Jeremy Browne: Clegg’s man in the Home Office

The Orange Book liberal is preparing for a renewal of coalition vows after the next election.

The Home Office is not a place to be squeamish about state power. As the department responsible for preventing crime and disorder, its stock-in-trade is monitoring, control and coercion. Under the coalition government, it seems perpetually to be “cracking down” on something.
 
It was the Home Office that came up with the idea of driving mobile billboards inviting illegal immigrants to “Go home or face arrest” around multiracial boroughs of London. It was a mistake, says Jeremy Browne, the Liberal Democrat minister of state at the department responsible. “I was not consulted beforehand, neither was Nick Clegg, and that is a serious oversight.” Browne defends the voluntary repatriation policy but is scathing about the way the signal was sent out: “The debate about immigration should be conducted in a tone that is civilised and humane, rather than pandering to the least attractive elements in the human spirit.”
 
We meet in Browne’s sparse room at the Home Office, where he has been for just a year. He was previously Clegg’s man at the Foreign Office. The move was seen in Westminster as an attempt to get more leverage in a department that often aggravates liberal scruples. But if Browne’s unofficial job title is thwarter-in-chief of authoritarian Tory tendencies, he isn’t letting on. The Conservatives, he says, are the second most liberal party when it comes to home affairs, while Labour attacks the coalition from populist, right-wing positions.
 
“The Conservatives may be a magnetic force pulling the Lib Dems away from a purer form of liberalism but it’s not true that if we were in coalition with Labour, it would represent some easy, liberal utopia. There would be a much bigger gap to bridge to try to accommodate the authoritarian instincts of the Labour Party.”
 
Browne is a classical liberal from the Orange Book wing of his party – the side that was suspicious of socialism and state intervention even before the opportunity arose to make common cause with the Conservatives. While some left-leaning Lib Dems are wary of their party’s proximity to David Cameron, Browne is certain that the Tory leader has a firmer grasp of the challenges facing the country than Ed Miliband does. He declares “the global race” – Cameron’s pet theme – to be “the big issue of our time”. By contrast, he describes Labour as “intellectually lazy, running on empty” and suffering from “a leadership void”. “I just don’t think of them as equipped to run the country,” he says.
 
It sounds as if Browne is preparing for a renewal of coalition vows after the next election. There are, he claims, Tories who would rather keep the current arrangement than go it alone and be held to ransom by maverick backbenchers. For these “moderate Conservatives”, the worst-case scenario at the next election is a small majority. “They would be beholden to the people on the right of the party, who have a lot more in common with Ukip than they do with David Cameron.”
 
In Browne’s view, there are between 25 and 30 Tory MPs who reject the Prime Minister’s authority. (“They actually like the idea of wielding their collective muscle to push him around.”) He says that, as a result, “The Conservatives would have difficulty governing in as stable a fashion as this coalition government has done with a majority of much less than 40 or 50.”
 
This is a rehearsal of the Lib Dems’ pitch at the next election. Neither of the two main parties, they will say, can be trusted to govern alone; both need leavening with a dose of Cleggism. It is an optimistic line from a party whose poll ratings languish in single figures. Ukip, I suggest, is now performing the function that the Lib Dems once had as the place voters go to express a rejection of the big Westminster parties.
 
Browne does not recoil from the comparison. Nigel Farage’s party, he says, is mimicking the strategy that the Lib Dems used to graduate from protest vehicle to potential party of government. Ukip is here to stay. “We are moving away from bipolar politics, where every opinion is corralled into two main parties, to a situation where more and more things are being unpackaged.”
 
Browne even argues that the Lib Dems and Ukip, despite competing for third place in opinion polls, represent a more precise account of the rival visions that politics offers Britain. “Essentially, the big choice the country faces is not really embodied that well by the two biggest parties: it is represented by the Lib Dems and Ukip. That’s where it’s thrown into stark relief.” He defines the contest as between “pulling the drawbridge up, erecting barriers to the outside”, and “being a welcoming, liberal, outward-looking, internationalist country that embraces the opportunities of globalisation”.
 
That means being more relaxed about immigration than British politics seems to allow. Browne describes himself as part of the “unfashionable minority” that celebrates the opening of British borders to EU workers from eastern Europe. “I don’t think there was a mistake. It was transformational in terms of Britain’s relationship with countries like Poland . . . It was in our foreign policy interest but, at a much more direct, micro level, there are lots of employers in my constituency and around the country who are full of praise for the contribution that Poles have made to their businesses and the economy more generally.”
 
Will the Lib Dems be so enthusiastic about the Romanian and Bulgarian migrants who will enjoy new freedoms to work in Britain from next January? “They’re only complying with the same rules as British people who live in Spain or have holiday houses in France, or who work in Germany.” Browne is quick to add the caveat that the influx has put pressure on public services, which accounts for much of the political backlash. “But I think if you look at the overall ledger . . . the positives outweigh the negatives.” 
Nick Clegg and Jeremy Browne speak with a police officer at the Stockwell Park Estate on April 25, 2013 in London. 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 16 September 2013 issue of the New Statesman, Syria: The deadly stalemate

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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?