Big data

The UK economy could gain £216bn through the better management.

As the amount of data continues to grow exponentially, compounded by the internet, social media, cloud computing and mobile devices, it poses both a challenge and an opportunity for organisations – how to manage, analyse and make use of the ever-increasing amount of data being generated.

In an economic study on ‘big data’ by the Centre for Economics and Business Research (Cebr), sponsored by business analytics company SAS UK, we investigated how UK organisations, both public and private, can unlock the economic value of big data through the adoption of analytics.

The results show that ‘Data Equity’ – the economic value of data – has the potential be worth £216bn to the UK economy over the next five years – equivalent to more than the current defence, NHS and education and budgets combined.

The benefits of data equity are expected to manifest themselves in the creation of new jobs – Cebr predict that 58,000 could be created as a result of the entry to markets of new businesses, through which the business creation benefits are derived.

Business creation benefits and could raise employment as the result of new business start-ups and increased demand for data-specific roles. Improvements in market and customer intelligence in every sector will support entrepreneurial activity, allowing for more precise strategising and reduced uncertainty, therefore attracting new business start-ups into these markets.

The main efficiency gain is contributed through improvements to customer intelligence. Data-driven improvements in targeted customer marketing, the more effective meeting of demand and the analytical evaluation of customer behaviour is forecast to produce £74 billion in benefits over the next five years – the majority being driven by UK manufacturing (£45bn) and retail (£32bn).

We expect the manufacturing sector to see the largest innovation gain from the adoption of big data analytics. The utilisation of high-performance analytics could lead to new product development benefits of £8 billion in increased output over the next five years. The retail sector can also experience significant gains through innovation such as new consumer products which are expected to induce a £3 billion rise in output.

There is also much value to be unlocked from supply chain and logistical data. Cebr anticipates £46 billion in gains through using predictive analytics to better forecast demand, replenishment points and optimise stock and resource allocation to reduce costs.

The public sector is another key gainer. Government could save £2 billion in fraud detection and generation £4 billion through better performance management. A further £6 billion in efficiencies could be gained by analysing performance data, with the healthcare system benefiting by £2 billion.

This enhanced information, and ability to react dynamically to changes in the market landscape, will enable smaller businesses to compete more effectively with larger and more established ones, having reduced barriers to entry. Small retailers and manufacturers are anticipated to take significant advantage of this big data opportunity, generating £15 billion of new business.

Job creation is a key aspect of the report and experts agree that data equity has the potential to be as important to organisations as brand equity. As a result there is an increasing demand for ‘data scientists’ – highly skilled statisticians who work with data to derive business insights. We are already seeing the emergence of the Chief Data Officer in the US as organisations look to capitalise on their data equity for a competitive advantage, and it won’t be long until that trend crosses the pond.

But currently demand for data scientists outstrips supply, with the UK facing a particularly acute skills gap when it comes to science, technology, engineering and mathematics (STEM) subjects. This emphasises the need to teach high quality STEM skills at school and university to prepare the next generation of graduates for the big wide world of data.

As the volume of data created exponentially increases and big data’s value is unlocked to greater effect by technological advances, we would expect data to start appearing on the balance sheets of companies that begin to realise its value in financial terms. Furthermore, the efficiency and innovation gains generated from data-driven technologies can play a vital role in ensuring the competitiveness of the UK’s goods and services on the global stage, and thus generate a wider economic benefit beyond the value of the significant asset to its owner.

Tapping into the dizzying amount of big data could be the stimulus the UK economy has been searching for. High performance analytics has the power unlike any other technology to generate growth, reduce debt, create jobs, develop new innovations and deliver greater operational efficiencies. Organisations, large or small, government or commercial, must get to grips with the big data challenge, and use analytics to identify tomorrow’s opportunities.

Big Data: A man inspects a supercomputer in Paris. Credit: Getty

Shehan Mohamed is an economist at the Centre for Economics and Business Research and Andy Cutler is the head of high performance analytics at SAS UK. They co-authored the report Data Equity: unlocking the value of big data.

 

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We're racing towards another private debt crisis - so why did no one see it coming?

The Office for Budget Responsibility failed to foresee the rise in household debt. 

This is a call for a public inquiry on the current situation regarding private debt.

For almost a decade now, since 2007, we have been living a lie. And that lie is preparing to wreak havoc on our economy. If we do not create some kind of impartial forum to discuss what is actually happening, the results might well prove disastrous. 

The lie I am referring to is the idea that the financial crisis of 2008, and subsequent “Great Recession,” were caused by profligate government spending and subsequent public debt. The exact opposite is in fact the case. The crash happened because of dangerously high levels of private debt (a mortgage crisis specifically). And - this is the part we are not supposed to talk about—there is an inverse relation between public and private debt levels.

If the public sector reduces its debt, overall private sector debt goes up. That's what happened in the years leading up to 2008. Now austerity is making it happening again. And if we don't do something about it, the results will, inevitably, be another catastrophe.

The winners and losers of debt

These graphs show the relationship between public and private debt. They are both forecasts from the Office for Budget Responsibility, produced in 2015 and 2017. 

This is what the OBR was projecting what would happen around now back in 2015:

This year the OBR completely changed its forecast. This is how it now projects things are likely to turn out:

First, notice how both diagrams are symmetrical. What happens on top (that part of the economy that is in surplus) precisely mirrors what happens in the bottom (that part of the economy that is in deficit). This is called an “accounting identity.”

As in any ledger sheet, credits and debits have to match. The easiest way to understand this is to imagine there are just two actors, government, and the private sector. If the government borrows £100, and spends it, then the government has a debt of £100. But by spending, it has injected £100 more pounds into the private economy. In other words, -£100 for the government, +£100 for everyone else in the diagram. 

Similarly, if the government taxes someone for £100 , then the government is £100 richer but there’s £100 subtracted from the private economy (+£100 for government, -£100 for everybody else on the diagram).

So what implications does this kind of bookkeeping have for the overall economy? It means that if the government goes into surplus, then everyone else has to go into debt.

We tend to think of money as if it is a bunch of poker chips already lying around, but that’s not how it really works. Money has to be created. And money is created when banks make loans. Either the government borrows money and injects it into the economy, or private citizens borrow money from banks. Those banks don’t take the money from people’s savings or anywhere else, they just make it up. Anyone can write an IOU. But only banks are allowed to issue IOUs that the government will accept in payment for taxes. (In other words, there actually is a magic money tree. But only banks are allowed to use it.)

There are other factors. The UK has a huge trade deficit (blue), and that means the government (yellow) also has to run a deficit (print money, or more accurately, get banks to do it) to inject into the economy to pay for all those Chinese trainers, American iPads, and German cars. The total amount of money can also fluctuate. But the real point here is, the less the government is in debt, the more everyone else must be. Austerity measures will necessarily lead to rising levels of private debt. And this is exactly what has happened.

Now, if this seems to have very little to do with the way politicians talk about such matters, there's a simple reason: most politicians don’t actually know any of this. A recent survey showed 90 per cent of MPs don't even understand where money comes from (they think it's issued by the Royal Mint). In reality, debt is money. If no one owed anyone anything at all there would be no money and the economy would grind to a halt.

But of course debt has to be owed to someone. These charts show who owes what to whom.

The crisis in private debt

Bearing all this in mind, let's look at those diagrams again - keeping our eye particularly on the dark blue that represents household debt. In the first, 2015 version, the OBR duly noted that there was a substantial build-up of household debt in the years leading up to the crash of 2008. This is significant because it was the first time in British history that total household debts were higher than total household savings, and therefore the household sector itself was in deficit territory. (Corporations, at the same time, were raking in enormous profits.) But it also predicted this wouldn't happen again.

True, the OBR observed, austerity and the reduction of government deficits meant private debt levels would have to go up. However, the OBR economists insisted this wouldn't be a problem because the burden would fall not on households but on corporations. Business-friendly Tory policies would, they insisted, inspire a boom in corporate expansion, which would mean frenzied corporate borrowing (that huge red bulge below the line in the first diagram, which was supposed to eventually replace government deficits entirely). Ordinary households would have little or nothing to worry about.

This was total fantasy. No such frenzied boom took place.

In the second diagram, two years later, the OBR is forced to acknowledge this. Corporations are just raking in the profits and sitting on them. The household sector, on the other hand, is a rolling catastrophe. Austerity has meant falling wages, less government spending on social services (or anything else), and higher de facto taxes. This puts the squeeze on household budgets and people are forced to borrow. As a result, not only are households in overall deficit for the second time in British history, the situation is actually worse than it was in the years leading up to 2008.

And remember: it was a mortgage crisis that set off the 2008 crash, which almost destroyed the world economy and plunged millions into penury. Not a crisis in public debt. A crisis in private debt.

An inquiry

In 2015, around the time the original OBR predictions came out, I wrote an essay in the Guardian predicting that austerity and budget-balancing would create a disastrous crisis in private debt. Now it's so clearly, unmistakably, happening that even the OBR cannot deny it.

I believe the time has come for there be a public investigation - a formal public inquiry, in fact - into how this could be allowed to happen. After the 2008 crash, at least the economists in Treasury and the Bank of England could plausibly claim they hadn't completely understood the relation between private debt and financial instability. Now they simply have no excuse.

What on earth is an institution called the “Office for Budget Responsibility” credulously imagining corporate borrowing binges in order to suggest the government will balance the budget to no ill effects? How responsible is that? Even the second chart is extremely odd. Up to 2017, the top and bottom of the diagram are exact mirrors of one another, as they ought to be. However, in the projected future after 2017, the section below the line is much smaller than the section above, apparently seriously understating the amount both of future government, and future private, debt. In other words, the numbers don't add up.

The OBR told the New Statesman ​that it was not aware of any errors in its 2015 forecast for corporate sector net lending, and that the forecast was based on the available data. It said the forecast for business investment has been revised down because of the uncertainty created by Brexit. 

Still, if the “Office of Budget Responsibility” was true to its name, it should be sounding off the alarm bells right about now. So far all we've got is one mention of private debt and a mild warning about the rise of personal debt from the Bank of England, which did not however connect the problem to austerity, and one fairly strong statement from a maverick columnist in the Daily Mail. Otherwise, silence. 

The only plausible explanation is that institutions like the Treasury, OBR, and to a degree as well the Bank of England can't, by definition, warn against the dangers of austerity, however alarming the situation, because they have been set up the way they have in order to justify austerity. It's important to emphasise that most professional economists have never supported Conservative policies in this regard. The policy was adopted because it was convenient to politicians; institutions were set up in order to support it; economists were hired in order to come up with arguments for austerity, rather than to judge whether it would be a good idea. At present, this situation has led us to the brink of disaster.

The last time there was a financial crash, the Queen famously asked: why was no one able to foresee this? We now have the tools. Perhaps the most important task for a public inquiry will be to finally ask: what is the real purpose of the institutions that are supposed to foresee such matters, to what degree have they been politicised, and what would it take to turn them back into institutions that can at least inform us if we're staring into the lights of an oncoming train?