Political sketch: Cabinet millionaires, put your hands up

The Labour leader had them squirming, as he challenged the Front Bench to nod if they'd be quids in

Every year the Chancellor of the Exchequer stands outside No 11 Downing Street, waving his little red briefcase in the air, asking us to guess what's in it. Today we knew the answer: his sandwiches.

In times past it contained the secrets of the Budget hidden away from the nation, and in Gordon Brown's time hidden even the Prime Minister - only to be divulged to the masses when the time was right.

But thanks to the coalition, where the messenger is at last more important than the message, there were no secrets left to divulge.

Hugh Dalton was forced to resign as Chancellor when he inadvertently tipped off a journalist about some of the tax changes in the 1947 budget on his way into the House of Commons to deliver his speech. But so many Ministers leaked this one that, had the same rule applied, the Government Front Bench would have been reduced to Ken Clarke; only because he'd been having a nap when the details were handed out.

As it was, the present incumbent George Osborne looked rather relieved as he appeared outside his official front door on his way to tell us nothing we did not know already. Being Chancellor during the worst recession for 80 years meant that he stepped smartly into the car that was to carry him the dangerous 150 yards through the imminent recipients of his largesse into the Commons.

There he had to endure what was more than the usually irrelevant Prime Ministers Questions, as a sort of poor man's hors d'oeuvres to the main course. Comedy was provided by the Paymaster General, Francis Maude, who found himself on his feet finishing off queries about government business, as Dave, George and the first team slipped in behind him for PMQs.

Mild-mannered Francis - whose job, by the way, has nothing to do with pay, mastery or anything remotedly connected to Generals - found to his horror as he sat down that he was jammed between Dave and his deputy Nick Clegg as battle was abut to commence.

Dave, so often the hapless victim at PMQs, seemed positively relaxed as he realised his tormentor Ed Miliband had to save his best lines to have a go at George and his budget. How right he was.

The Prime Minister took time out to tease Speaker Bercow whose unpopularity in Tory circles, somewhere near to that of Arthur Scargill, was only enhanced by his "kaleidescope" speech to the Queen yesterday. George nervously munched his way through what seemed a pocketful of throat lozenges as his deputy Danny Alexander, whose own sandwiches had hopefully been smuggled in through the same red box, looked as confused as ever about why he was there.

Suddenly PMQs was up and Dave was down. Francis Maude popped up like a cork out of a bottle and fled down the bench and Speaker Bercow, as befits a grand parliamentary occasion, did a runner - leaving the wonderfully named Chairman of Ways and Means to referee the upcoming bout.

George spoke for an hour, gazed at in what appeared to be awe by the PM and trepidation by Nick Clegg, who was obviously fearful something he and Danny had not been told about might be sneaked out.

Normally the budget speech is marked by cheers and jeers as the Chancellor doles out his goodies, but with tax and spending plans already known, the opposing sides didn't quite know when to exercise their lungs. George was on good enough form to portray a 0.1 per cent increase in the forecast for growth to 0.8 per cent this year as some sort of minor miracle - despite forecasting three times that much just 18 months ago. He was on even better form as he demonstrated that cutting the top rate from 50p to 45p was five times better news for us - and not the rich who would be clobbered anyway by a crackdown on tax dodging.

The thought of the UK's rich turning away from their televisions in tears seemed a bit strong for Business Secretary Vince Cable, who had managed to turn up late enough to find a place close enough to the exit in case things got out of hand. But George, having promised to lay about the wealthy with a big stick, finally confirmed everything in this morning's papers, and sat down. The PM smiled, Nick looked relieved, Danny looked for his sandwiches and the Chancellor sat back with a flourish.

Then Ed Miliband stood up and asked how many of the Cabinet's many millionaires would gain from the 45p tax cut. He invited them to stick their hands up if they were going to benefit personally.

Clearly talking about people's wealth is bad form in Tory circles, and the Front Bench seemed shocked into silence as Ed displayed his lack of manners by going on about it.

People earning a million would get a £40,000 tax cut, said Ed, and £250,000 more if they picked up £5m. Some of the people at the poor end of the ladder would lose £4,000 a year in benefits.

Ed had been tipped to fall on his face over the Budget following Labour's own less-than-consistent record on taxes - not to mention its own handling of the economy during the reign of GB, who must have been turning in his grump anyway at the thought of telling the people what the government was planning.

But the new Labour leader had them squirming as he challenged the Government Front Bench to nod if they would be quids in after the budget.

We are no longer all in it together, said Ed, as his own side finally realised he was on a roll and found their voice.

Dave and George looked a bit shell-shocked. This one will run all the way to the General Election.

Peter McHugh is the former Director of Programmes at GMTV and Chief Executive Officer of Quiddity Productions

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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?