The Office for National Statistics is poised to start using VAT data from thousands of firms to produce its estimates of GDP. Chief Economist Nick Vaughan explains how this innovation will provide a much clearer view of economic performance by sector and area.
When we produce our GDP figures just before Christmas, there will be a subtle but important change in the way the numbers are produced.
For many years ONS economic releases have relied on monthly survey returns from businesses to calculate how much the economy has grown. We send forms to 45,000 companies – including all the biggest firms – to ask them if their turnover (the amount of money coming in and out of their bank accounts) has increased, and by how much. We then use this to estimate whether our economy is growing or not, and to what extent.
However, beginning with our Quarterly National Accounts release on 22 December, to complement the 45,000 survey responses, we will also use 600,000 of the 1.8 million total VAT returns to improve our estimate of how the economy is performing.
Initially we will only use VAT returns for small and medium sized businesses, those employing up to 100 people. These firms make up about 20% of the economy but 98% of all businesses.
New VAT data source
This new VAT data source will also give us a more detailed picture of how the UK economy is performing. For example, while we currently publish information on ‘food and beverage service activities’, we can’t tell you how different parts of this industry, such as restaurants, takeaways, clubs and pubs, are performing.
So for example, we currently send 172 forms a month to small restaurants and takeaways while we can now access nearly 28,000 VAT returns. Similarly we send 108 forms a month to pubs and clubs when we will use 18,000 VAT returns to improve the quality of our estimates. The scaling up in available data means we can now measure detailed geographies and industries much more quickly than we have ever achieved before.
In December we’ll be publishing much more timely and detailed information about how the economy is performing at a local level. VAT data is an important part of this improvement, which will help us understand how different sectors are performing around the country from motor manufacturing in Cheshire to accountancy & legal work in West Wales & The Valleys.
We are phasing these data in gradually and will ramp up the number of VAT returns we use over the coming years. But this only marks the first step in the transformation of the way we produce our figures. The monthly short-term surveys will be transformed over the next few years – moving to a model where we increasingly rely on VAT data for businesses with simple corporate structures and surveys for businesses with more complicated structures. At this point we will then deliver a significant reduction in monthly surveys, cutting our costs and the survey burden on small businesses.
Nick Vaughan is Chief Economist for the ONS