Growth outlook to change in ONS data revolution

A revolution in official UK economic data on Friday will show households saving more but the nation as a whole saving less, when the Office for National Statistics introduces some of its largest revisions to the national accounts in recent years.

Household savings, which were recorded at a 50-year low in June, will be revised sharply higher but the balance of payments will show a bigger deficit on the current account, implying that Britain is borrowing more from abroad than thought.

The revisions will give a new view on the sustainability of UK growth and the outlook for consumer spending and business investment.

What is the good news?

Household finances will be shown to be less precarious than thought. In June, the ONS said the household saving ratio was 1.7 per cent in the first quarter of 2017, its lowest for more than 50 years.

From Friday, current and historic data will change to improve the recording of income and dividends paid to owner-managers of their own incorporated companies.

The importance of this information to the national accounts has increased dramatically as self-employment has grown and more people have decided to incorporate, partly to take advantage of more generous tax treatment.

Better recording of this data means that real household disposable income grew 5.3 per cent in 2015, not the 3.5 per cent currently recorded in the national accounts. The additional income also means the savings ratio for 2015 will rise from 6.1 to 9.2 per cent.

Will the figures still show savings have dropped sharply since the EU referendum?

Probably. The ONS has published new estimates for the annual savings ratio for up to 2015 only but the ratio is higher in most years.

Current official data show it falling from 6.1 per cent in 2015 to 1.7 per cent in the first quarter of 2017; a similar sized fall is likely after all the revisions are made, but because the starting point is higher, it is also likely that the new data will no longer show a 50-year low.

There are other things to note, however. First, the upgrade to the 2015 savings ratio is likely to be the biggest for any single year because many companies paid additional dividends in the 2015-16 tax year, ahead of higher taxes on dividends that applied from April 2016.

Second, income in the first quarter of 2017 has been artificially depressed by the tax those same people had to pay on those dividends when they settled their income tax self-assessment accounts. And third, household income has also been depressed recently by lower corporate payments to fill pension fund deficits.

When new data for the second quarter of 2017 are published, they will probably therefore show the saving ratio has bounced back.

Where is this money coming from?

If households have higher income, but the nation is no richer, the revisions need to remove money from other parts of the national accounts. The ONS has said it will be companies that will appear worse off.

The corporate sector will be shown to have been borrowers as much as lenders in recent years, making talk of a “cash pile” that businesses have been sitting on much less believable.

Why will the nation as whole appear to be saving less?

The revisions described above do little more than transfer money from the corporate sector to the household sector in the national accounts. A separate ONS analysis has found foreigners own many more UK shares and corporate bonds than previously thought and an error in the recording of dividends so that more of the income flows abroad than previously thought.

In 2015, the net effect of these changes and other smaller revisions will be for the 2015 current account to deteriorate from a deficit of £80bn to £98bn, nearly 1 per cent of gross domestic product.

Why do these revisions matter?

They will change the picture of the economy. From Friday, households will seem more resilient than thought, but Britain will be shown to be more dependent on the “kindness of strangers”, as Bank of England governor Mark Carney said, to fund its large current account deficit with the rest of the world.

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