Labour should take up the mantle of radical civil service reform

Ed Miliband must help shape a cross-party agreement on the civil service that turns it into a tool to support social democratic governance in the future.

Civil service reform has traditionally been the business of well-appointed London seminar rooms: the kind of backroom issue that seems vitally important to ministers and mandarins, but has no resonance on the doorstep. The sheer lack of public interest means that the great departments of state have gone without serious reform for at least a quarter of a century and have consequently decayed until they can no longer bear the strain of modern government.

This situation may finally be about to change. Steve Hilton’s comments about the failings of the Whitehall machine, reported this weekend, seem to have catalysed the beginnings of a cross-party consensus for reform. Tony Blair has already joined the off-the-record voices of coalition secretaries of state in calling for serious change.

The coalition has undergone a Damascene conversion: in opposition, key figures tended to assume that the only problem with Whitehall was its mismanagement by Labour. The Tories are radically reducing the size of the civil service, but beyond this they have only offered micro-reform. Francis Maude once justified the creation of a weak Downing Street by reference to his own experience as a junior minister in the 1980s, a time when the gentlemen who ran departments were untroubled by overbearing Blairite management consultancy.

Given this background, it would be easy for Ed Miliband to take an oppositionalist stance and accuse the coalition of seeking to debauch the supposedly great traditions of Whitehall. His own experience as climate change secretary should tell him that this is a mistake. But if he needs any further convincing he should consult some of his fellow former Labour ministers, who tend to exhibit a mixture of exasperation and bitterness when talking about their former officials.

Labour’s goal should instead be to shape a cross-party agreement on the civil service that turns it into a tool to support social democratic governance in the future.

There are two problems that need to be addressed. The first is that the civil service lacks serious accountability. The current structures of Whitehall means permanent secretaries are accountable to their secretaries of state, who are in turn accountable to parliament. But in practice the demands of political neutrality mean that ministers cannot sack or discipline officials.

There are ways around this problem – at least one Labour secretary of state disliked their perm sec so much they refused to allow them into ministerial meetings for months on end. But this is a poor substitute for a properly organised system of clear performance goals and proper accountability for meeting them. Labour should therefore support a greater say for ministers in official appointments and performance reviews, and perhaps even the framing and publishing of performance agreements with permanent secretaries.

Any deal on civil service reform must also address the question of political advisers. The coalition has come to deeply regret its self-denying pledge to reduce the number of spads. The sheer complexity of modern government means that ministers need more advisers to help them master their briefs – think of  Hilton’s foot high pile of papers, representing a couple of days of civil service paperwork. Just as importantly, only a handful of senior officials can ever have significant exposure to their secretary of state, leaving many policy makers to frame their proposals by reading Michael Gove’s newspaper articles. Good political advisers are not the vampiric spin doctors of tabloid fable, but policy specialists who provide a link between ministers and their officials. There should be a lot more of them.

Addressing the accountability issue would ensure that ministers are able to push their policies through the Whitehall machine more effectively, but it is only half the challenge. To actually make change happen on the ground, you have to find a way to engage with NHS trusts, local authorities and schools. The second issue Labour must address is the absurdly siloed nature of Whitehall, where effective policy making too often comes second to maintaining the integrity of departmental baronies.

Most big policy issues cross departmental lines – helping a child out of poverty requires local authorities to work with the NHS, police and schools. But at the moment the fragmentation of Whitehall policy making makes coordination far too difficult, leading to poor outcomes and rampant inefficiency. For instance, a recent study from the Local Government Association showed that better integration of skills, social care and families policy could save more than £20bn over five years.

The solution is to reform Whitehall structures. One of the most persistent myths of British government is the idea that it has an overweening central triumvirate of departments – No 10, the Cabinet Office and the Treasury. The truth is that the PM can, if they wish to, wield a large amount of personal power, but the administrative support they receive from Downing Street and the Cabinet Office is unusually weak in international comparison.

So Labour should support a radical strengthening of the Cabinet Office to turn it into a Department of Strategy and Capability, which would be charged with civil service reform, coordinating policy in line with the government’s programme and ruthlessly managing a small number of cross-cutting goals. There could even be virtual ministries housed at the centre, which would commission policy advice from across departments and go beyond into the worlds of think tanks and academia. In a world where there will not be much money available, Labour should focus on five or six big challenges, rather than engaging in the sometimes undisciplined splurging of the Blair years.

Labour has a proud tradition of civil service reform. The Fulton inquiry of the 1960s was arguably the last radical attempt to shake-up the upper policy making echelons of the mandarinate. It is time for Miliband to take up the reformist mantle once again, and help forge a badly-needed consensus on how to modernise our once-great institutions of state.

David Cameron's former director of strategy Steve Hilton complained that "the bureaucracy masters the politicians". Photograph: Getty Images.

Simon Parker is director of the New Local Government Network

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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?