The Point of Percentages

The Commons Brexit committee has just published the official internal Brexit Impact study leaked to BuzzFeed last month, and it clears up a question I’d been debating with someone on Twitter the previous day. It started when MEP Seb Dance tweeted the list of Brexit impacts on regional growth of -2% to -11% and compared them with “Worst UK fall in 2008 crash: -2%”.

One commenter said, “You’ve confused a % reduction in growth with a fall in gdp. These are not the same.”

That confused me, as negative growth is a pretty standard concept, and standardly expressed as a negative percentage. It expresses a contraction, a fall in GDP, not “a % reduction in growth” as if it were the same as a modest reduction of profits.

When I said as much, the commenter replied, “it’s not negative growth its the % reduction in the growth. Ie -5% means you get 95% of the growth that you would have had.”

That confused me even more, as if that were the case the only way to express contraction would be if the negative percentage exceeded 100%, and we never see such figures reported, even in recessions. Was he, I wondered in reply, basing this on reporters’ shorthand, such as “growth would be down five per cent”? Because that means negative growth or contraction; if it were otherwise, there would be no way of expressing contraction in terms of “growth” as they do.

In reply, he retweeted the BBC’s Laura Kuenssberg, who wrote that it was “important to note forecasts are for a fifteen year period - and predict how much more slowly the economy would grow, not how much it would shrink”.

Okay, I thought, I see the issue now. The fifteen years makes a difference, and Dance’s tweet was misleading there, for a start; small annual growth figures accumulate over time. But more importantly, the DExEU figures were in comparison with current forecasts: that is, they forecast that our growth over fifteen years would be 2, 5 or 8 points less than it otherwise would have been, under the different scenarios of EEA, FTA and WTO.

That would still be significant, though, especially as we’re now looking at a Canadian-style FTA or No Deal as the only Brexit outcomes. I wasn’t sure of the government’s previous fifteen-year growth projections, but assuming growth between 1.5% and 2.0% per annum, which is pretty much what we’ve had for the past decade (quite a bit below the 1956-2017 average of 2.45%), we’d have been looking at growth of around 30% over 15 years. Applying -8% for a WTO scenario reduces that to around 22%, so we’d be sacrificing 25% of the growth we would otherwise have had—which will feel like a lot, when we see competitors outstripping us.

The original commenter’s “% reduction in growth” expression was still a bit misleading, though; it’s a percentage point reduction, not a percentage reduction. When I tweeted as much, he replied, “How would a flat % point reduction make any sense?”

I wasn’t sure what to say. Occam’s razor? Decimating our manufacturing and services sectors is far more likely to have a major impact on growth than a minor one? I’m not an economist, but as a political scientist read a fair bit of their work, and was sure I hadn’t been wrong in thinking for thirty or more years that they use percentage points to express changes in key indicators like inflation, unemployment and growth. If they want to indicate percentage change, they use indexes. Reporters can be pretty loose in distinguishing between percentages and percentage points, though, so this distinction isn’t always made clear.

When I looked around for examples of UK economic reporting that might illustrate this, I found exactly the ambiguity that led to our Twitter exchange in the first place: some saying percentages when they seemed to mean percentage points; others, like the FT, reliably using percentage points in a way that seemed to confirm that this was the norm among economists. The reporting of the DExEU leak was as ambiguous as Kuenssberg’s tweet, which could be read either way. The question, then, was not “how much more slowly the economy would grow”, but how much is meant by “how much”.

The screenshots of the leaked report tweeted by Faisal Islam yesterday clinch it. DExEU were talking about percentage point changes, as made clear in the second image in Islam’s tweet, titled “16. Preliminary results from HMG modelling”.

So the impact will indeed be much bigger than my Twitter counterpart was thinking. From that image, we can see that DExEU have projected 15-year growth of 25% without Brexit. This translates to 1.4% p.a., well below the long-term average, and on the weaker end of recent years—itself a disturbing prospect. The Brexit impact assessments are then applied to these 15-year figures in percentage point terms, so that an FTA gives us 15-year growth of 20%, and WTO 17%. The former gives an annual growth rate of around 1.2%, the latter around 1.0%. Neither drop is trivial. (And we should remember that these figures assumed a favourable post-Brexit trade deal with the U.S., which is hardly a given.)

If DExEU had meant actual percentages and not percentage point changes, then FTA would have implied 23.75% growth rather than the actual 20%, and WTO would have implied 23% growth rather than the actual 17%. I don’t know the politics of my Twitter correspondent (his timeline doesn’t suggest much either way), but if there are Leavers operating under a similar misconception of what those DExEU figures mean, it’s no wonder that some have concluded that leaving with No Deal would have little economic impact.

It might be tempting to think, “What’s the problem? We’ll still be growing either way.” But a chronic reduction in growth can have a big impact over the long term on how a country fares relative to its neighbours and peers. To take an example close to my heart, consider the population growth of my home state of Tasmania, and Australia as a whole:

Tasmania, 1901: 172,475
Tasmania, 2016: 519,100

Australia, 1901: 3,788,123
Australia, 2016: 24.13 million

Tasmania had 4.55% of Australia’s population at Federation; today it’s 2.15%. That drop in relative significance has had a major influence on the culture and self-image of the state, and on national perceptions of it. And yet Tasmania’s population has tripled over those 115 years. It grew, but not nearly as much as other Australian states. It grew, in fact, by just under 1% per annum. The rest of Australia, meanwhile, grew by between 1.6% and 1.65% p.a, to six and a half times its population at Federation.

The worst aspect of the DExEU forecasts is that the regional figures show that parts of the UK that have already suffered significant decline relative to London and the southeast since the 1980s stand to decline even more in relative terms after Brexit, in the same way as Tasmania’s population has. This message of Dance’s initial tweet is still important, as is the message that every Brexit scenario leads to a decline in growth, even if his direct comparison with 2008 figures was misguided.

I’m not at all consoled to know that on our current Brexit course the UK will sacrifice one fifth of the growth we were forecast to see over the next fifteen years, and if we leave with no deal will sacrifice almost a third of it.

9 March 2018 · Politics

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