25 April 2011

Libya and the Iraq Inquiry

An earlier post about the Iraq Inquiry wondered what issues its report would address that hadn’t been covered in 2004 by Lord Butler and his comments on the machinery of government. Now the Inquiry is faced with the problem that what will be known as the Chilcot report (after its Chairman who is likely to present it to the Prime Minister this summer) seems to have been overtaken by the UK’s becoming involved in the conflict in Libya. It’s worth repeating the Inquiry’s terms of reference:
"Our terms of reference are very broad, but the essential points, as set out by the Prime Minister and agreed by the House of Commons, are that this is an Inquiry by a committee of Privy Counsellors. It will consider the period from the summer of 2001 to the end of July 2009, embracing the run-up to the conflict in Iraq, the military action and its aftermath. We will therefore be considering the UK's involvement in Iraq, including the way decisions were made and actions taken, to establish, as accurately as possible, what happened and to identify the lessons that can be learned. Those lessons will help ensure that, if we face similar situations in future, the government of the day is best equipped to respond to those situations in the most effective manner in the best interests of the country."
Seemingly the Inquiry is not an academic or legal exercise but is aimed at assisting the current Coalition and future governments to deal with Iraq-like situations in an optimal fashion (note ‘best’, ‘most’ and ‘best’ again in the last sentence) from start to finish. However, lessons about ‘sofa government’ seem to have been applied anyway. According to Anthony Seldon:
… Cameron was equally clear that his premiership would see a return to formal Cabinet government. Cabinet meets for between an hour and a half to two hours each Tuesday. Regular meetings include the National Security Council [NSC], which he established at the outset.
On Libya, he [Cameron] is relying on Ricketts’ [Peter Ricketts, National Security Adviser] advice daily, not least at the daily meeting of the NSC’s Libya committee.
So presumably the making of judgements about the UK’s developing involvement in Libya is being very properly documented. This should please contemporary historians in years to come when (or if) the NSC files are released by The National Archives. They may even be able to conclude whether the formality of the decision-making made much difference when, inevitably, there were major uncertainties as to the course of the conflict and the nature of post-conflict Libya.

Arguably, the UK’s involvement in Libya is putting into practice ‘liberal interventionism’. This was the subject of an earlier post which looked at the contribution of Sir Lawrence Freedman, a member of the Iraq Inquiry Committee, to Tony Blair’s Chicago speech in 1999.

ADDENDUM JUNE 2011: This later post might also be of interest..

24 April 2011

Expect golden days, actuarially

In the FT Weekend Magazine 23/24 April (£), there is a pre-Royal Wedding article by Matthew Engel, Welcome to the firm, in which he remarks that:
Actuarially, it is very plausible that he [Prince Charles] will predecease his mother, whose constitution seems more robust than Britain’s.
The Office for National Statistics (ONS) provides data on life expectancy in the form of life tables. Within these, ONS proposes that the “Cohort expectation of life, 1981-2058” is the “more appropriate measure of how long a person of a given age would be expected to live, on average, than period life expectancy.” Various projections are available, but the “Principal projection” provides a life expectancy for a UK female of 85 of 7.5 years, and for males of 62 and 63 life expectancies of 20.9 and 20.1 years respectively*.

While it is impossible to proceed from the general to the particular, and also there will presumably be some inheritance of longevity, mother to son, actuarial plausibility would seem to suggest that good King Charles III's golden days** will last more than a decade!

Engel might have been influenced by Princess Diana’s prediction that Prince Charles would never be King and that William would succeed his grandmother.

*Queen Elizabeth II (85) was born on 21 April 1926, and Prince Charles (62) on 14 Nov 1948.

**Song: The Vicar of Bray

In good King Charles's golden days,
When loyalty no harm meant;
A furious High-Church man I was,
And so I gain'd preferment.
Unto my flock I daily preach'd,
Kings are by God appointed,
And damn'd are those who dare resist,
Or touch the Lord's anointed.
And this is law, I will maintain
Unto my dying day, sir,
That whatsoever king shall reign,
I will be Vicar of Bray, sir!
Etc etc

20 April 2011

Puzzling Lord Dannatt

In a previous post, I mentioned the “large cohort of senior officers of all three services, serving and retired, unafraid to speak their minds”.  One of the most prominent of these gentlemen (no-one at this level seems to be female) is the former head of the British army, Lord Dannatt (formerly General Sir Richard Dannatt).  His opinions are called for at present on Libya. On Saturday 16 April on BBC Radio 4’s Today programme he addressed the extent of the stalemate in Libya and was subsequently reported by the Daily Telegraph:
Lord Dannatt, the former head of the UK's armed forces [sic], has called for the UN to pass a resolution authorising the training and arming of rebels fighting Colonel Muammar Gaddafi's forces in Libya. Lord Dannatt urged the international coalition to seek a fresh UN Security Council resolution specifically authorising the move.

He also said that reports that Gaddafi had been using cluster bombs during the siege of Misurata had further weakened the Libyan leader's position.

"We have got to move this one on, we have got to be innovative about the way we do it. I have thought about it long and hard: go back to New York, get a strengthened UN Security Council resolution and arm, equip and train the opposition."

Speaking to Radio 4's Today programme, Lord Dannatt added: "If we thought that Gaddafi had lost the moral right to rule this country a month ago, he has lost it in the last 24 hours, that's for sure."
According to Google news this was one of over 4000 articles generated from the Today piece. (Don’t bother going to the Today website (limited duration) to hear what he actually said, the player link is wrong and you will find yourself listening not to Dannatt, Richard but to Dilmott, Andrew on funding for adult social care.)

The same morning in Tim Walker’s Mandrake column, the Daily Telegraph was running another story:

Walker didn’t explain where and when Dannatt made these remarks, but Dannatt has links to the Telegraph newspapers – in his maiden speech in the House of Lords he described himself as “a periodic contributor to the Daily Telegraph and Sunday Telegraph” (Hansard 10 Mar 2011: Column 1815).

Lord Dannatt’s views, whether one agrees with them or not, are always expressed with the clarity to be expected of a former senior officer.  However, it's a bit of a puzzle when, at the same time as appearing on one of the BBC's most influential programmes, elsewhere in the media he is criticising one of its senior correspondents .  The puzzle extends to deciding who is he speaking for.  He may be speaking for himself. On the other hand, he could be articulating opinions on behalf of the Army which it would be inappropriate for serving generals to express publicly. Although in the past he had links to the Conservative party, he sits in the Lords as a crossbench peer (non-aligned).

And the Today programme clearly doesn’t ignore the Daily Telegraph!

David Cameron on Today, 19 April 2011

Text of Mandrake article:

Libya: General Lord Dannatt's concern over BBC giving succour to Gaddafi

A lugubrious presence at the best of times, Jeremy Bowen, the BBC’s Middle East editor, stands accused of not accentuating the positive in his dispatches from Libya on the British, French and American-led coalition’s efforts to bring to an end Col Muammar Gaddafi’s bloody regime.
“People hang on the words of the BBC in Libya and throughout the Middle East and I do wonder if what he has been saying has been entirely helpful,” says General Lord Dannatt, the former Chief of the General Staff. “Mr Bowen has, of course, every right to report what happens, but when he dwells to such an extent on intangible things — such as how long the operation will take and whether the will is there to see it through — then it sets a tone that could hardly have given heart to members of the rebel forces.”
Dannatt urged Bowen, whose Wikipedia entry already boasts that he was “the first British journalist to interview Muammar Gaddafi since the start of the Libyan uprising against him and the government,” to “weigh his words with care.”

18 April 2011

Guillaume Canet’s ‘Little White Lies’

Posts on this blog often lack the “south western” content that the Profile on the left might encourage readers to expect. So, the last film mentioned, Archipelago, being set in the Scilly Isles in SW England, it is appropriate that this post is about a film mostly shot in SW France, on the Atlantic coast of the Gironde.

Most cinema-goers in France see the same Hollywood product as the rest of the world, but the French government (nationally and regionally) goes out of its way to support a francophone film industry. For example, support to domestic films is a condition of the Canal+ TV licence. Admittedly much of what is produced is quite lightweight but at least it’s French, and it doesn’t get beyond the francophone world, where mainstream audiences don’t much go for subtitled foreign language films anyway. However, the best French films have for a long time attracted enthusiasts, cinéastes even, and are subject to serious critical attention eg recently, The Faber Book of French Cinema.

From time to time, French films do make it into the international mainstream. Recently, for example La Vie en Rose (an Edith Piaf biopic, La môme, in France) which became the third-highest-grossing French-language film in the United States in the last two decades. Piaf was played by Marion Cotillard, the partner of Guillaume Canet. Canet directed Tell No One (Ne le dis à personne, 2006), a well-regarded thriller, which he followed with Little White Lies (Les petits mouchoirs), just released in the UK.

Cotillard and others make up a strong cast for this tragi-comic story of Parisians on holiday at Cap Ferret, one of those French pine and sand seaside places with baffling 10-months-idle-out-of-12 economics. The plot (and some of the music) has more than a passing resemblance to Lawrence Kasdan’s The Big Chill (1973). Little White Lies is a bit too long and the cast a bit too slick at piling on the sentiment, however familiarity with some of the locations made up for a lot. If any reader who doesn’t know the area is looking for somewhere new to go in France this summer, Archachon, its Bassin, and the Pyla Dune certainly ‘merite un detour’, as does Cap Ferret and the view from the lighthouse there. In the magic two months of July and August, expect it to be busy.

Peter Aspden recently gave his Culture column in the FT over to a very droll tongue-in-cheek discussion of boboisme, in the context of Little White Lies:
You all know how it is with a certain type of French film. The women are beautiful, and so are the men. They smoke, but they do not have rasping coughs. They gather for al fresco suppers at their beach houses, and open bottles of cru classé wines that are drinking perfectly right now. They are good friends, with wholesome appetites and slim silhouettes.
… they talk of life. They wave their arms charismatically and make references to the philosophers they studied in their perfect schools. Their conversation is witty and fluent, and touches intellectual and emotional depths. Before the end of the evening, two of them will have paired off, seduced by the erotically charged debate. There are more cigarettes, more wine, more philosophy. None of them needs an early night because they don’t appear to have jobs, though they seem strangely well off. By the end of the film, they have wrestled with the dilemmas of human existence, but their affluent lives go on. There is always next Saturday night.
The French are not without a sense of self-deprecation, so they have a word for these admirable creatures: they are the bobo set, the “bourgeois bohemians” who fill the air with exotic ramblings and yet enjoy all the material comforts of a gilded life. It is a pejorative, ironic term. Yet the bobos are the envy of the world. They have worked out how to be rich and interesting, replete and reckless.
Little White Lies is certainly bobo but less intello than this description implies - no philo, for sure.

The French film which has impressed me recently was Mia Hansen-Løve’s Father of My Children (Le père de mes enfants, 2009), a very accomplished start to an almost certainly brilliant directing career. Here she is talking about that film.

13 April 2011

Matt Cavanagh on Labour and the Generals

Matt Cavanagh was a special adviser to Defence Secretary Des Browne from 2006-2007 and then to Gordon Brown from 2007-2010. He drew on his experiences during the Labour government to provide a very thoughtful review, Inside the Anglo-Saxon war machine, of Bob Woodward’s Obama’s Wars for Prospect magazine in November 2010. He said:
… This is a book about the British experience too, for essentially the same internal debate played out here over the same period, with the same camps in the same positions—and the same result. 
Of course, there are differences. In the British debate, a great deal of time and effort went into working out what the Americans were thinking, and it is all too clear from Woodward’s book that the reverse was not true. It would be unfair to blame this entirely on American insularity. However important our decisions were to us in Britain, they mattered far less in strategic terms, as a glance at the numbers shows. Obama sent 20,000 more troops to Afghanistan early in 2009, and spent the second half of the year debating whether to send another 40,000, while Gordon Brown and his generals were arguing over 1,000: one per cent of the international force. ...
By summer 2009, at the same time as Brown’s and Obama’s doubts and frustrations were growing and public concern was rising, they were coming under increasing pressure from the senior military to approve an escalation in troop numbers. For although the senior military had also begun to realise that things were not going well, their reaction was to press for greater resources and greater urgency. To them, defeat was unthinkable, even if the more thoughtful and intellectually honest of them weren’t sure if victory was achievable either. In both Washington and Whitehall they ensured that debates over troop numbers crowded out more important debates over military strategy, a political settlement, governance, corruption and aid effectiveness. They placed great store by generic concepts of decisiveness, leadership and “momentum”—more than the specifics of strategy—and they railed against what seemed to them to be indecision and delay from the politicians. ...
Does this mean the military are too powerful? Certainly, in the current political and media climate, any leader (and in particular any Democrat or Labour leader) should pick their battles with them very carefully. Few besides Paddy Ashdown—who made the case this October in an article for the Times—would recommend that politicians wrest back control of running wars. Few generals besides Richard Dannatt are seriously arguing for handing it all over to the military. ...
... the senior military are almost without exception genuinely wedded to the national interest, and genuinely supportive of civilian control of the military. It is true that they can’t always resist the temptation to open up a second front in the media. They know the odds are stacked in their favour: the public admire and trust them, and distrust ministers; journalists tend to lack the knowledge or energy to question their assumptions or motives, finding it easier to lionise them in contrast to base and shallow politicians. But high-profile generals like David Petraeus or our own Mike Jackson and David Richards manage for the most part to tread this line—and if they step over it, like Stanley McChrystal, they accept their fate. Those like the second world war US general Douglas MacArthur—whose self-delusion, belief in their own infallibility and contempt for democratic politics make them potentially dangerous—are mercifully rare. ...

Towards the end of the book, Woodward reports General Lute wondering if “Obama had to do this 18-month surge just to demonstrate, in effect, that it couldn’t be done.” We must hope this was not the only or even the main reason: it cannot justify the 500 more combat deaths in those 18 months, and the $150bn added to the deficit. But either way, if come July Obama decides it is time for Plan B, the senior military—British as well as American—must accept that Plan A hasn’t succeeded. They must start working up, in good faith, the alternatives their political leaders ask for, and resist any temptation to encourage—even with their silence—the inevitable stream of chickenhawks and conspiracy theorists complaining that victory would have been assured if only the politicians hadn’t once again stabbed our brave boys in the back.
Cavanagh has returned to the war in Afghanistan in an article in The Spectator, (8 April 2011), Operation amnesia, which is well worth reading in full. He sheds some more light on political-military relationships towards the end of the New Labour period:
… We don’t have five years’ experience in Helmand, we have six months’ experience ten times. Successive brigades have relearned the painful lessons of their predecessors, or overcompensated for their perceived failings. Debriefings of battalion and company commanders, and attempts to harness their valuable experience, have been perfunctory. Four years ago, when I was working for the then defence secretary, Des Browne, we pressed senior military officers to look for ways of mitigating this short-termism: longer tours, or a staggered rotation of units, or greater continuity in the command structure. The army, then led by General Dannatt, flatly rejected the first two options. They dismissed longer tours on the basis of the strain on soldiers and their families, and rejected staggered rotation due to the importance of ‘a brigade training and deploying as a brigade'.
We were sympathetic to the former argument, both on human grounds and because we knew that the American military, in which tours routinely lasted 15 months, struggled to retain experienced personnel. We were less sympathetic to the argument for training and deploying as a brigade, which appeared rather dogmatic. I suspected it encouraged precisely the kind of large-scale set-piece engagements I was sceptical about. It also put our creaking helicopter and transport fleet through the added strain of mass troop rotations, and required us to keep scarce equipment in Britain so an entire brigade could train with it.

But as happens so often in politics, we civilian advisers and strategists shied away from overruling the military. We worked with the less dogmatic generals to identify a small number of senior posts (and junior posts in specific areas like intelligence) where tours of duty could be lengthened. We were assured that other initiatives would improve continuity, but these too were relatively minor and seemingly given a low priority. The issue of command structure got lost in wider debates about troop numbers and the looming arrival of American forces in Helmand. ...
This is not to deny the importance of the limits on British troop numbers, the subject of such heated debate during 2009. As someone who had a share in responsibility for those limits, I was acutely aware of the dilemmas they forced on commanders. But I was also aware of the potential for troop increases to exacerbate the military’s dominance of what was meant to be a joint civilian-military campaign, and to feed the tendency of new commanders to try to do too much. For three years the top brass had argued that additional troops would enable us to ‘thicken’ our forces, increasing their effectiveness, reducing casualties, and enabling proper stabilisation work to begin. But when we sent reinforcements, it had the opposite result: an expanded footprint, increased activity, and increased casualties, to no obvious strategic effect. …   
The military’s obsession with troop numbers and the media’s failure to challenge it have obscured the wider lessons of the Afghan campaign. Before the American surge, lack of troops was blamed for everything. … 
… More troops will not help our militaries master the complex tribal dynamics, nor judge whether they are making friends faster than they are alienating people. More troops will not change the attitude of the Afghan and Pakistani authorities, nor create a political process that addresses Afghan grievances. 
Because of these wider political problems, Britain’s lack of success in Afghanistan in strategic terms cannot be blamed on the military. But at the operational level, most of the responsibility is theirs. They took the tactical decisions in summer 2006 — admittedly under great pressure — to disperse our forces across the ‘platoon houses’ in northern Helmand. They chose, in the years that followed, to continue to prosecute the campaign in an expansive and aggressive manner, despite the constraints on resources and the lack of evidence that this approach had a lasting positive effect. And while they lost no opportunity to plan and lobby for more troops, they were slow to fill the gaps in our intelligence, or to respond to the Taleban’s shift in tactics towards improvised explosive devices.
Cavanagh’s conclusion echoes that of his Prospect piece:
When failure becomes not just a possibility but a reality, it ought to provide the impetus for change. In war it is vital to learn from mistakes. … But it won’t happen if politicians are blamed instead, as in America over Korea and in Britain over Iraq.
The media, the Conservatives and the military have already prepared the way for a similar narrative on Afghanistan: blaming the previous government, mainly for not providing enough resources. If only we’d had more troops and better equipment, the argument will run, we would have defeated the Taleban, and got out on our own terms. It suits a great many people to go along with this, but in the long run it will only prevent us from learning the real lessons of the past five years.
Hopefully Cavanagh will write more about Afghanistan as he saw it from the privileged position of a government special adviser, and about the lessons that need to be learnt. While he is probably realistic in anticipating that the military will attempt to pin the blame for any unpleasantness in the eventual Afghanistan end-game (planned for 2015 at the latest) on the politicians, it could be that, by then, the previous government will no longer be their primary target. NATO’s Libyan operation is now, with the US no longer in the driver’s seat, largely reliant on France and the UK. The resulting pressure seems to have opened up tensions arising from the UK’s 2010 Strategic Defence and Security Review (SDSR) between the army and the other services. The FT reported on 8 April:
A plan brought forward by General Sir David Richards, head of the armed forces, proposed shedding up to 5,000 additional army personnel to free up money for other priorities. However, this was rejected by David Cameron’s team because the prime minister was unwilling to back cuts that could lead to some veterans of combat in Iraq and Afghanistan being laid off. The proposal reflected the widespread realisation in Whitehall that the army emerged relatively unscathed from the defence review, at the expense of civil servants and the other services.
“Even the army are now prepared to entertain the idea of more army cuts. But No 10 are just not interested,” said one senior Whitehall figure. Richards and Wall realised that they overplayed their hand during the SDSR,” he added, in reference to the chief of defence staff and General Sir Peter Wall, the head of the army.
A few days later a senior RAF officer, Air Chief Marshal Sir Simon Bryant (Commander-In-Chief Air Command) was reported (somewhat disjointedly) by The Scotsman and the Daily Telegraph to have said about SDSR:
"The thinking behind it was sound, but I'm not sure we're going to end up in a balanced place."
“I think it's appropriate we have a review of where we go to make sure what we are able to deliver at no notice is replicated in five years' time, and in 50 years' time."
“I think it's appropriate we have a review of where we go to make sure what we are able to deliver at no notice is replicated in five years' time, and in 50 years' time." 
In Libya, “the ability to go and see and hear what the enemy are doing” was vital and that may not be possible with an “unbalanced set of Armed Forces”.
Then, not for the first time in recent months, a group of former naval persons wrote, on this occasion to The Times (£ 11 April 2011), complaining:
… if all three services had the same "harmony rules" as those of the Royal Navy and Royal Marines, significant reductions in the strength of the Armed Forces would be possible. These reductions would more than match the numbers now being cut, but with no loss in capability ...
… the RAF is already indicating that the current Libya operation will be unsustainable beyond June, or not long after. There are about 40,000 personnel in the RAF, including some 120 officers of air rank each paid about £100,000 a year or more, and there are many hundreds of aircraft. If the RAF can't sustain current operations, what are all those people and all that expensive equipment for? There is much that curious Defence and Treasury ministers should question about the RAF's structure and management.
There would have been no comparable complaint from the Royal Navy, after just one month, about sustainability of the Libya operation were an aircraft carrier, with a Harrier force, now operating off the north African coast.
One asset which British defence seems to possess in abundance is a large cohort of senior officers of all three services, serving and retired, unafraid to speak their minds and, when not at odds with each other, ready to criticise the government of the day. (Perhaps the implementation of career average, rather than final salary, pensions in the armed forces, as Lord Hutton has recommended, will eliminate one of the incentives for this top-heaviness). Depending on the robustness of the Coalition, the next election could be at any time up to the planned date of UK’s leaving Afghanistan in 2015. However, when it comes, the dominant issues are more likely to be the economy and the NHS than the extent of Labour’s shortcomings on resources pre-SDSR in 2009, despite Cavanagh’s misgivings. One might also expect the uniformed Top Kneddies to show some inhibition about criticising politicians, much as they dislike SDSR, given their natural inclinations towards the Conservative party.

Lord Dannatt has featured in earlier posts on this blog. One quoted Jonathan Powell’s observations of Dannatt at Tony Blair’s lunch meeting with the service chiefs in 2006, and another featured Dannatt’s widely-reported remarks about “boots on the ground” in Afghanistan in July 2009 when Gordon Brown was PM.

5 April 2011

The Political Potential of Price Indices

The significance of inflation for the Coalition’s economic policies was made clear, from the opening paragraphs of the Executive Summary onwards, in the March 2011 Economic and Fiscal Outlook produced by the Office of Budgetary Responsibility (OBR):
1.1 The key economic developments since our November 2010 Outlook have been an unexpected fall in UK GDP in the final quarter of 2010, a rise in world oil prices, and higher-than-expected UK inflation. The labour market has performed much as expected, with unemployment rising after registering significant falls in the middle of last year
1.2 These data have on average prompted external forecasters to reduce their estimates of economic growth in 2010 and 2011. The average external forecasts for CPI and RPI inflation have risen significantly, again reflecting recent data.

Although they are among the most familiar of government statistics, the generation of the Retail Price Index (RPI) and the Consumer Price Index (CPI) is a complex business. The Office for National Statistics (ONS) CPI Technical Manual explains the derivation of the RPI and CPI figures and the differences between them. To understand these more fully, it is helpful to look at an Information Note produced by the ONS in August 2010, Differences between the RPI and CPI Measures of Inflation. This shows (extracts below) that, although “both track the changing cost of a fixed basket of goods and services over time and both are produced by combining together around 180,000 individual prices for over 650 representative items”, there are three significant methodological differences between the RPI and CPI: Coverage, Population Base and Index Construction.




As the chart below, also taken from the Information Note, shows, index construction is the most significant of the various factors which lead to changes in CPI being lower than in RPI over the same period. It is often referred to as the “formula effect” because of the difference between the geometric mean (GM) and the arithmetic mean (AM) of the same set of data.
The next most significant factor is housing.  There is a comprehensive explanation of the problems in taking account of this in CPI provided in Wikipedia.


In December 2003 the CPI, which is comparable internationally, became the basis of the inflation target of 2% set by the government for the Bank of England Monetary Policy Committee (MPC). The RPI continued to be used for other significant purposes – for example, pension increases and uprating of taxation allowances. However, the 2010 Coalition budget announced that the CPI will be used for the indexation of benefits, tax credits and public service pensions from April 2011. Later this was extended to be an option for private pension uprating. In the 2011 budget it was announced that most taxation allowances and thresholds would also be uplifted in future by reference to the CPI.

Not surprisingly given the beneficial impact of the formula effect on public expenditure, the OBR, in its March 2011 Outlook, paid close attention to the likely difference between RPI and CPI in the next few years (Box 3.5 page 70), and provided this chart:

Clearly, the impact of the formula effect increased during 2010. The cause, (clothing and footwear) had been the subject of a further ONS Information Note in January 2011, CPI and RPI: increased impact of the formula effect in 2010.

The OBR asserts that the CPI “is better-suited to accounting for the effect of substitution between goods and services when relative prices change”, echoing the ONS’s statement that “An advantageous property of the geometric mean is that it can better reflect changes in consumer spending patterns relative to changes in the price of goods and services.” However, the Royal Statistical Society (RSS) does not agree. In a recent letter to the Chair of the UK Statistics Authority (UKSA) (the ONS being its executive office) they state:
The UKSA's Monitoring Report concluded that the uses of consumer price indices both as macroeconomic measures of inflation and as "compensation indices" imposed different requirements on the indices. We believe that the need to address this and other issues is now pressing, and are keen to offer the Society's help in doing so. We are concerned, as I am sure you are, about the further damage that will be done to consumer confidence in official statistics if it is perceived that uprating to pensions and other benefits is being governed by an index perceived by many as inappropriate and unfair without a more relevant index being offered by statisticians.
There are good arguments for the CPI as a macroeconomic indicator (particularly once some indicator of owner occupier costs has been included) but, as you know, we do not feel that it currently serves the purpose of being a sufficiently good measure of price inflation as experienced by households to be used in uprating pensions and benefits or for use in wage negotiations …
Lord Hutton recently proposed a new basis for public sector pensions - Career Average Revalued Earnings (CARE) pension schemes, (good outline on the BBC website). A key feature during employment when the pension is being accrued, is the annual uprating, which Hutton thinks should be in line with earnings. Hutton proposed:
Recommendation 8: Pension benefits should be uprated in line with average earnings during the accrual phase for active scheme members. Post-retirement, pensions in payment should be indexed in line with prices to maintain their purchasing power and adequacy during retirement.
But a problem arises with people who leave public service before retirement age:
Ex.18 Regarding the indexation of deferred members’ benefits, there is a trade-off to be made. If the indexation measure were the same as for active members this would favour mobility. If it were lower, for example, if active members’ benefits were indexed by earnings and deferred members’ benefits by prices, this would favour retention. The Government should decide on whether pre-retirement indexation for deferred members is on an earnings based measure or prices based measure, as this decision will need to be based on the explicit objectives that government has about recruitment and retention versus mobility.

Could the gap between the two inflation measures, and the Coalition’s substitution of the CPI for the RPI, become a political issue? This very much depends on the progress of the UK economy in the next few years. Two broad scenarios can help illustrate the situation at the time of the next election (2015 if the Coalition holds).

In the first, Ed Balls’ and Paul Krugman’s predictions are borne out  (for the former's see an earlier post, for the latter's, see his Op-Ed, The Austerity Delusion, in the New York Times on 25 March):
And then there's the British experience. Like America, Britain is still perceived as solvent by financial markets, giving it room to pursue a strategy of jobs first, deficits later. But the government of Prime Minister David Cameron chose instead to move to immediate, unforced austerity, in the belief that private spending would more than make up for the government's pullback. As I like to put it, the Cameron plan was based on belief that the confidence fairy would make everything all right.
But she hasn't: British growth has stalled, and the government has marked up its deficit projections as a result.
If Balls and Krugman are right, whenever the election comes Labour can campaign on the basis of “we told you so” and “things can only get better”. There will no need for them to get over-involved in specific issues and Labour should easily win a working majority.

In the second scenario, the Coalition’s economic policies are to some extent successful, but the pain incurred is not so easily forgiven. The Coalition will try to hang the deficit they inherited around Labour’s neck. In response, Labour may well want to position themselves on the winning side of voter-friendly issues, taking a line clearly different from the Coalition’s while appearing responsible on public expenditure. The 2010 Budget changes involving CPI affected only a minority of electors, albeit a substantial one, pensioners and benefit recipients. The latest changes, extending CPI to allowances, makes the basis of inflation indexing something which affects most taxpayers and voters.  The general public's boredom threshold for a fairly dry mathematical subject can easily be moved up a notch when they realise it concerns money in paypackets.

On that basis, it is interesting to read Early Day Motion (EDM 1629) put to the House of Commons on 17 March under Ed Miliband’s name and sponsored by the shadow treasury team:
That this House considers that the Pensions Increase (Review) Order 2011 (S.I., 2011, No. 827) which was laid before this House on 17 March 2011 should be withdrawn because the Order requires the uprating of public sector pensions using the consumer price index, replacing the retail price index which the Government has indicated will be a permanent change; notes that the Government has refused to heed arguments that a temporary three year change to the index used would represent a fair contribution from benefits and pension recipients, at a time when wage growth generally is suppressed, to reducing the deficit whilst not unfairly impacting on their incomes over the longer term; but regrets that the Government has instead indicated that the change is permanent, leaving public sector workers and the poorest in society disadvantaged permanently, year after year, even once the deficit is gone and earnings growth has returned.
It would be naïve to think that before the 2010 election the RPI CPI change had never been an option for government. The Financial Times Westminster blog on 21 June 2010 posted the following:
Darling predicts coalition will link benefits to CPI not RPI
Alistair Darling [the former chancellor] has just briefed the lobby hacks on what to expect from tomorrow’s Budget. Top of his predictions was a change in index-linking for benefits from RPI (and the less well-known Rossi index) to CPI. The obvious benefit … is that the CPI measurement of inflation is usually lower. As a result the government could save about £1bn a year
Darling described the shift from RPI to CPI as one of several ideas lying around the Treasury which – having worked there until 6 weeks ago – he was obviously aware of. Some were more “fit for human consumption” than others, he joked.
The Coalition is not slow to claim that, however unpopular its measures may seem, a Labour government would have had to do the same. In this particular case, it looks as though Labour might have had more sense.  On the other hand, they may have got very close, which could explain, as well as the need to seem responsible on expenditure,  why the wording of EdM's EDM seems rather hedged about.

3 April 2011

Price Index Peculiarity Resolved

Back in January, I posted about what appeared to be a peculiarity in the way the Consumer Price Index (CPI) was being presented by the Office for National Statistics (ONS). In several months the annual percentage change calculated directly from the published values of the CPI had been 0.1 % lower than the one being published. However, there wasn’t a problem in calculating the Retail Price Index (RPI) % change the same way.

This happened again when the CPI and RPI data for February 2011 appeared. But now, thanks to the kind assistance of Capital Economics, I have the explanation, which comes from the Consumer Price Indices Technical Manual 2010. The process used by the ONS for the RPI is to round the index figures down to the published single decimal place, and then calculate the % change (see the earlier post for the formula). For the CPI, the ONS uses unpublished figures with more decimal places to calculate the % change. The CPI index figures are published after rounding down to one decimal place. The implications of this are that the published indices cannot be used to calculate % changes – for successive 12 month periods the published % figures can be used, but to measure the CPI change over any other period, more exact values of the CPI have to be obtained from ONS. The justification for this can be found on page 80 of the Technical Manual:
The CPI follows the standard ONS approach which is to calculate derived statistics from unrounded monthly indices while the RPI calculations are based on the published rounded indices. The CPI approach limits the impact of rounding effects … and ensures that re-referencing will not in future lead to revisions to one-month and 12-month percentage changes.
The RPI approach is transparent in that all derived statistics can be traced back to the published monthly index levels. This is particularly important given the wide range of uses to which the RPI is put including the indexation of state benefits and index linked gilts.
Since the Technical Manual was published the range of uses of the RPI has been reduced in favour of the alternative CPI, as will be discussed in the next post.