Why the Lib Dems shouldn't enjoy Tory retoxification too much

Lib Dem ministers are in danger of looking like helpless passengers in a right-wing government.

Political strategists are obsessed with messages that "cut through". They mean the bits that somehow penetrate the consciousness of those people who don’t spend all their time thinking about politics, which is pretty much everyone.

Inconveniently, politicians are often surrounded by other politicians and journalists. They (we) are often as bad as each other at remembering an axiomatic truth about whatever it is they (we) have just said or written: most of the time, no-one cares.

So I do not mean to belittle the Liberal Democrats at their annual conference when I say that most of what passes as "news" – and what animates the chatter in the hotel bars of an evening – will skim off the surface of voters’ minds without leaving a mark.

I’d guess that two things have "cut through" in politics in the last week. First, that Nick Clegg is sorry. It might not be entirely clear what he is sorry for. We know he regrets making a pledge not to raise university tuition fees when he wasn’t remotely sure he could keep it. We know also that he stands by the policy on tuition fees currently in place. He is frustrated because the episode haunts his party, casting him as the emblematic face of broken promises and making it impossible to get any other messages heard. So, after much deliberation, Clegg decided to lob a contrition grenade – hardly a precise weapon, but sufficient, he hopes, to enable him to change the subject.

The Deputy Prime Minister’s aides insist his video apology is not meant to solve an image problem overnight (and plainly it hasn’t). The test of its effectiveness, they say, will only come towards the end of the parliament, when campaigning for a general election starts up. The hope is that, by then, it will seem tired and petty for Clegg’s rivals to attack him as the king of paltry pledges. He’s said he’s sorry – not a lot of politicians do that – what more do you want? It’s a pretty optimistic line, but probably fractionally better than the alternative, which was not apologising.

There are voters who will never forgive Clegg, whatever he says or does. They are lost to the party for the foreseeable future. As for the rest, given that one of the few things everyone knew about the Lib Dem leader is that he broke a promise, it is probably a small net positive that one of the other few things people now know is that he is also sorry. The details don’t matter so much. That’s cut through.

The second thing that has probably registered on most people’s political radars is that a senior Conservative member of the cabinet might or might not have called a police officer "a fucking pleb". Quite how toxic that is for the Cameron project hardly needs spelling out – it underlines the image of the Prime Minister as surrounded by a haughty, wealthy clique that is out of touch with the lives of ordinary people. Worse, it gives the impression that they despise public servants. Whether or not Andrew Mitchell actually said the words attributed to him – and he denies it – is hardly relevant. What counts is that it resonates as the sort of thing a millionaire, ex-banker Tory might be expected to say. Unfair, maybe. But that’s how cut through works.

The strong impression I get from speaking to senior Lib Dems here in Brighton is that they think Cameron ought to have jumped on the whole episode harder and faster. He should, they suggest, have seized it as an opportunity to trumpet his abhorrence at the attitudes attributed to his chief whip, declaring that there is no place for such language in a modern Conservative party. It is probably too late now. Whether Mitchell survives or not, the damage is done.

The Lib Dems aren’t too upset about that. It suits them to be seen as the reasonable, down-to-earth, humble face of the coalition as distinct from the moneyed arrogance of their partners. Predictably, Vince Cable exploited the opportunity to salt the Tory wound in precisely that way by proudly declaring himself to be a "pleb" in his conference speech. One senior Lib Dem, wearing a broad grin, yesterday described the whole Mitchell episode to me as  "dynamite!" A conference stall selling Lib Dem memorabilia sold out of badges announcing "I’m sorry" in the first days of the conference; "pleb" badges quickly replaced them as the must-have accessory.

But the relish with which Lib Dems are enjoying watching the Conservatives re-contaminate their brand does not sit entirely comfortably with the hope that Clegg’s apology will win the party a new audience.

In theory, it should be possible for the two episodes to cut through simultaneously in a way that helps the junior coalition partner. "Behold," the Lib Dems cry, "what we have to put up with! Yes, we made some mistakes, but aren't you glad we're here to rein these beastly Tories in. Imagine what they’d be like without us. The horror! We may not have won every battle - we handled that tuition fees thing all wrong - and yet we are winning some battles too." Then they hope their message of fairer taxes - making the wealthy carry more of the burden of austerity - will be heard and earn them some political credit.

But Tory toxicity is not specific to any policy. It is also contagious. It is a cultural apparatus that surrounds great tranches of the population, especially in the north and Scotland, as well as many younger voters and minority communities (as some glum Tories regretfully concede in private). It is a kind of political inoculation against putting a cross in a certain box come polling day. It is the force that stopped David Cameron from winning a majority. In that sense it is obvious that the Lib Dems should want to nurture the most vicious caricature of their governing allies – and hazardous.

There is ample evidence that the junior coalition party struggles to assert its identity in partnership with a much mightier political beast. Attempts at "differentiation" to overcome that problem have focused largely on policy. But individual policy rarely cuts through – especially when the question of credit and blame for good government in this parliament is largely dependent on the performance of the economy.

There is always the prospect that the Lib Dems are seen to be gathering up only crumbs of policy compensation in exchange for complicity in a largely Conservative project. And in that case, reveling in Tory toxicity is not risk-free.

While there is some disappointment in Brighton that Mitchell’s story has blown the conference out of the headlines, there are still a large number of people of in the party who see the  "pleb" episode as anything other than an open goal – and they’ll keep banging the ball in. It is hard to begrudge them that opportunity at their annual conference, since the occasion is all about celebrating the party’s distinctiveness and independence. But then the business of government must resume and the Tories will not have ignored the pleasure that was taken in their discomfort nor will they forget it. The task of managing coalition effectively, demonstrating that it can be a functional system of government, is as important a prize for the third party as differentiation from the Tories.

The lesson of the past two years is that, when the Conservative party feels wounded and insulted by the Lib Dems, it retaliates by demanding that Cameron ignore Clegg and crush his policy ambitions. The Prime Minister always acquiesces.

So the risk is that gleeful – and from the Tory point of view, gratuitous – punching of a bruised brand accelerates a process that ends up with the Lib Dems getting less out of coalition and looking more like helpless passengers. It is one thing for voters to know that Nick Clegg feels bad about handling one policy wrong. But if the two things they know are that he is sorry and that he doesn’t get his way, what cuts through is the sense that the Lib Dems are apologising for the basic fact of having propped up a Conservative government but not sorry enough to do anything about it.

Vince Cable joked that he was a "mere pleb" in his speech to the Liberal Democrat conference. 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?