The strange case of the disappearing department

Has anyone heard from the Department for Environment, Food and Rural Affairs?

Of all the government departments to lead, you might think the Department for Environment, Food and Rural Affairs (Defra) is a bit of a cushy number. You could hardly say it's high profile. You might know that Caroline Spelman is the Secretary of State, but I challenge any of you to pick Richard Benyon, Jim Paice or Lord Taylor of Holbeach out of a line up. I've just done a Google image search of all three and I'm still not entirely sure I can.

But as it happens, there's a case that Defra might be one of the more challenging ministerial portfolios. It has a nasty habit of biting politicians in the backside. Feather-footed through the plashy fen passes the questing minister, calmly scuttling off on relaxing away-days to Cumbria and Cornwall, when suddenly - splat. An almighty political combine harvester creeps up behind them and the next thing they know they've been sliced to a bloody pulp.

Back in 2001 the Ministry of Agriculture, Fisheries and Food (Maff - Defra's predecessor) was serenely going about its business when it was hit by the Foot and Mouth crisis. The department's media officers, who until that point had little more strenuous to do than draft press releases about EU fishing quotas, were suddenly elbowed aside by a cohort of thrusting Number 10 media advisers, stomping all over their patch like the FBI containing an alien invasion while telling the town sheriff to keep his nose out of it. A year later, as a result of the department's inability to cope with the farrago, Maff had been brutally and swiftly dissolved: Defra was born.

And it's a department that's still tussling with some of the issues that led to its creation. It spent £113m on land for the disposal of animal carcasses as a result of Foot and Mouth. Last year Private Eye reported on the news that land it had bought at Throckporton for £3.8m had been sold for £831,000, to a man who'd previously been jailed for dumping contaminated waste. Whichever way you look at it, that's probably not a great deal.

Caroline Spelman's combine harvester moment, of course, was the sale of Britain's forests. It made so much sense on paper, didn't it? The Forestry Commission was one of those quangos that was regulator, owner and sole profiteer - it was stagnant, and devoid of incentives to do anything new or exciting. Time to hand that land over to communities and charities.

How gaping the gap between political theory and reality. In practice the Forestry Commission is no such thing. In practise the shoddy presentation of the plan meant it managed to enrage sandal-wearing environmentalists, marmalade-dropping Telegraph readers and everyone in between. Even I was annoyed, and I don't even like forests that much. Spelman was forced into a U-turn the scale of which hadn't been seen since Napoleon fled Moscow, apologising for getting it totally "wrong" and even "thanking colleagues for their support during what's been a difficult time," as if admitting to some secretly-held drug dependency.

It's interesting to look at this retreat in retrospect. There was no determination from Number 10 to fight for the bill as there has been with the NHS reforms. It was a bad bill, but that's never stopped governments trying to get them passed before. And how interesting to learn a few months later that the National Trust and the Wildlife Trust had actually presented Spelman with "shopping lists" - of 171 areas of woodland that they considered perfectly suitable for purchase thank you very much. Doesn't seem to square with Dame Fiona Reynolds of the National Trust's public pronouncements: "We were created by three Victorian radicals who were not afraid to stand up and say society needs beauty and fresh air. It is wonderful to remember that," she said, fingers no doubt tightly crossed behind her back.

At the time of Spelman's retraction, so mealy mouthed had it been, there was acceptance she'd taken one for team Cameron. She has previous in this regard. She prostrated herself before the Cabinet upon getting the job by offering a 30 per cent cut in four years - from £3bn to £2.2bn - by far the largest. The cuts will largely impact on civil servants and quangos (reduced from 92 to 39). The U-turn and departmental shrinkage appear to mean we have a Department that, for us muggles, is doing a passable impression of the Ministry of Magic. We've heard it's there: we just can't see it. Departments - even under Tory rule - are supposed to bother us with initiatives and pronouncements. It's infuriating: but it's their job. Look at this! Do this! Don't do that! From Defra we hear almost the opposite. Don't mind us; we've got everything under control. Ooh look over there; a squirrel.

Perhaps it's because there's a bigger storm around the corner. If you think the print publishing industry is a basket case, it's nothing on farming. The average farmer relies on subsidies - the EU Single Farm Payment (SFP) - for their annual income. It was supposed to be an interim measure, and is paid to farmers per acre of land they farm - whether they produce food or not. And for many livestock farmers, they may as well not bother. Despite rising farm outputs, incomes are declining due to rising costs in feed and fuel. Three quarters of arable farmers need the subsidy to make a profit.

It counts for 36 per cent of the EU's annual budget. New legislation aims to reinstate payments linked to production where there is evidence of so-called "slipper farming" (faking the production of food), but God only knows how Defra will ensure farmers abide by regulations given they're haemorrhaging civil servants. And last year the department's own study showed the UK would be the worst affected of any of the 27 EU member states if the SFP vanished - 75 per cent of livestock farms would trade at a loss.

Last year Spelman produced another U-turn: it got much less attention than the forest sale, but it was no less significant. Early in 2011 she told the Oxford farming conference she wanted to end farmers' dependence on subsidies. You can imagine how well it went down. Soon she was "clarifying her position" once more - she didn't want "dogmatic" scrapping - she wanted "reform" so that farmers "could stand on their own two feet". A far more (pardon the pun) friendly speech at the corresponding event this year generated no headlines.

Mind you, some farmers could be forgiven for thinking subsidies have already been scrapped. The Rural Payments Agency, an executive agency of Defra, was formed to pay out £1.7bn a year in subsidies to English farmers in the form of SFPs. Last year we learned £300m was paid out in extra staff to sort out backlogs in payments, and £327m to the EU in fines because of SFP errors. The Commons Public Accounts Committee met in November hoping to hear of improvement - instead it heard about £53m set aside for EU disallowance fines relating to SFP. These late payments have left farmers in penury. A quarter of them live below the income poverty line of less than £20,000.

It's a tough enough time to work in agriculture- not only is your union spineless (witness the complete lack of support it gave during the supermarket milk price war), but you're overseen by a department that seems to be doing little to help. Even on badger culling, Defra has first wrung its hands and left it to the farmers (the Big Society option), before it delayed the decision till May. The department's recent food and drink export plan was well-received and a step in the right direction for a sector that could really boom if it's able to tap into the Russian, Chinese, Indian and Brazilian markets, but there is so much to be done. At present none of them figure in the top ten countries to which we export agri-food and drink.

After you've downsized, there's a problem with laissez-faire policies, and more so with delays: you might stay out of the headlines, but sooner or later people who take any interest will start to think there's nothing happening at all. Whether it's the badger cull or reform of the Common Agricultural Policy in 2013, there's a simple point - a department might be able to keep a low profile for a while, but it can't disappear.

Alan White's work has appeared in the Observer, Times, Private Eye, The National & TLS. He lives in London and tweets as @aljwhite. As John Heale, he is the author of One Blood: Inside Britain's Gang Culture, republished this year.

Alan White's work has appeared in the Observer, Times, Private Eye, The National and the TLS. As John Heale, he is the author of One Blood: Inside Britain's Gang Culture.

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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?