Osborne should beware of bolstering the Tories' anti-green wing

Voters don't see climate change as a priority, but caring about it was an emblem of Tory moderation.

I recently had a conversation with someone who has conducted a lot of political focus groups. The conversation turned to climate change and environmental policy. The context was the Conservative party’s conspicuous abandonment of green messages. Presumably, I said, this is animated to some degree by the fact that voters aren’t that interested in the subject. The economic crisis has bumped climate change lower down the priority list of public concerns – even lower than it was before. I was surprised by the answer. “It’s more than that. It’s actually a negative,” I was told. Apparently, green policies are seen by many swing voters as an expensive luxury and – worse still – a pious elite preoccupation; one of the ways that a wealthy few sneer at those without money to spare. “Have you seen how much apples cost at the farmers’ market compared to Tesco?” is a standard response.

Making people buy groceries at farmers' markets is not, of course, any party’s idea of a serious policy to tackle climate change. The point is that there is, in many people’s minds, a whole apparatus of environmentalism that is bundled up with the “green lifestyle”, which is, in turn, seen as exclusive, judgemental and expensive. (I don’t say this is true, just that it is the perception.)

That makes it rather easier to understand why the Tories – and George Osborne in particular – feel comfortable striding purposefully away from their old “Vote Blue, Go Green” slogan. The Chancellor, who doubles as Conservative campaign strategist, has surely conducted a simple cost-benefit analysis. On one side of the equation is the awkwardness of being seen to jettison what was once a high-profile policy. On the other side: an easy way to appeal to Tory backbenchers. There is a large section of the Conservative party that sees Labour-era regulations to limit carbon emissions as an onerous burden on business. (As I noted in my column this week Osborne is said, in private, to speak with undisguised irritation and contempt for the Climate Act.)

A smaller, but vocal segment of Tory opinion with important cheerleaders in the media, is unpersuaded by the science of climate change in general. And there are many MPs in rural areas who channel their constituents’ rage at the prospect of wind farms accused of blighting the landscape.

The enhanced power of that wing of the party is plainly expressed in the reshuffle elevation of Owen Paterson, a vocal opponent of wind farms, to the job of Environment Secretary. Meanwhile, a low-level war of briefings and counter-briefings is well under way between the Treasury and the Department for Energy and Climate Change (DECC) over the forthcoming Energy Bill – specifically, on the question of how incentives for investment in renewable energy are structured and how much emphasis should be placed on (unrenewable) gas as a power source. In the Spectator this week, James Forsyth reports the Prime Minister instructing John Hayes, the new Tory minister of state at DECC, to “deliver a win for our people on windfarms.” It all looks like an aggressive pincer movement against Lib Dem Energy Secretary Ed Davey. That is certainly how the Lib Dems are interpreting it.

The shift in emphasis is also provoking concerns on what is sometimes still called the “modernising” wing of the party (although increasingly Tories of all persuasions speak of that feature of the Cameron project in the past tense, some with glee, others in despair).

There are traces of angst about the party finding itself on the wrong side of a moral divide; potentially, in the long-run, on the wrong side of history. Voters might not see climate change as a big political issue, but many still recognise that it is a problem. Some Conservative MPs believed David Cameron when he said he wanted to lead the “greenest government ever” and found it a genuinely attractive proposition. For the time being, however, those eco-dissidents on the Tory benches are staying rather quiet, probably for fear of sounding sympathetic to the Lib Dems – a deeply unfashionable place to be in Conservative circles.

But there is also blunt political calculation animating concern about the Tory leadership jettisoning its green credentials before they were ever properly established. Even if voters don’t want their politicians to bang on about greenery, they haven’t forgotten that Cameron once did. The issue itself is secondary to what it says about the cavalier way in which the Prime Minister picks and chooses his beliefs. As one disillusioned Cameroon put it to me recently: “You can’t claim to be all green one minute, then forget all about it and expect people not to notice.”

This in turn feeds concerns about the influence that George Osborne has over Tory strategy. His reputation as a political chess grandmaster was lost during the Budget and hasn’t been recovered. He is more generally seen now as a relentless tactician – and a fairly crude one at that. He might see ditching green policies as a relatively cost-free way of shoring up his position with the right of the party but that doesn’t mean it makes good strategic sense.

The danger is that dismissal of environmental concerns nurtures and empowers the full-on climate change deniers in the party. That lobby then acquires the kind of fanatical and implacable character of Tory euroscepticism – an article of ideological faith rather than an agenda for practical government. Voters don’t like the European Union much, but that doesn’t mean they are wooed by a Conservative party that channels and amplifies hysterical rage against Brussels. (The issues are connected to the extent that the EU is seen as an engine of low-carbon regulation.)

What matters in terms of the fragile Tory brand is less what MPs think about Europe or the environment so much as the quixotic mania that is perceived to be driving those views. It isn’t clear how Osborne helps his party’s election prospects by being seen, almost literally, to be tilting at windmills.

Osborne is said to speak with "undisguised irritation and contempt for the Climate Act." Photograph: Getty Images.

Rafael Behr is political columnist at the Guardian and former 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?