NGOs are being outmanoeuvred on overseas aid

If the promised legislation to lock in the 0.7% is not secured in the next two years, the NGOs will only have themselves to blame.

I agree with David Cameron. Yesterday he told the UN General Assembly that “when we make a promise to the poorest people in the world, we should keep it, not turn our back on people who are trusting us to help them.” But I really wish that he would keen the promise that he made in his manifesto and legislate for the commitment he reaffirmed yesterday. On page 117 of the Conservative manifesto, his commitment, and the timing of it, was explicit:

“Will be fully committed to achieving, by 2013, the UN target of spending 0.7% of national income as aid. We will stick to the rules laid down by the OECD about what spending counts as aid. We will legislate in the first session of a new Parliament to lock in this level of spending for every year from 2013.”

This was reaffirmed in on page 22 of the coalition agreement:

“We will honour our commitment to spend 0.7% of GNI on overseas aid from 2013, and enshrine this commitment in law.”

Just after the new Development Secretary Justine Greening was appointed, the Chancellor argued that “it is not about legislation; it is about delivering the money." But I beg to differ.

Yesterday, UK development NGOs were falling over themselves to welcome the Prime Minister’s declaration at the UN but the NGOs are at risk of being outmanoeuvred on this issue.

No doubt the aid budget in 2013/14 will represent 0.7 per cent but DFID will almost certainly underspend it. This is because the budget has effectively been frozen since 2010 and so will jump by a third in 2013. Greening will be under pressure to deliver another underspend in 2014/15 after which the future of the aid budget will be subject to the next round of election manifestos.

I predict that, as opposition from their backbenchers grow, the Conservatives will commit to an independent review after the next election, much like the one on tuition fees after the last election and like the review on the third Heathrow runway after the next election. The UN’s 0.7 per cent target is 40 years old, after all.

Labour and the Liberal Democrats will be under no electoral pressure to create a political dividing line on this issue. In fact the opinion polling suggest the opposite. Their political incentive will be to wait for the outcome of such a review to neutralise the debate until after the election.

I have written for New Statesman about the importance of the promised legislation many times before (here, here, here and here). But after the reshuffle, I am now more convinced than ever before that if the NGOs can’t secure the legislation in this Parliament, and thus require another vote to repeal it, then the UK’s aid budget will only remain at 0.7 per cent for two years.

Justine Greening may be the first Development Secretary in British history who didn’t want the job. Metro newspaper claimed she said “I didn’t bloody well come into politics to distribute money to people in poor countries” [as in the print version, although now removed from online as Greening's office disputes the quote], while The Times said three No 10 sources claimed said she argued for an hour at Downing Street on reshuffle day.

When Greening is reported as saying she wants the aid budget to “do more, with less” I feel conflicted (Greening denies having said this). I like the first sentiment but not the second. Everyone wants taxpayers money spent well and if after two years of operation, Andrew Mitchell’s Independent Commission for Aid Impact isn’t working, then Greening is right to be focused on value for money. But the government did inherit a department that the OECD and the ONE campaign consistently ranked as a global leader in aid effectiveness.

On Newsnight last night, David Grossman rehearsed all the arguments about why the aid budget should not rise as promised. But the most compelling argument of the night was put by Adrian Lovett of the ONE campaign: that you can’t clear the deficit by cutting the aid budget anyway. Recent IPPR analysis of the big choices facing politicians in the next Spending Review shows that the planned rise in the DfID budget is just a rounding error in the public finances. The big choices are about the NHS budget, the welfare budget, future tax rises and crucially, the pace at which the deficit is reduced. Even if you scrapped DfID entirely, you’d still have to face up to one of these four big public spending choices.

The spirit of Make Poverty History is needed now more than ever. IPPR and the ODI have studied UK public attitudes towards international aid and development as a contribution to the next phase of UK campaigning on poverty reduction and global development. It is time for NGOs to stop apologising for politicians and campaign for them keep their promises. If the promised legislation is not secured in the next two years, the NGOs will only have themselves to blame.

UPDATE 26/09/2012 16:00

A DfID spokesperson said:

"Justine Greening's views are clear. She has said "Delivering on our promise of 0.7% is the right thing to do, whether it's helping countries cope with natural disasters and famines, or working with some of the British charities who are world leaders in international development. I will critically assess our budget on behalf of the British taxpayer to make sure that, pound for pound, it goes exactly where it's intended and where it can make the biggest difference."

Richard Darlington was Special Adviser at DFID 2008-2010 and is now Head of News at IPPR - follow him on twitter: @RDarlo

New International Development Secretary Justine Greening. Photograph: Getty Images

Richard Darlington is Head of News at IPPR. Follow him on Twitter @RDarlo.

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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?