How Labour can redefine the public sector debate

Reform will get nowhere if it starts and ends with confrontation with the workforce.

The public sector now looks set for months of bitter confrontation between the government and the unions. The doctors have announced a day of industrial action  -  their first in more than 40 years. Meanwhile teachers are set to strike in the autumn over changes to pensions.  Earlier in May tens of thousands of public sector workers including police and prison officers, lecturers and civil servants took part in a day of action and union leaders have warned of more to come.  It is clear that the mood among public sector workers is one of anger – and in their fight against the coalition’s programme of cuts and reforms the unions are looking to Labour for strong, unequivocal backing. 

How should the Labour leadership respond?  According to the former cabinet minister, Charles Clarke in a new article for IPPR’s journal Juncture, by adopting its own radical reform strategy for  public services. Clarke's prospectus is bold and much of it controversial: he calls for tight control over pay and spending, greater hypothecation of tax and an extension of user charging and competition.  He acknowledges that many of these reforms are unlikely to win the support of the industrial wing of the labour movement but argues that Labour shouldn’t allow "vested interests, even including some of its own members and supporters" to stand in the way of change. He does however offer new forms of institutional dialogue with unions and professional bodies to get agreement over areas such skills development, pensions and working arrangements.

Clarke is right that a future Labour government would have to make tough decisions. This is underlined in a new briefing published by IPPR today in conjunction with the CBI. The report highlights the fact that long-term trends, especially an ageing population, will increase demand on public services, while reducing future tax revenues.  The analysis is based on projections from the Office for Budget Responsibility showing how Britain’s budget balance is likely to move from a surplus of 1.3 per cent of GDP in 2015-16 to a deficit of 0.6 per cent of GDP in 2030-31 and then to 3.2 per cent of GDP in 2060-61: a deterioration of 4.5 per cent of GDP or £66 billion in today’s terms. 

These pressures are not unmanageable, still less an excuse for cutting back on providing high quality universal services. But they mean that any future government will have to make very difficult choices. The way forward is to create a broader, more sustainable tax base, take big strategic decisions about which services we as a country should prioritise and get serious about raising public sector productivity over the long term.

In terms of prioritisation we should be investing in universal affordable childcare: the success of the Nordic countries shows that this has massive long term pay offs in terms of reducing educational inequalities, as well as helping to expand the tax base by raising the female employment rate. In short, investment in early years is a massive win/win. But if we put our eggs in that basket it means that other services will face a tighter funding settlement over the long term.

That brings us to productivity. The electoral success of New Labour was built on the idea that social justice and economic efficiency could go hand in hand. It is my contention that the success of a future Labour government would depend on making public service productivity and the values of social justice, association and democratic empowerment go hand in hand.  

Lets be clear: being serious about productivity means being hard headed about reducing costs. In particular that means looking at where new technology can deliver services in a less labour intensive way. For example, new technologies in health mean that people will be able to monitor their own conditions much more actively without the need to consult a doctor. In another example, increasingly universities in the United States are opening up their degrees to the public by allowing online access to teaching material.  This could radically transform the nature of a university education by allowing wider access at lower cost. 

But delivering better value also requires the engagement and enthusiasm of those who deliver our public services day to day.  An agenda that seeks to marry the values of cooperation and employee participation to the need to improve efficiency has the potential to secure the buy-in of public service professionals. 

For example, could staff be rewarded by collective bonuses when a service improves? Or for example could we create new forms of not for profit service delivery organisation in which staff and users are jointly in control? The prospect that social care users could mutualise their personal budgets to create community led care providers is an enticing one. 

Of course user and producer interests will still clash and it is for that reason that we need robust forms of accountability in public services. We should also be realistic: it will be impossible to achieve agreement on every reform. And Clarke is right that before working out how it can better engage staff in the process Labour will need to be much clearer than it has been about its overall strategic approach to reform and the kind of changes that are necessary.  But it is important to remember that reform will get nowhere if it starts and ends with confrontation with the workforce.

Rick Muir is IPPR's associate director for public service reform

A future Labour government would have to make tough decisions on funding. Photograph: Getty Images.

Rick Muir is director of the Police Foundation

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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?