Cameron's reshuffle: who's in, who's out?

Full details of the Prime Minister's first major reshuffle as they emerge.

After months of speculation, David Cameron's first major cabinet reshuffle began last night. Here's what we know so far.

15:36 Tory deputy chairman Michael Fallon, renowned as the party's attack-dog-in-chief, has been made minister of state for business. Tory MPs will hope he'll act as a powerful counterweight to Vince Cable.

15:00 Elsewhere on The Staggers, Frances Crook, the chief executive of the Howard League for Penal Reform, has posted on why she'll miss having Ken Clarke as Justice Secretary. Clarke was making good on the promise of a "rehabilitation revolution", she says.

14:14 Tory MP Zac Goldsmith, who blogged yesterday on The Staggers on why the government should not support a third runway at Heathrow, has added his voice to those criticising the removal of Greening as Transport Secretary.

He commented on Twitter: "Greening’s appointment 11 months ago indicated the PM’s position on Heathrow was solid. Yielding so easily suggests panic, not principle."

13:42 Boris Johnson has criticised the removal of Justine Greening as Transport Secretary as confirmation that the government is intent on building a third runway at Heathrow, a policy that he described as "simply mad".

Courtesy of PoliticsHome, here's the full quote from his Sky News interview.

There can be only one reason to move her - and that is to expand Heathrow Airport. It is simply mad to build a new runway in the middle of west London. Nearly a third of the victims of aircraft noise in the whole of Europe live in the vicinity of Heathrow.

Now it is clear that the government wants to ditch its promises and send yet more planes over central London. The third runway would mean more traffic, more noise, more pollution - and a serious reduction in the quality of life for hundreds of thousands of people. We will fight this all the way.

13:11 With the remaining vacancies now filled, we've just published a full list of the new cabinet here.

12:28 It's worth noting that the five Liberal Democrat cabinet ministers (Nick Clegg, Danny Alexander, Vince Cable, Michael Moore and Ed Davey) have all remained in their current posts. However, as expected, David Laws, who became the cabinet's first casualty when he resigned as Chief Secretary to the Treasury in May 2010, has returned to government as an education minister. Simon Hughes is reported to have turned down a ministerial post in order to remain as the party's deputy leader.

12:20 We've just had another flurry of announcements as the reshuffle is finalised.

As expected, Grant Shapps has been named as the new Conservative chairman. He will attend cabinet as Minister without Portfolio.

Maria Miller, currently the minister for disabled people, has joined the cabinet as Culture Secretary and Minister for Women and Equalities.

Justine Greening, who was removed as Transport Secretary, is the new International Development Secretary.

12:12 We've been in touch with New Statesman legal correspondent David Allen Green to get his take on Chris Grayling's promotion to Justice Secretary. Here's what he had to say.

Grayling is a disappointing choice as Justice Secretary and Lord Chancellor.  This is not because he is the first non-lawyer since Tudor times to hold the post of Lord Chancellor but because in a number of statements he shows no understanding of the principles of equality and fairness.  The criminal justice system is already in crisis.  The appointment of a mere sloganeer can only make things worse.

11:53 Following Sayeeda Warsi's removal as Conservative co-chairman, it's been announced that she will take up a new dual role as senior Foreign Office minister and minister for faith and communities. She will continue to attend cabinet.

11:40 As I've commented on Twitter, Cameron's decision to move Hunt to health is the biggest gamble of his reshuffle. The media will be after his scalp from the start and they'll be plenty of bad news stories from the NHS. But Hunt - personable, telegenic, socially liberal - is the archetypal Cameroon and the PM's decision to promote him is an assertion of his authority.

11:35 Owen Paterson, formerly Northern Ireland Secretary, has been named as the new Environment Secretary, while outgoing Chief Whip Patrick McLoughlin replaces Justine Greening at Transport.

11:28 I've blogged on Chris Grayling's promotion to Justice Secretary here, pointing out why he was left out of Cameron's first cabinet: he defended the right of B&B owners to turn away gay couples.

11:04 In defiance of Jeremy Hunt's many critics, Cameron has just named him as the new Health Secretary.

10:45 Again via Twitter, Downing Street has just confirmed Chris Grayling as the new Justice Secretary.

10:31 The Downing Street Twitter feed has just named transport minister Theresa Villiers as the new Northern Ireland Secretary. The current incumbent, Owen Paterson, a favourite of the eurosceptic right, is in line for a promotion.

10:27 In the most significant move of the reshuffle so far, Andrew Lansley has been removed as Health Secretary and will become Leader of the House of Commons.

10:17 ConservativeHome are reporting that Chris Grayling, currently welfare minister, is set to be named as the new Justice Secretary.

09:29 Michael Gove and Iain Duncan Smith will remain in their respective posts as Education Secretary and Work and Pensions Secretary. Duncan Smith was reportedly offered Justice but, unsurprisingly, declined. He has previously said that Work and Pensions is the only job he wants to do in government and his defining policy, the Universal Credit, won't be implemented until 2013.

Similarly, it would have been odd to move Gove, also hailed by the right as crusading reformer, before his education reforms are complete.

Gove and Duncan Smith join George Osborne, William Hague, Theresa May and Vince Cable as those certain to remain in their current jobs.

08:35 Michael Fallon, the current Tory deputy chairman, has been seen walking into No 10. Along with Grant Shapps, he has long been cited as a possible replacement for Warsi as chairman. When asked if he had been awarded her job, he smiled, according to the BBC's Norman Smith.

07:18 Cheryl Gillan has left her post as Welsh Secretary after Conservative MPs called for someone representing a Welsh constituency to do the job (the Tories currently hold eight Welsh seats). In what has been dubbed the first "Twitter reshuffle", Gillan signalled her departure by removing the words "Secretary of State for Wales" from her bio on the site.

Andrew Mitchell has been named as the new Chief Whip after leaving his post as International Development Secretary. He replaces Patrick McLoughlin, who is tipped to become Transport Secretary. David Cameron said: "As chief whip, Andrew will ensure strong support for our radical legislative programme, by working hard to win the argument in the Commons as well as playing a big role in the No 10 team. He will be invaluable as the Government embarks on the next, vital phase of its mission to restore our economy to growth and reform our public services."

Despite a late appeal for Cameron to save her job, Sayeeda Warsi has been removed as Conservative co-chairman. She confirmed her departure via Twitter late last night and is expected to be replaced by housing minister Grant Shapps.

Ken Clarke, the man known as the "sixth Liberal Democrat cabinet minister", has been removed as Justice Secretary but is expected to remain in the Cabinet, most likely as minister without portfolio.

Caroline Spelman has been removed as Environment Secretary and will leave the cabinet.

David Cameron will announce full details of his cabinet reshuffle on Tuesday afternoon. Photograph: Getty Images.

George Eaton is political editor of the New Statesman.

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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?