Lib Dem Minister: Ed Miliband’s “One Nation” Labour is a delusion

Perhaps the Labour leader’s brother could assist him in coming up with a more economically literate policy platform, says Lib Dem minister Jeremy Browne.

We've had “Old Labour”, “New Labour”; now it's “One Nation Labour”. Ed Miliband is staking a lot on this rebranding. It is not, he insists, just the appropriation of the most hackneyed old cliché in British politics, it defines his ambitions for office.

It is easy to criticise the emptiness and evasiveness. And the vagueness; the lack of meat on the bones. To be “One Nation Labour” is to defend child-benefit hand-outs for the wealthiest 15 per cent of the population, including asset millionaires like Ed Miliband, paid for from the taxes of much poorer people, on the unintelligible basis that the richest section of society constitutes "the squeezed middle". To be “One Nation Labour” is to believe that it is immoral to have a top rate of tax lower than 50 per cent, but not to have the moral fortitude to commit to reinstating this rate in office. To be “One Nation Labour” is to claim a preference for democracy over unaccountable entrenched privilege, only to connive and vote to scupper House of Lords reform.

But the deepest criticism of “One Nation Labour” is more profound than just dithering policy indecision and ducking difficult choices. The fundamental flaw with “One Nation Labour” is its crushing parochialism.

To believe in socialism in one country is fantasy. The big fact of life today is how many different nations are rising in global importance. The world has never been more inter-connected; more globalised. There is a revolution taking place, with the dramatic rise in Asian prosperity and political influence, that seems to have escaped the exponents of “One Nation Labour”.

That is surely because Ed Miliband is a highly conservative and nostalgic politician. He takes his slogan from a nineteenth century Conservative Prime Minister. He becomes most animated when idealising the shared hardship of ration-book era Britain. He reserves his greatest ideological admiration for a recently deceased historian who championed the virtues of the Soviet Union.

But Britain will not thrive in a bubble of isolation floating somewhere in the sepia-tinted past. To prosper now we have to be internationally interconnected and competitive.

So, for a start, “One Nation Labour” would have to set tax rates that were globally competitive. To do otherwise would be ruinously destructive of our tax-base and our ability to fund good public services. That is why this coalition government is cutting corporation tax in Britain to the lowest level in the G7 to attract new investment and jobs. And it is also why Ed Miliband needs to be aware that globalised businesses and entrepreneurs are unlikely to chose to pay avaricious rates of tax under “One Nation Labour”, to the detriment of our public finances.

“One Nation Labour” would need to understand that we live in a far more globalised employment market. That explains Polish plumbers and Indian call-centres. And this market is getting far much competitive. It is getting more highly skilled. That is why this coalition government is reforming education to raise standards. Britain has fallen down the league tables in childhood numeracy and literacy. We will not succeed as a “knowledge economy” if we have a less knowledgeable workforce than our competitors. “One Nation Labour”, if it remains in cahoots with militant teaching unions wanting to protect the past, will oversee a Britain that becomes less competitive and less attractive to inward investors. The children forging ahead in South Korea and Singapore will not make allowances for an inward-looking British education system that fails to equip our children for the modern world.

And “One Nation Labour” would be forced to understand that no country can live beyond its means and borrow money without reference to the outside world. What vanity to believe we can ignore pragmatic welfare reform and the financial implications of a rapidly aging population. The countries that spend money they cannot afford and shirk reform – Greece is a good example – certainly don't live in splendid “One Nation” isolation. Quite the opposite: they become wholly dependent on others, forfeit their self-government and self-respect, and the poorest and most vulnerable people end up suffering the greatest hardship.

When it comes down to it, “One Nation Labour” is a delusion. It sounds reassuring precisely because it is backward-looking, nostalgic and implies a comforting isolation from the rest of the world. It suggests that Britain can go it alone, without reference to others. And crucially, it implies that the hard choices facing other countries around the world need not apply to us. On our island we can spend money and dodge difficult decisions without consequences.

Where can Ed Miliband turn to try and devise instead a more plausible ideological platform? Maybe he should start close to home. David Miliband has a reputation for being personally aloof. It probably cost him the Labour leadership in 2010. But he could possibly help his brother now, if Ed Miliband wants to be helped.

After two-and-a-half years travelling the world as Foreign Secretary, and two-and-a-half more benefiting personally from his internationally marketable skills, David Miliband must at least understand the parochial limitations of “One Nation Labour”. Maybe he could assist his leader by encouraging Labour to have a more outward-looking, up-to-date, globally aware and economically literate vision than Ed Miliband, with “One Nation Labour”, has managed to come up with on his own.

Jeremy Browne is a Home Office Minister and the Liberal Democrat Member of Parliament for Taunton Deane.

 

Ed Miliband speaking at last year's Labour Party conference. Photograph: Getty Images
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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?