The SNP's Clause IV moment

Is Alex Salmond preparing to water-down his party's traditional opposition to nuclear weapons?

In Inverness this weekend, the SNP will hold its first conference since winning an unprecedented overall majority at the Scottish elections last May. No doubt the party faithful will be in buoyant mood. Recent polls have suggested growing support not just for Alex Salmond and his nationalist administration, but also for its raison d'etre of independence. Better still, Scotland's two main opposition parties -- Labour and the Conservatives -- remain leaderless and apparently incapable of developing an effective strategy to save the union.

Without question, a key factor in the SNP's current success has been its ability to maintain, as shadow foreign secretary Douglas Alexander put it in a speech last week, a "Mandelsonian discipline". This was necessary during its first term in office when -- as a minority government -- a single dissenting vote could block the passage of any piece of legislation. Yet even in the six months since it took full control of the chamber at Holyrood, its ranks have remained essentially unbroken. The prospect of an independence referendum sometime in the next three to four years seems to have further strengthened nationalist unity.

But outside the MSP and MP groups, there are signs of emerging discontent. In particular, many ordinary members and grassroots activists are disturbed at what they perceive as a shift away from the party's traditional opposition to the stationing of the British nuclear weapons system on the Clyde.

In its submission to the UK Basing Review in June, the Scottish government officially welcomed the decision of the Ministry of Defence to roughly double the size of its nuclear powered submarine fleet at Faslane from five to around twelve or fourteen by 2017. Although not stated in the text, the probable grounds for this are that it would secure the several thousand jobs at the base well beyond the timing of the independence referendum.

The announcement, which ministers were careful not to publicise, followed the publication of an article by Jim Sillars -- whose contribution is significant because of his former status as leader of the party's fundamentalist wing -- in which he argued that Scotland should maintain a form of "military Unionism" with England after independence, including a deal to lease out the Trident base for an unspecified period of time. In the rollicking style typical of the ex-Labour MP, Sillars wrote: "Leasing the Trident base? Jings, crivvens, help ma Boab. Never! is likely to be the first reaction of party members. [But] we must look through the English end of the telescope. Scottish independence, in the old model and old policies, threatens English state interests". There was no public riposte from the nationalist leadership, which tends to be highly sensitive to such radical departures from its script.

The concept of military unionism articulated by Sillars is consistent with the notion of "independence-lite" or "devolution-max" which the First Minister has hinted will be included as a third option on the referendum ballot paper. If this turns out to be the preferred choice of the Scottish people -- and most polls suggest it will be -- it would see Scotland gain full economic autonomy while Westminster retains control over defence and foreign affairs. As such, the possibility of Scotland achieving a quasi-independent status yet still carrying the burden of risk inherent in hosting the UK's nuclear capacity is very real.

The SNP's policy of unilateral nuclear disarmament is a core element in its claim to radicalism -- the nationalist equivalent of Labour's Clause IV. If Salmond was to retreat from it in any way, his party could experience the same moral collapse suffered by Labour under the stewardship of Tony Blair but without the associated electoral success. (A number of surveys show that a majority of Scots are against the renewal of the Trident system.)

So why would the First Minister, famed for his tactical intelligence, take such a potentially damaging step? Well, like Sillars, he may reason that watering down his opposition to the independent deterrent could work to soften London's resistance to full Scottish self-government by reducing the threat it poses to the UK's international standing.

But Sillars and Salmond forget that it is not politicians in London the SNP needs to have on side in order to win the forthcoming referendum; it is people in Scotland, including ordinary party members.

Although the Scottish government has, since June, repeated its intention to get rid of the Trident nuclear submarines, its submission to the Basing Review has created a degree of ambiguity with regard to its longer-standing commitment to make Scotland totally nuclear free. A motion has been tabled at conference which invites the SNP's policy elite -- principally Salmond and his referendum campaign director and Westminster leader Angus Robertson MP -- to reaffirm that commitment. If they refuse to endorse the resolution -- or worse, simply ignore it -- that much-vaunted "Mandelsonian discipline" could begin to unravel just when it is going to be needed most.

James Maxwell is a Scottish political journalist. He is based between Scotland and London.

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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?