of the exodus from the Chamber that many may regard this as a dry, technical report, but it is in fact a revealing tale of how complacency on the part of the statistics authorities and opportunism on the part of Governments have led to the use of inflation statistics leaving many people worse off. I asked my noble friend the Minister about this at Question Time and he assured me that he would deal with it comprehensively. I look forward to hearing his response.
The committee’s attention was drawn to the problems with the calculation of the retail price index through a series of articles by Chris Giles in the Financial Times, a long-time campaigner on these issues. We asked the Governor of the Bank of England about these problems during his annual evidence session with the committee last year. He told us that the RPI had “known errors”, should not be further embedded in government contracts, and that if there was anything the committee could do to advance this process, we would be providing “a real service”. I hope that we have risen to the Governor’s challenge.
We began our inquiry a year ago in June 2018 and reported in January of this year. Before I discuss the findings, I would like to thank the committee staff who produced the report: Luke Hussey, Ben McNamee and Lucy Molloy. Ben McNamee is leaving the committee after five years to go to work for the National Infrastructure Commission, following our report on HS2. He is the original gamekeeper turned poacher, and we wish him well.
Chapter 1 of the report describes the history of consumer price inflation. There are two main measures of consumer price inflation in use in the United Kingdom: the retail price index, which was introduced in the 1950s, and the consumer price index, which was introduced in the 1990s following the Maastricht treaty. Both indices are based on the changes in price of a fixed basket of goods and services, but there are a number of differences between what the indices cover and how the price changes are calculated. One of the main differences is how the two indices calculate the average price change for unweighted items in the basket: that is, items on which a proportion of household spending is not available for the level at which prices are collected. It may help to give an example to illustrate this point.
The survey used to calculate the indices will reveal the proportion of household spending on potatoes as a class of goods, but it will not reveal the spending split between the different varieties of potatoes—say, King Edward or Maris Piper. This means that the price changes of different varieties of potato—the price of King Edwards may rise by more than Maris Pipers, for example—cannot be weighted according to household spending. A method is therefore required to calculate the average price change when expenditure weights are not available—I hope your Lordships are following me so far. The RPI does this for some items through the Carli formula, which uses the arithmetic mean. The CPI, however, largely relies on the Jevons formula, which uses the geometric mean. Statisticians have been debating which is the preferred formula since the 19th century. We set out the arguments in chapter 2 but decided, probably wisely, not to enter into that debate.
My Lords, we live in strange political times. I find myself in complete agreement with everything that the noble Lord, Lord Forsyth, said. I think that I speak for the rest of the Economic Affairs Committee in acknowledging his skill as a conciliator—the House will be very familiar with that—which has enabled us to produce not just this report but a number of others, which I hope will be of value in decision-making as and when the next Government are formed. Before I proceed, I draw the House’s attention to my entry in the Register of Lords’ Interests: since the report was produced, I have become a trustee of the International Valuation Standards Council, which some might consider relevant.
The debate is essentially about the role of the UK Statistics Authority and, bluntly, what it is for. It is also about the integrity of statistics and the trust in institutions. For a long time—indeed, a number of decades—there has been a move away from Governments deciding things that can be controversial towards putting them in the hands of independent agencies or organisations, such as the UK Statistics Authority. This will work only if they show that they are truly independent and are acting in the public’s best interests so that we can maintain confidence.
Inflation matters, as the noble Lord, Lord Forsyth, pointed out. The rate of RPI and how taxes are indexed affects how much millions of people pay, whether on their fares, whether they are students, and so on. It is not only a technical issue; it matters a great deal to the well-being of millions of people in this country. That is why it is so important that we have confidence in the Statistics Authority. As the noble Lord said, nowhere in the 2007 Act—which set up the United Kingdom Statistics Authority, made it independent and gave it responsibility for the maintenance, integrity and accuracy of the statistics—does it say that it should consider other matters, as he said that its chairman told the committee. We find that difficult to understand because, for this authority to work, it has to be independent.
My Lords, my noble friend Lord Forsyth has achieved a notable success in making statistics both interesting and controversial. Normally there is nothing so dry as statistics, but he has demonstrated by his speech, the committee by its report and the noble Lord, Lord Darling, by his speech that statistics are not only dry but have a profound impact on people’s standard of living, sense of well-being and, therefore, political attitudes. The choice between the RPI and the CPI, with its problems, means that people are either better off than they thought they were or they have resentment because they are worse off than they should be. In practical terms, that means that decisions that ought to be taken in a democratic fashion, and debated and made judgments on in Parliament, are left at the whim of statistical inconsistencies. This is very wrong.
Having listened carefully to my noble friend and the noble Lord, Lord Darling, it is difficult to think of anything to add to what they have said. I had prepared a speech, but everything that I had intended to say has already been said. Rather than make that speech, I should like to emphasise, in no particular order, what is at stake: first, the position of the statistical authority; secondly, the way in which the Government make judgments between different sections of the community—bond holders, students, commuters and the rest; and, thirdly, as a result, the way in which decisions are taken in Parliament that have an immediate impact on the lives of ordinary people.
My noble friend Lord Forsyth has carefully explained our recommendations, and it remains for me to say only that this important debate demonstrates the unanimity of the members of the committee, who are people drawn from each of the political parties, of different backgrounds and approaches, in supporting this important report. We look forward to what my noble friend Lord Young will say. Earlier, he said that he had been a Treasury Minister, and we look forward not only to his response but that of the Chancellor of the Exchequer, whoever he may be in a short time.
My Lords, I declare an interest: in two weeks’ time, I begin to receive a Civil Service pension that will be uprated by the consumer prices index.
I congratulate the noble Lord, Lord Forsyth, and his committee on a rigorous and high-quality report, and on securing this timely debate. Public confidence in statistics is essential in a liberal democracy. I recall the words of Sir Michael Scholar, the first chairman of the independent UK Statistics Authority, who, incidentally, was appointed by the noble Lord, Lord Darling. He said:
“For me, good statistics is like sound money or clean water, it is an absolute necessity and if you do not have it things go seriously wrong”.
When it comes to economic statistics, measuring the rate of inflation is perhaps the most important statistic of all. Maintaining the value of a benefit, tax or charge has been hardwired into our social system since the Rooker-Wise-Lawson amendment of 1977.
I fully recognise that estimating the overall price level at any time is not easy, and I have considerable sympathy with the statisticians at the Office for National Statistics who must wrestle with this problem. Nobody has the same spending pattern. Expenditure tends to vary with age and income. Consumer habits and technological innovation mean that spending patterns are continually evolving. There is also a regional dimension, in that a lettuce will inevitably cost more on Uist than in Kent.
I was Permanent Secretary to the Treasury when the UK Statistics Authority, on the advice of the National Statistician, withdrew the retail prices index’s status as a national statistic in January 2013. At that time, it seemed that the RPI’s days were numbered. I knew that there would be a transition before the ONS and the Government alighted on a new arrangement, but six and a half years on I am surprised at how little progress has been made. I can understand the Treasury dragging its feet. At a time of fiscal consolidation, index shopping was helpful if, as the noble Lord, Lord Forsyth, pointed out, opportunistic, but there comes a point where such an approach damages the wider credibility of government policy, and we are now past that point.
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Lord Lea of Crondall (Lab)
My Lords, I begin by referring to a remark made by the noble Lord, Lord Macpherson, about the confidence that people must have in statistics. I was on the Retail Prices Index Advisory Committee for many years when I was at the TUC. I draw attention to the fact that a very strange omission in the report, which the noble Lord, Lord Forsyth, did not mention, is that what most people associate with the RPI is not gilts or housing costs but wage negotiations. The bedrock of all wage negotiations is the RPI. No one anywhere would think that the yardstick in wage negotiations could ignore the RPI.
Before we scrap the RPI—some people want to do that, so let us make no bones about it—we have to relate that to the dictum about confidence. If anybody in this country ever starts to think that somebody has a vested interest in tinkering around with the RPI, that will be a very bad day indeed. For that reason and others, I am glad that the committee has come down on the side of reforming the RPI but not abandoning it.
That being the case, I would like to put a question to the Minister. Is he aware that, in recent months, there has been a concerted campaign from somewhere in the newspapers, where any reference by economic correspondents to the RPI is preceded by the adjective “discredited”? If you pick up any dozen references in the last six months to the RPI or any consideration of it in the newspapers, you will find the word “discredited”. Where is this adjective coming from? It must be coming, I suspect, from the Treasury or the Bank of England. I would like to hear any other suggestions about where it is coming from, but these organisations have regular confidential conversations with economic correspondents —I do not think that the ONS does in quite the same way.
For the first time, we are in danger of making this issue into a bit of a political football. It has never been a political football, and I hope that it never will be. I do not even think that Boris Johnson would have it in mind to remove Brussels sprouts from the index. There has never been any political interference with it. The advisory committee has always tried to reach an agreed conclusion, although I think that some years ago there was a vote about something to do with housing costs.
That leads to my second point, which is that there is no perfect solution. I thought that the noble Lord, Lord Darling, let his rhetoric run away with him in implying that somehow a clear overall message was coming out of this and that something ought to be done about it. It is a very delicate balance indeed.
On housing costs, I think that the report says almost in these terms, “Well, we don’t much like housing costs being in the index, but on balance we can’t have an index without them in it”. If that was not in this committee’s report, it was in that of another weighty committee not so long ago. Housing costs are inherently very difficult because, unlike Brussels sprouts, they are ultimately a question of the valuation of land. We all know that economics textbooks refer to the factors of production being land, labour and capital, but in practice, of course, land is not a factor of production—as somebody once quipped, “They don’t make much of that any more”. The house price question has been a main driver of the change in economic activity in many parts of the country—exacerbated, I would say, by the component of RPI that we cannot take away—and there is obviously a difference between the received estate agent index affecting London and that affecting Aberdeen or Aberystwyth. So there are a number of delicate dilemmas.
My Lords, I support this report from my noble friend Lord Forsyth and his committee. There is very little that my noble friend and I disagree on. He trained me well when I was his PPS many years ago and I fully support the thrust of this report. The governance and probity of the UK Statistics Authority has quite rightly been called into question. The parts of the report that go into the legal basis for it leaving in place what is clearly an error as far in the RPI calculations must be addressed quickly.
As someone who takes a particular interest in disability benefits, over the years it has been a matter of great irritation to me—I put it no stronger than that—that there are winners and losers. As my noble friend described, the Government’s index-shopping is a sleight of hand; unless one is engaged every day in studying these types of statistics, the average person in receipt of this increase or decrease is probably not going to notice it in actuarial terms, but will certainly notice it in their pocket. Therefore, I support what the report is suggesting.
In Box 1.A of last year’s Budget report, it seemed that the Government recognised only too well that there is a fundamental problem here. They said that,
“the government will not introduce new uses of RPI”,
which makes me think that they are more aware of what needs to be done than they have indicated to my noble friend in correspondence.
Indeed. I used the phrase “sleight of hand” quite deliberately. Clearly, there needs to be some fundamental change here. The legal basis for the change is well set out in my noble friend’s report. I find it rather strange to be debating whether something that has been proven in law to be wrong should or should not be changed, and why there are so many reasons against changing it. A can-do approach by the Treasury is needed to bring about the committee’s recommendations.
I am not going to speak for long, although I should declare that I am one of those elderly pensioners in receipt of some government index-linked investments—a very modest holding. I do not know whether that will be good or bad. I think it has been bad already, but never mind—I have declared it to the House.
My noble friend said that at some point in the evidence session to the committee, somebody—I have forgotten who—said that they should be cautioned against market fragmentation of the gilts market, and my noble friend said that that was most unlikely. I share that view. However, in the two areas of gilts that are addressed in the report, one of those organisations already holds gilts with the dates as set out by previous speakers, and that particular group needs to be addressed. With the future issuance of gilts, if there is just one rate it also means that anybody looking at it to decide whether it is a good investment would at least know where they stood.
I would also like my noble friend to bear in mind that, for investments and savings generally, we are in an age of trading by algorithms. Huge sums of money are moved around in nanoseconds. Whether it is the manager of a corporate pension fund or the individual being given financial advice about quite a modest investment, gilts have for many years been the foundation of good advice. The fewer assets people have, the more they are recommended to have a higher holding of government-based investments rather than the equity-based ones which have the higher risk, which we would all be familiar with.
My Lords, I too thank the noble Lord, Lord Forsyth, for securing this debate and chairing the committee so effectively. I found the inquiry rather a strange experience to begin with. I had spent almost 20 years in the Treasury worrying about how to control inflation, yet in this inquiry we were deep in the detail of measuring inflation down to a few decimal points. In the process, as has been mentioned, we became aware of a series of quite surprising events that cast doubt on the Government’s various measures of inflation. I should like to develop some of those concerns.
I well recall that the main governance for the RPI until the mid-1990s was the existence of the RPI advisory committee, which consisted of some officials and a number of stakeholders, including the trade unions. The noble Lord, Lord Lea, mentioned that he was for many years a representative on that committee; there were also business representatives. My recollection is that the advisory committee found it difficult to accept any change that made a significant impact on the inflation rate, one way or the other. Indeed, there was a strong and continuing concern to uphold confidence in the RPI measure of inflation, for the reasons he mentioned.
It turns out that the RPI advisory committee did not meet between 1995 and 2007. I was somewhat surprised to learn this. It was charmingly referred to by the ONS in its evidence to us as a period of “no governance”. Then in 2007, we had the Statistics and Registration Service Act and the introduction of the RPI protocol. This required the ONS to produce a monthly figure for the RPI and introduced the formality we have heard about: that the Chancellor had to give his consent to any fundamental changes judged by the Bank of England to be materially detrimental to the holders of relevant gilts.
Paradoxically, this legislation, designed for the worthy purposes of increasing the independence of the Statistics Authority and improving the governance of the RPI, turns out to be a contributory factor in the loss of confidence in the RPI as a measure of inflation. In my mind, this stems from the asymmetric treatment of changes that are detrimental to the holders of gilts, as opposed to changes that are to their advantage and to the detriment of others. This is set out in the statute.
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This difference in how to calculate price changes for unweighted items leads to a difference in the inflation rate which each index produces. The gap between the CPI and the RPI-recorded inflation rate, which is attributable to this methodological difference, is referred to as the “formula effect”. In December 2009, the ONS estimated that the formula effect was responsible for RPI recording the rate of inflation as 0.54 percentage points above the rate recorded by CPI. However, by December 2010, the difference had increased to 0.86 percentage points—a 0.32 increase. What caused this substantial change? In 2010, the ONS changed the way it collected prices for clothing. It increased the sample size of clothing it recorded prices for, relaxed the rules on what types of clothing were considered comparable, and began collecting prices during the January sales. This is colloquially known as the strappy tops problem.
This was believed to be a routine methodological change, but it had a strange effect on the recorded price change of clothing in the RPI. From 1987 to 2009, the average annual price change in women’s clothing as measured by the RPI was a 2.5% decrease, but from 2010 to 2017, the average annual price change was an 11.1% increase. Something had clearly gone amiss. The ONS held up its hands and admitted that it had made an error. Witnesses were generally agreed that the interaction of the Carli formula with the new method of price collection was to blame for the overestimation of price rises. Although the error also affected CPI, it affected RPI more, and the ONS said that the change was responsible for 0.3 percentage points of the 0.32 increase in the formula effect.
That may sound very technical so far, but that error created real-life winners and losers. Who won? Holders of index-linked gilts. These gilts are linked to RPI, and the resulting 0.3 percentage point increase in the index led to an undeserved windfall. Chris Giles has estimated that the value of interest payments received by index-linked gilt holders was increased by about £1 billion a year. Who lost? Commuters, because rail fare increases are linked to RPI, and students, because the interest on student loans is linked to RPI. The increased difference between inflation as recorded by RPI and CPI also encouraged Governments to engage in the practice known as index shopping. Benefits, tax thresholds and public sector and state pensions were all switched from being uprated by the higher RPI to the lower CPI.
This brings us to the most surprising part of the story, with which my noble friend refused to engage at Question Time. The UK Statistics Authority, of which the ONS is the executive arm, has refused to correct the error, despite admitting that it had made a mistake. Why? As the correction of the error would be likely to reduce the rate of RPI inflation, it would adversely affect holders of index-linked gilts.
The 2007 Act requires the authority to obtain the consent of the Chancellor of the Exchequer to such a change. Sir David Norgrove, the authority’s chairman, told us that the 2007 Act meant that there was no point in requesting the change, as the Chancellor would just say no. Last week, he wrote to me to say that he was unable to reply to our report after all this time as discussions with the Government continue. In my mind, this undermines the independence of that body. The National Statistician, John Pullinger, who retired last week, suggested to the committee that Section 7 of the 2007 Act required him to take into account the interest of those who would be affected negatively by any such change, such as index-linked gilt holders.
This is not the committee’s interpretation of Section 7. Section 7(1) gives the authority the objective of,
“promoting and safeguarding the production and publication of official statistics that serve the public good”.
Section 7(3) states that the authority should,
“promote and safeguard … the quality of official statistics … good practice in relation to official statistics, and … the comprehensiveness of official statistics”.
Section 7(4) states that,
“references to the quality of any official statistics includes … their impartiality, accuracy and relevance, and … their coherence with other official statistics”.
The committee’s reading of this is that the authority is, to put it mildly, at risk of failing in its statutory duties by its refusal to attempt to correct the clothing error in RPI, which it openly admits. It is not for the authority to pre-empt the decision of the Chancellor, as its chairman suggested. The Chief Secretary to the Treasury told us that it was difficult for the Chancellor to say yes or no to a proposal he had not received. The Chancellor told us that he was happy to hear from the authority. The committee was unconvinced by the National Statistician’s suggestion that he should take into account the interests of index-linked gilt-holders when deciding whether to make a change. It is not clear from section 7 that this is a relevant consideration to be taken into account. We believe that the authority is required, by its statutory duties, to attempt to fix the issue with clothing prices.
The decision not to correct the error is part of a wider neglect of RPI by the statistical authorities. Following a review of inflation indices, the authority removed national statistics status from RPI in 2013 and now treats RPI as a “legacy measure”. Following the recommendations of a 2015 review by Paul Johnson, it has resolved to make no further methodological improvements to the RPI. However, that is a very surprising stance, given that RPI remains in widespread use. Paul Johnson told us that he had changed his mind since his 2015 review. He said that his recommendation to make no further improvements to RPI was predicated on RPI being phased out. He said that given this has not happened, the committee should ask the authority to correct the RPI. We therefore called for the UK Statistics Authority to resume its programme of periodic methodological improvements to RPI.
When the Governor of the Bank of England asked us to look into this, he suggested that with three official measures of inflation—RPI, CPI and CPIH—it would be good to consolidate the focus into one. We agree, and believe that in the future there should be one measure of general inflation that is used by the Government for all purposes. To achieve that, work is required on how best to capture owner-occupied housing costs in inflation indices. Witnesses criticised the approach of the RPI which uses mortgage interest costs, and the approach of CPIH, which uses rental evidence. CPI does not account for owner-occupied housing costs, save for minor repairs.
We said that the UK Statistics Authority, together with its stakeholder and technical advisory panels and a consultation of a wide range of interested parties, should agree on a best method of capturing owner-occupied costs. Once a method has been agreed, the authority—again, after consultation—should decide which index to recommend as the Government’s single general measure of inflation. We would like to see that adopted within five years.
Sir David Norgrove told us that RPI is not a good measure of inflation and does not have the potential to become one. We disagree, and believe that an improved RPI would be a viable candidate for the single general measure. A single general measure of inflation would prevent governments from index-shopping. Table 2 on page 39 of the report shows that when the Government are making payments to the public, CPI is the index used to uprate payments; but when the public are making payments, it is RPI that is used. The Government say that they are changing that. However, in May this year, the latest example was when National Savings and Investments index-linked savings certificates were switched from RPI to CPI. In other words, pensioners and savers around the country are being cheated. It appeared to be a switch motivated by its favourability towards the Government, rather than a principled approach to uprating.
The present Government, however, have taken some steps to address the imbalance. Business rates were changed to be uprated by CPI rather than RPI, and discussions have taken place around uprating rail fares by CPI rather than RPI.
A single general measure would remove the temptation to index-shop. As the single general measure of inflation will take time to be implemented, the Government need to take interim action to stop this unfair practice. They should switch to CPI for uprating purposes in all areas where they are not bound by contracts to use RPI. The exception to this recommendation is the interest rate on student loans. As recommended in our report, Treating Students Fairly, this should be reduced to the 10-year gilt rate—something that the Augar review, which we will debate tomorrow, was not able to recommend because, I am told, the Treasury leaned on committee members to say that they should not make any recommendations that would result in increased public expenditure.
This interim switch to CPI should also apply to new issuances of index-linked gilts. We heard evidence that there was sufficient demand for CPI-linked gilts. Ben Broadbent from the Bank of England dismissed concerns from the Debt Management Office that the existence of CPI and RPI-linked gilts would lead to market fragmentation. Anyone who knows anything about the gilts market knows that an argument about market fragmentation lacks some credibility. We heard concerns about the effect that the change to the calculation of RPI would have on existing index-linked gilts, the last of which is due to mature in 2068 for private sector bonds and pension schemes. As some witnesses discussed, a sudden change, such as redefining RPI, CPI or CPIH, would be inappropriate, but once the single general measure of inflation is in place, the Government and the UK Statistics Authority should decide whether RPI, if it is not the chosen measure, should continue to be published in its existing form or whether a programme of adjustment should be made to RPI so that it converges on the single general measure.
To avoid disruption, any programme should take place gradually over a sufficiently long period to a plan that was clearly communicated at the outset. That includes our recommendations. The Spring Statement said that the Government would respond to a report by the end of April. The Chancellor wrote to me on 30 April to say that the issues raised in the report are “complex and wide-ranging”—a bit like social care, which we will report on next. He said that the “breadth, complexity and importance” of the issues meant that the report requires further education. Sorry, I mean further consideration—a Freudian slip. He said that the Government would respond to the committee’s report as soon as is practicable to do so, but wrote to me last week to say that the issues are so complex that the report requires further consideration.
The report cannot remain unanswered. It raises serious questions about decision-making by the statistics authorities. The Government and the UK Statistics Authority need to address the challenges highlighted by our report. I beg to move.
The 2007 Act not only requires high standards of stewardship but specifically gives the authority responsibility to compile and maintain the retail prices index, which the authority and everyone else agrees is defective at the moment. It is flawed—and has been so for almost 10 years—yet apparently nothing is going to be done about it. It is worth labouring the point that, at a time when it has become fashionable to denigrate experts and trash institutions, to find an institution such as this inflicting harm on itself is deeply depressing. The only way this authority will command respect is if it recognises that a mistake has been made or that there is a flaw in the statistics, and does something to put it right.
The authority knows that RPI is flawed. It refers to the RPI as a legacy matter—some legacy; it is being used, day in, day out, to calculate people’s entitlement—and that it is not a good measure of inflation. There have been arguments about this for the past 100 years or so but in this case since 2010, because of the methodological point raised by the noble Lord, we know that the inflation measure is higher than it would otherwise be. As I have said, this is not just an academic issue because it matters to people.
The authority has also said it wishes to discourage the use of the RPI. If that is its ambition in life, I am afraid that has failed as well. Members of the public think the RPI statistic is the main measure of inflation. It is better known than the CPI, let alone the CPIH, which is hardly known at all outside a narrow field of public opinion.
It is vital for the Statistics Authority to reconsider its position. When the chairman said to us that there is no point in going to the Chancellor because he will say no, that is to completely misunderstand the authority’s position. It is there to act in the public interest and to say to those who are elected—the Chancellor of the day—that they need to do something about it. They should not just assume—I suspect it is an informed assumption, in the usual way—that such a recommendation would not be welcome. None the less, it needs to be dealt with. As a former Chancellor, I am aware that if I were the Chancellor of the Exchequer I would probably find it unwelcome. However, having received other things that I felt unwelcome in my time in office, I do not see why I should treat this one any differently. You have to get on with it. Frankly, it does not do the Government’s reputation for policy-making and making decisions any good to carry on with a procedure that we all know is fundamentally flawed.
The noble Lord, Lord Forsyth, eloquently made the point that many gain from this—if they hold government gilts they are gaining handsomely—but many other people are losing. Sooner or later they will wake up to the fact that they are losing and will continue to lose unless something is done about it. I appreciate, too, that there will be a cost to the Exchequer if this is to be done too quickly—although I have read the utterances of the two candidates now vying to be the next Prime Minister, and fiscal rectitude does not appear to be the order of the day. They may have a more open mind than I might have had as to how much money they are willing to spend, as there does not seem to be any constraint on that at the moment.
The committee has raised an issue of great importance, in outlining not only the practical results of a flawed RPI but the more fundamental question that, if Parliament decides to put these matters into the hands of an independent authority, unless that authority exercises its judgment, does what is right and what it is required to do in the Act of Parliament, one is bound to ask what on earth is it for.
I thought the UKSA handled the issue in textbook fashion in 2013, but since then it has been less sure-footed. It is no longer credible for the UK Statistics Authority to hide behind the Government. It needs to be clear about what is the best measure of inflation, and it needs to move the retail prices index into line with that measure.
Personally, I think the committee has been rather too kind to the RPI as currently constituted. It is not just the clothing formula which is the problem; it is the use of the Carli formula more generally. No other country uses it. Canada dropped it for sound reasons in 1978. Everybody else, with the exception of Slovenia, uses the Jevons formula. As Paul Johnson said in his 2015 review,
“Carli should not be used in any index aiming to achieve a good estimate of changes in consumer prices”,
and further it,
“is not suitable for use”.
Dr Ben Broadbent in his evidence to the committee reinforced the case against Carli saying that its failings,
“have been evident for a century”
I know this country welcomes exceptionalism, but we really ought to adopt international best practice. I would therefore advise against keeping the Carli index on life support. It is better to put it out of its misery once and for all.
Dropping Carli will have big implications for people who use the RPI. Having criticised the UK Statistics Authority for slowness, I should give it credit for its approach to consultation hitherto, and I hope it will consult further as and when—I hope it is soon—it reaches a definitive view on the way forward. I recognise that the UKSA is independent of government, but I would be grateful if the Minister could confirm that consultation lies at the heart of the UKSA’s and the Government’s strategy when it comes to change.
A reformed index would mean a transfer of resources to rail travellers and graduates with outstanding loans. The Government, understandably, have not recognised these groups as priorities hitherto, given competing calls on taxpayers’ money, but it is always open to the Government to change the relevant uprating formulae, just as they introduced the triple lock to underpin the state pension.
This brings me to the vexed issue of index-linked gilts. My recollection is that this was the swing factor when the Carli problem first emerged in 2013. I can see why the Treasury and the Debt Management Office do not want to disrupt the gilt market—it is to their credit that it is one of the most efficient markets in the world—but here the committee’s report is persuasive. First, whether or not the ONS changes the basis of the RPI, the market is sufficiently big—and it is likely to get bigger with current spending proposals—to be able to bear CPI-based issues existing alongside gilts indexed to the RPI. As the committee’s report makes clear, there are only three index-linked gilts left with a requirement that the Treasury buys them in at par if there is an index change. All will have expired by 2030, and even if the Government had to buy them in, I do not believe that would prove too disruptive, not least because at current prices few, if any, holders would want to exercise the option.
I urge the UK Statistics Authority and the Treasury to act. Maintaining the status quo is increasingly untenable.
I recognise that the committee does not conclude with a broad rhetorical flourish; it concludes with some careful recommendations—not throwing javelins at random in the direction of somebody at fault who has not been paying attention. That is why Mr Boris Johnson’s namesake himself adjusted his position to look at this thing in the round. Broadly speaking, I think that this is a good report, but there are arguments on both sides of many of the questions under scrutiny.
Yes, it is true that the RPI is generally a bit above the CPI, but that is factored into much of industrial life. Saying that there should be just one index is a dangerous road to go down when all the academic literature at least pays lip service to the notion that, if you are looking at macro policy or international monetary policy, you probably need something constructed along the lines of the CPI. But given that historically, ever since the Ernest Bevin era when it was created as a cost of living index, the retail prices index has had confidence, we should stay with it. On getting a solution to the clothing dilemma, I do not totally understand it, but clearly it is correct to have that recommendation.
The people at the receiving end of statistics such as the RPI might expect the House of Lords’ Economic Affairs Committee to include some people who have been a bit more involved in wage negotiation; there are no such people in sight on the committee and this is relevant to the point we were debating half an hour ago. This is a matter for the man and woman on the street; it has become a bit of a debate between the economic academics, the Treasury and the Bank of England.
I finish with the theme on which I began, which is that it is a pity that there should be this relentless and democratically not very sensible campaign on the part of certain bodies—I suspect that it can only be the Treasury and the Bank of England—who keep putting the word “discredited” before “RPI”. Given the state of Britain now, that is not a very sensible thing to do. Although the RPI is not perfect—and no index is—many of the criticisms made of it reflect a misunderstanding of its purpose and are implicitly based on the erroneous assumption that it should follow in full the economic principles suitable for indices such as the CPI and CPIH.
I am sorry for making a rather long statement, but one cannot say that people should accept in their wage packets a difference of minus £350 a year by shifting from the RPI to the CPI. That is a street level understanding of the question, not a highly academic one.
The way in which the changes to gilts are brought about, as outlined in this report, needs some careful handling. It would be detrimental to best advice and best interests, for the corporate and individual investor and the reputation of gilts, if the changes that are clearly necessary resulted in people becoming nervous or not feeling it worth while to have at least a floor of that type of investment, particularly when it is a mixed investment. Over the years, we have seen fewer people prepared to take smaller returns on investments; they have what is almost a cavalier approach to savings and investments. Gilts have played a very big part in securing what most people would recognise as best advice. The changes are necessary for those who already hold gilts and those who will consider newly issued gilts. I hope it will be understood that the security of gilt-edged investments is an important part of that good advice, which our financial services market has relied on for many years.
As we have heard, where a fundamental change is seen as materially detrimental to the holders of gilts, the Chancellor, with advice from the Bank of England, has to decide whether the changes should go ahead. By contrast, if changes are beneficial to the holders of indexed gilts, the Bank of England is not required to take any action. This asymmetry became evident in 2011 and 2012, when there was a change in measurement of clothing prices, as we have heard. I argue that the Statistics Authority then made some quite serious mistakes.
The effect of the change was, as we have heard, an unexpectedly large increase in the clothing component of the index and an increase in difference in the growth of the RPI and CPI to around 0.8% a year, instead of 0.5%. I stress that, in the evidence we received, there was a lot of criticism of the change, along with claims that it had not been tested before implementation. This was the first mistake.
What I conclude to be a second mistake followed, which was not to undo the change and to go back to the previous arrangements reasonably quickly, when the emerging problems became evident. It became clear that the statisticians were influenced too much by worries that it would be judged a fundamental change that was materially detrimental to gilt holders. The one-sided nature of the protocol meant there was no requirement to be concerned about the original change, which had materially advantaged gilt holders. Instead, the options were studied and the focus switched to the weighting system and horrendous technical debates about the merits of different methods of compiling the two indices. This response is a classic case of the best being the enemy of the good. Reversing the clothing changes would not have removed the whole difference between the two measures but would have dealt with it in part. Reversing it quickly might also have been seen as a correction and not a fundamental change.
There followed what I think we all agree was a third mistake: the decision to maintain the RPI in its current form, but to declassify it as a national statistic and consider it a legacy measure, with no further improvements to be made. This was astonishing, because it was evident that the RPI would be in place in contracts for many years, both for gilts and pensions. The committee raised the question of whether admitting that this statistic is flawed, but refusing to fix or maintain it, leaves the authority failing in its statutory duties.
Another related governance aspect of this story worries me, which was emphasised by the noble Lord, Lord Darling. The authority admitted that it had been reluctant to propose a change to the Bank of England when there was a significant risk that it would be told that it was a fundamental change likely to go to the Chancellor. This fails to follow what is set out in the legislation. I have some experience of public bodies, where the framework for their independence is set out in statute but there is a requirement to obtain the agreement of Ministers on a limited number of occasions. My interpretation is that it is for the public body to take a view about changes that should be made on professional grounds and not to shrink from referring them to Ministers for their approval, when required. In this case, it is not for the statistics authority to seek to guess the Bank’s response before deciding whether to propose changes; the decision should be taken on professional statistical grounds. It is then for the Bank of England to decide the materiality and potential detriment and for the Chancellor, in turn, to take a view on whether the proposed change should go ahead.
The committee has come forward with a sensible and workable set of proposals to try to get us out of this stand-off. At the same time, we should reflect on aspects of the governance of national statistics. As I said, the drafting of the legislation is unhelpful because of the asymmetric treatment of gilt holders and other stakeholders, not least those saving through government saving schemes. Even taking the legislation at face value, surely it is possible to make changes necessary in the light of changes in markets and product innovation without them being classed as fundamental and so that, when a mistake is made, repairing it is seen not as a fundamental change but as a tiny correction.