Front cover Independent review of UK economic statistics Independent Review of UK Economic Statistics Professor Sir Charles Bean March 2016 March 2016 2904936 Cover and Dividers v1_0.indd 1 09/03/2016 13:43 Independent Review of UK Economic Statistics Professor Sir Charles Bean March 2016 ii Independent Review of UK Economic Statistics Contents Chapter 1: Introduction and overview 1 Background to the Review 1 A vision for the future provision of economic statistics 6 Recommendations: Measuring the economy 8 Recommendations: ONS capability and performance 10 Recommendations: Governance of statistics 13 Content outline 15 Chapter 2: Measuring the modern economy – established challenges 19 Measuring GDP 19 Measuring services 35 Measuring financial inter-connectedness 42 Regional statistics 47 Measuring the labour market 50 Physical capital 58 Land market statistics 62 Addressing established statistical limitations 68 Chapter 3: Measuring the modern economy – emerging challenges 71 Value added in the digital modern economy 71 The sharing economy 91 Intangible investment 98 Accounting for quality change 106 Understanding the international location of economic activity 112 Keeping abreast of an evolving economy 116 Chapter 4: Effectiveness of ONS 121 Recent history of ONS 121 ONS resources 124 Recent ONS performance 130 Culture, Capability and Collaboration 137 Survey data sources 156 Administrative data and alternative data sources 162 Contents iii Data science capability 167 Technology and data infrastructure 176 Dissemination of ONS statistics 180 Chapter 5: Governance 191 Background to the current governance arrangements 192 Independence 195 Quality assurance and improvement 201 Prioritisation 207 The role and effectiveness of the UKSA Board 210 Oversight of UKSA 217 Annex A: List of tables and charts 221 Annex B: Acronyms 223 Annex C: Terms of reference 226 Annex D: Call for evidence 227 Annex E: Call for evidence respondents 231 Annex F: Stakeholder Engagement 234 Annex G: Bibliography 238 Chapter 1: Introduction and overview 1 Chapter 1: Introduction and overview Background to the Review 1.1 On 10 July 2015, as part of the government’s productivity plan,1 the Chancellor of the Exchequer, George Osborne, announced an independent review of UK economic statistics. The Terms of Reference of the Review are to: • Assess the UK’s future (economic) statistics needs, in particular relating to the challenges of measuring the modern economy (‘Needs’); • Assess the effectiveness of the Office for National Statistics (ONS) in delivering those statistics, including the extent to which ONS makes use of relevant data and emerging data science techniques (‘Capability’); • While fully protecting the independence of UK National Statistics, consider whether the current governance framework best supports the production of world-class economic statistics (’Governance’). 1.2 The Review was prompted by the growing difficulty of measuring output and productivity accurately in a modern, dynamic and increasingly diverse and digital economy. In addition, there was a perception that ONS was not making full use of new data sources and the continuously-expanding volume of information that was becoming available about the evolution of the economy, often as a by- product of the activities of other agents in the public and private sectors. Finally, frequent revisions to past ONS data, together with several instances where series turned out to be deficient or misleading, had led to a perception in some quarters that official data were not as accurate and reliable as they should be. 1.3 The Review has been undertaken by Sir Charles Bean, Professor of Economics at the London School of Economics and formerly Deputy Governor for Monetary Policy at the Bank of England, with the support of a small team of officials from HM Treasury, ONS and the Bank of England.2 In order to provide a suitable evidence base, the Review team issued a Call for Evidence to users of economic statistics, to which there were 66 responses, and conducted more than 200 meetings with relevant organisations and stakeholders. In addition, the team also met representatives of several overseas National Statistical Institutes (NSIs) to 1 HM Treasury, (2015). ‘Fixing the foundations: creating a more prosperous nation’. Available here. 2 Nick Broadway, James Clarke, Mausmi Juthani, Nayeem Khan, Karina Kumar, Will Laffan, Ivan Petrella, Mario Pisani, Britta Rinaldi and Michal Stelmach. 2 Independent Review of UK Economic Statistics give an international perspective on the UK’s statistical system and its practices. The team also benefitted greatly from the willing assistance of many members of ONS and the UK Statistics Authority (UKSA). 1.4 As requested by the Chancellor of the Exchequer and the Minister for the Cabinet Office, an Interim Report, containing five strategic recommendations underpinned by eight recommended actions, was published on 2 December 2015.3 That Interim Report focussed exclusively on the first and second bullets in the Terms of Reference. This Final Report develops the analysis in the Interim Report along several dimensions, including a fuller consideration of the challenges and opportunities generated by the digital revolution, and also extends the analysis to encompass governance issues, the third bullet in the Terms of Reference. 1.5 This Review builds upon a number of previous reviews of various aspects of economic statistics carried out in the past 30 years, including those by Stephen Pickford, Chris Allsopp, Tony Atkinson, Kate Barker and Art Ridgeway, and Paul Johnson. The regular commissioning of external reviews of ONS statistics, together with the recurrence of some similar themes, suggests that there are long-standing issues that have not yet been addressed. These reviews are discussed in more depth in Chapter 4. Measuring the economy 1.6 Economic statistics are central to monitoring, understanding and managing the economy, at both national and regional levels. Access to statistics that are accurate, reliable, relevant and timely is thus vital for policy makers. But such statistics are equally important for effective decision making in the private sector. Moreover, economic statistics provide a yardstick for assessing economic performance and are thus central to the ability of Parliament, the media and the public at large to hold policy makers to account. 1.7 Economic statistics constitute a very broad canvas. For the purposes of this Review, an economic statistic is simply any piece of quantitative information that is valuable to either the public or private sector for the analysis of a relevant economic issue. The primary organising framework for the statistical analysis of the economy is, of course, the National Accounts. These provide a set of interlocking accounts for the outputs, expenditures and incomes of the constituent sectors of the economy. But many other economic statistics are valuable too. These include data on: prices and pay; the supply and demand for labour; asset prices and financial transactions. 1.8 For some purposes, information is needed below the level of the aggregate economy. For instance, analysis of financial stability benefits from a detailed accounting of the flows of assets and liabilities between sectors and, better yet, individual firms. Similarly, effective regional policies require that information be available about economic activity at the level of the corresponding regional units. 3 The Review’s Interim Report can be found here. Chapter 1: Introduction and overview 3 1.9 An effective NSI therefore needs to be able to deliver reliably a broad range of statistics that correspond to the needs of users, to an acceptable degree of accuracy, and in a sufficiently timely fashion. It is worth stressing that this task is an extremely demanding one: a statistic is not a fact. Even when a variable is seemingly well-defined, such as the total number of people working at a particular time, in most cases it still has to be estimated, usually by sampling a fraction of the total population. Ensuring that this sample is representative is often a challenge in itself. 1.10 Moreover, in many cases the variable of interest is itself conceptually complex. Take, for instance, a variable such as real GDP – the total quantity of value added in the economy within a given period at a constant level of prices. This involves aggregating the outputs net of inputs, across an enormous variety of individual lines of business, appropriately adjusting for movements in the relevant price levels. This is hard enough when an economy largely produces physical goods, but becomes even harder in developed countries like the UK where services constitute a large fraction of the economy, as these are frequently specifically tailored for individual customers. And some goods and services, for instance those provided by the public sector, are often supplied free of charge at the point of delivery implying a direct measure of the value of the output is lacking. 1.11 Measuring the economy has become even more challenging in recent times, in part as a consequence of the digital revolution. Quality improvements and product innovation have been especially rapid in the field of information technology. Not only are such quality improvements themselves difficult to measure, but they have also made possible completely new ways of exchanging and providing services. Disruptive business models, such as those of Spotify, Amazon Marketplace and Airbnb, are often not well-captured by