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How big is big?

Wad of cash
Would this make you rich? Yes, if you were broke but not if you're wealthy

How big is big? In his regular column, Michael Blastland looks at the latest news on the financial crisis and says it all depends on you.

Seen the news lately? Big numbers all over it: up, down, deficits, cuts, taxes.

Wish I knew what to make of it all. But so much is missing from the news that makes all the difference to what it really means. And - forgive the intrusion - what's missing is you.

I need to know - as you read about all the ups and downs - where you are, where you've been, where you are going, and with whom.

I'd better explain. But first a question.

What's £1,000 worth to the following?

  • An ancient Briton
  • Henry VIII
  • Your grandmother, aged 18
  • Bill Gates
  • Scotland
  • You

The answer… varies, obviously.

£1,000 means more if you've got less, and less if you've got more. It means more depending when you try to spend it - a pound spent 50 years ago means more than a pound spent now, ie inflation matters. It means more if it's all yours and less if it's shared.

Big or small? It all depends on your perspective

So numbers mean different things depending where, when and who you are. All of which is simple enough, but often, casually ignored.

Go Figure this week is a little exercise in finding out how much difference is made by knowing where you are.

So where are you as the numbers change?

Take a couple of recent examples from a serious newspaper, points also made by politicians:

  • The cost of housing benefit has doubled in 10 years
  • Welfare spending has increased by 40% in real terms in 10 years

Both were self-contained proof, so it was implied, that this spending is wildly out of hand. And maybe it is. But what's happened to us in the past 10 years?

The first example ignores what a pound was worth to you 10 years ago compared with now. It ignores how many of us there are: if the population doubles then we might expect quite a lot of spending to double.

It ignores the fact that the country grew richer in the past 10 years: people who grow richer tend to spend more on most things, even on the standard of living of those on benefits.

x2 over 10

Are there cheats and scroungers? Sure. Should they be stopped? I'm all for it. But is "doubled in 10 years" a lot?

Who takes the lion's share of the benefits bill? Pensioners

In fact, a bit of inflation plus a typical rate of economic growth would turn £100 into about £165 in 10 years, a 65% increase.

So after a decade, we might reasonably expect quite a few economic numbers to grow this much, just because that's what almost all numbers will do if everyone shares in economic growth, and none of this would imply profligacy.

But 65% is still far less than 100%, so it does look as if housing benefit really is growing much faster than we'd expect. But we needed some context. And there could be more, like whether there has been a change in who we are - more single parents maybe.

What about the second example, a 40% rise in real-term welfare costs?

Here, inflation - when we spend our money - has been taken into account, that's the "real terms" bit.

But how rich we are - economic growth - still needs factoring in. And this would cause most numbers to rise by about 30% in 10 years. About 2.5% growth doubles, yes doubles, the national income in a generation, every 28 years.

Richer and older

Should people on benefits share in this? Before you answer, note that the lion's share of the benefits bill is for pensioners… of whom there are a lot more these days. So maybe we'd expect a bigger share of the nation's money to go their way. We're living longer too.

So is "40% up" proof that someone went wild with a cheque book, is it about what we'd expect, or something in between? Whatever your answer we might still want to do something about this increase. I'm just after a sense of proportion, that's all.

So here are five reasons why the change you see reported depends on you.

  • Economic growth. You're richer, probably. Look past the recession to trends over the longer term and you would see that people have grown more prosperous at an astounding rate
  • Demographic growth. You're keeping more company these days, by which I mean there are more of you
  • Demographic composition. More of you are older, for example
  • Inflation. You pay more pounds for what you get
  • Priorities. You are choosing to buy different things, what's important to you is changing

The last matters to things like health, where the nation has gradually shifted more of its money for the last 60 years. Not just more money, but a rising share of more money - another characteristic of a richer nation.

Think of it like a passenger in a car who says that 1,000 more people went past in the last hour than the hour before. We need to ask, and were you stationary then, but doing 50mph now? What numbers mean depends how fast we move around them. And we move faster in more ways than most people think.

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