Enough is enough: this dash for gas has gone too far

Osborne's dogmatism will keep Britain hooked on expensive foreign imports and do nothing to tackle high fuel bills.

"Enough is enough", energy minister John Hayes proclaimed last week as he propelled himself into the headlines and a full-blown war of words over the future of British wind power. But unhelpful as his intervention was, his very public tussle with the Energy Secretary, Ed Davey, was a mere sideshow compared to murky dealings over energy policy going on behind closed doors in Whitehall, with the ministerial "quad" – David Cameron, Nick Clegg, George Osborne and Danny Alexander – expected to meet again soon.

This anti-wind rhetoric obscures another government agenda: a new dash for gas that will keep Britain hooked on expensive foreign imports and do nothing to tackle high fuel bills. This week, Friends of the Earth revealed that the coalition is preparing to write a blank cheque for the gas industry to build new gas plants. Outrageously, it’s exempting back-up gas power stations from the Levy Control Framework, a set of Treasury rules which restrict public spending on energy. The result is likely to be a huge rash of investment in gas, funded by taxpayers, which could see more gas power stations being built than are needed.

Friends of the Earth accepts that we need some gas as a back up while the UK makes the shift from fossil fuels to renewable energy, and this includes a small amount of unabated gas – without Carbon Capture and Storage – to be maintained as back-up capacity. But pledging unlimited sums of public cash for this end is madness. In effect, you and I could end up paying for gas power plants that, if run at full whack, risk busting our targets to tackle climate change. In fact, we could end up paying for them not to run at all, when the penny finally drops that too many have been consented, and all we’re left with is stranded assets.

So why are they doing it? The Treasury has pressed hard for these gas power stations to be exempt from the rules, and the Department of Energy and Climate Change (DECC) appears to have conceded without a fight. Nervous ministers may be listening to scare-mongering about renewable energy making the lights go out. But I suspect it has a lot more to do with the Chancellor, hell-bent on moving the government away from its green commitments at any cost to the economy, against the wishes of senior politicians and business including the CBI.

Let’s not forget the long string of free lunches that Osborne has handed to the gas industry over the past year. First came the announcement from the Energy Secretary in March that made green groups despair: "we can’t take our foot off the gas for some time yet". Davey was allowing new gas plants to pump out carbon at 450gCO2/kWh until 2045, which, given most modern gas plants emit just under 400g, was effectively a free permit to pollute for the next three decades.

I strongly suspect the decision was made by a novice minister under pressure from Osborne, without enough briefing from civil servants. It was accompanied by a pledge to develop a Gas Strategy, the rationale for which officials have privately conceded to be ‘because the gas industry felt left out’.

Then, in July, came news of a leaked letter to from the Chancellor to Davey, demanding the government issue "a statement which gives a clear, strong signal that we regard unabated gas as able to play a core part of our electricity generation to at least 2030". Cue a dutifully trotted out press release from DECC, the wording of which appeared to be practically lifted from Osborne’s letter. A few days later, the Chancellor’s father-in-law Lord Howell was exposed as an influential oil and gas lobbyist. The pieces of the jigsaw were slowly falling into place.

September saw more tax breaks for North Sea oil and gas, and an announcement that Osborne would consult over a new tax regime for shale. Then came Davey’s assurances to the gas industry in October that he expects 20GW of new gas to be built between now and 2030 – completely at odds with the Committee on Climate Change, which sees just 6.5GW of new gas by the same date.

It’s not hard to see who’s pulling the Energy Secretary’s strings. Taken together, these concessions add up to a covert strategy of support for gas by a Chancellor who appears in hock to the fossil fuel industry, whose economic calculations are frighteningly short-termist, and who sees green policies as a burden instead of an opportunity for growth.

The Treasury is lobbying hard to restrict future investment in clean energy through the upcoming Energy Bill, expected in Parliament this month. This is a once-in-a-generation opportunity to change the way we source our power for the next 20 years – and our booming green economy is at stake, which now accounts for almost a million jobs.

Enough is enough. It’s time for Cameron to stop the dash for gas in its tracks and urgently lay down a clear pathway for clean British energy.

Guy Shrubsole is energy campaigner at Friends of the Earth

Chancellor George Osborne is pushing for the government to restrict future investment in clean energy. Photograph: Getty Images.

Guy Shrubsole is energy campaigner at Friends of the Earth.

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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?