Cameron has morphed into the candidate the Tories wanted in 2010. What do they want in 2015?

The PM has found the campaign that the Tories wish they had used to win the last election. That is less than he needs to win the next one.

Three years late, the Conservatives are celebrating victory in the 2010 general election. They still don’t have a majority in parliament but they believe they have won the argument. Labour forfeited its right to govern – so the story goes – by presiding over economic calamity, squandering public money on benefits and opening Britain’s borders to an army of foreigners. The remedy was a Tory government that would cut spending, reform welfare and cap immigration.
 
At the party’s annual conference in Manchester, David Cameron and George Osborne will say their methods are vindicated by incipient economic recovery. Some Tories concede that the truth is more complicated but there is little doubt over who is winning the politics of blame and credit. “The economic argument is not as clear-cut as we’re making out but George has played it well,” says one Conservative adviser.
 
The Prime Minister and the Chancellor will avoid sounding boastful at the conference. They aren’t stupid. They know that the recovery is more legible on paper than it is palpable in pockets. Bills are rising; wages aren’t. In his speech at Labour’s conference, Ed Miliband accused the Tory leader of planning an undeserved “lap of honour”.
 
Cameron won’t oblige with crass claims of missions accomplished. Nor will he respond directly to the charge that the Tories are presiding over a “cost-of-living crisis”. Downing Street knows it has to do something to help struggling households but that task will be addressed later in the year, in a series of policy announcements building up to the Chancellor’s Autumn Statement.
 
At the Tory party conference, the message will be that the Conservatives are on the side of industrious people, while Labour favours freeloaders (domestic and foreign). What excites Tory strategists is that, after three years in office, they feel they have a record to support their argument. They also feel that the party’s MPs are happy with the message and well drilled at delivering it. Effort spent at summer garden parties mending relations between No 10 and backbenchers – the “barbecue offensive” – appears to have paid off. That doesn’t mean the Conservative Party automatically does the Prime Minister’s bidding, as his defeat in the vote on military intervention in Syria proved. But a year ago, such a rebellion would have triggered leadership speculation and lurid tales of panic in the ranks. This time, the disturbance was quickly contained. Cameron wriggled out of his foreign policy humiliation within 24 hours. His spin operation has become sharper and the number of Tory MPs who want nothing more than to hurt him has dwindled to manageable proportions.
 
Labour has watched this transformation with dismay. The Tories can no longer be relied on to deliver a steady flow of bungles. The new ruthlessness and discipline of the Conservative machine is noted with grudging respect by shadow ministers. Tories who once despaired of the way Downing Street was run now speak in reverential tones about Lynton Crosby, Cameron’s campaign director and the man credited with sharpening the party’s sense of strategic purpose.
 
But there is a difference between attacking the opposition harder and governing better. There are also great gaps between what Cameron and Osborne say they are achieving and what has actually been achieved. The deficit and public debt have not been trimmed to anything like the extent that was promised in 2010. Claims to have cracked down on immigration will look shaky when the controls that restricted labour migration from Bulgaria and Romania as a condition of their EU membership are lifted in January. The government’s flagship welfare reform – Universal Credit – has shrivelled from a national revolution in the benefits system to a pilot scheme in Ashton-under-Lyne. With it has shrunk the moral authority of Iain Duncan Smith, who sold Universal Credit as an emblem of “compassionate Conservatism” – easing the path from benefits to work, not just shredding the social safety net.
 
Labour has waited in vain for the public to recoil at the wounds inflicted by the Chancellor’s axe. MPs on both sides note the equanimity with which their constituents have tolerated the hardships of recent years. There is a stoical acceptance of financial insecurity as a force of nature rather than a consequence of government policy. As one Tory MP in a bellwether constituency tells me: “People don’t love us but I don’t get the sense that they are desperate to get rid of us.”
 
Others are less relaxed. “I’d like to show George around parts of my constituency to let him see what poverty really looks like,” says one Conservative defending a marginal seat. The Tories still struggle to shed their image as a favour factory for the rich and powerful. Cameron has steadied his party’s nerves but he hasn’t established what one influential backbencher describes as “a morality behind the narrative”.
 
In the conference hall, Cameron will be unchallenged. He will fight the next election as Tory leader. However, in the hotel bars, the gossip will revert to the discreet beauty contest among potential contenders for the succession – Michael Gove, Theresa May, Philip Hammond, Boris Johnson, George Osborne – because Tories also know that outright victory in the next election is still a remote prospect.
 
The criticism that Tories habitually level against Cameron is that he lacks fixed beliefs and that he changes his political clothes to suit the weather. With the help of Lynton Crosby’s natty tailoring, Cameron has at last found a costume to match his party’s tastes. He has persuaded the Conservatives that he really is their leader but he hasn’t imprinted his own politics on them. He is secure and confident because he has found the campaign that the Tories wish they had used to win the last election. That is less than he needs to win the next one.
David Cameron prepapres to greet his New Zealand counterpart John Key ahead of a meeting in Downing Street on September 18, 2013. Photograph: Getty Images.

Rafael Behr is political columnist at the Guardian and former political editor of the New Statesman

This article first appeared in the 30 September 2013 issue of the New Statesman, The Tory Game of Thrones

Getty
Show Hide image

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?