Has Cameron's EU referendum gambit dissolved in voter mistrust?

The "game-changing" pledge may be seen as just another slippery politician's promise.

It now looks pretty clear that the Conservatives have not enjoyed a sustained "referendum" surge in opinion polls following David Cameron’s promise of an in/out vote on EU membership.

A new ICM poll for the Guardian has Labour on 41 per cent and the Tories on 29 per cent, respectively up threee points and down four on their January ratings. (The Lib Dems are down two to 13 per cent and Ukip are up three to 9 per cent). The daily YouGov tracker has been telling a similar story.

This will come as a bitter disappointment to those Conservative strategists who thought the referendum gambit would change the game at Westminster. On the day of the big speech there was some quite exuberant cherishing of the Prime Minister’s presumed master-stroke. (Some of us were, ahem, less sure about that.)

There are all sorts of reasons why the Tories might not have enjoyed a great revival on the back of a promise to hold a plebiscite in 2017 when, after all, they may no longer be in government. GDP figures showing the economy still lifeless took the rosy glow off that week’s news for Cameron. There has since been a carnival of Tory division, with mutterings about the leadership ambitions of obscure Conservative challengers and a parade of the dinosaur tendency in hostility to gay marriage.

Even so the Tories would have hoped to see Ukip floundering in the wake of the referendum offer and, perhaps, to have scooped up the support of some eurosceptic ex-Labour undecided voters. But for that to happen, there would have to be lots of people for whom Britain’s membership of the EU is a pressing issue. The evidence shows that isn’t the case, with the numbers citing it as a top concern in steady decline since the late 1990s. Interestingly, this latest ICM poll also shows a decline in the number of people citing eurozone turbulence as the likeliest cause of our economic travails. That makes sense since there have been far fewer Eurogeddon headlines this year as the debt crisis in the single currency area appears – for the time being at least – to have stabilised.

So the people who care passionately about the EU, or rather, who despise it with a passion and are minded to choose a party on that basis, are pretty much the same people who have always felt that way. There are enough of them to flatter Nigel Farage’s ego (and send shivers up the spines of Tory MPs), but not enough to turn the Tory poll deficit into a lead.

What is more, those who obsess about the EU and flirt with Ukip as a way of expressing that feeling are, as Lord Ashcroft’s detailed polling has shown, channelling a wider scorn for politics and mainstream parties in general. Their Europhobia is bundled up with anger about crime, immigration and an inchoate mix of dislocation and anxiety about British or English identity.

In that context, Cameron’s pledge to consult the country any time other than right now looks like just another sleight of hand. Anyone concerned enough about colonisation by Brussels to get really excited about a referendum will also remember the Tory leader’s "cast iron" pledge to hold a vote on the Lisbon Treaty, which melted away as soon as he moved into Downing Street.

Having been in Eastleigh, canvassing opinion ahead of the by-election for Chris Huhne’s old seat, I can report that no-one I spoke to thought a European referendum at all likely to make them vote Conservative. (Of course, journalists vox-popping random punters is no statistical measure of anything, so my experience doesn’t prove much.) I encountered some half-hearted Labour voters who wished Ed Miliband would come out and fight more vigorously in favour of our EU membership; I met a few Ukip voters – ex-Tories mainly – who said they didn’t care what Cameron said about referendums and whatnot because only Farage’s party was reliably dedicated to the anti-Brussels cause.

Senior Tories insist their referendum gambit was never meant to turn the party’s fortunes around overnight. (They also point, reasonably enough, to Cameron’s EU budget negotiation success last weekend as evidence to rebut the pro-European claim that his domestic manoeuvres guaranteed diplomatic isolation.) The view at Tory high command remains that, come a 2015 election, the broad swath of eurosceptic voters will face a choice between one plausible governing party that wants a referendum and one big challenger that doesn’t. The message is simple: if you want that referendum, vote Conservative. Even Ukip voters who might toy with Farage mid-term, when faced with the hazard of letting Ed Miliband into Downing Street, should then come home to the Tories in a general election.

That is quite possible. Yet I’m not entirely convinced it will work. For one thing, as I’ve argued before, if Miliband really needs a referendum in his manifesto he can hide behind belated support for the 2011 European Union act to smuggle one in. But more important, the problem of trust in Cameron on the right is not credibly addressed by a "jam tomorrow" referendum bid. Besides, the Prime Minister has said he passionately wants the UK to stay in the EU, albeit on renegotiated terms. For angry, disillusioned ex-Tories, that sentiment places him still on the wrong side of a cultural divide, lumped together with the other cosy Brussels-loving elitists. If the hardline Europhobic vote is indeed an expression of more profound, nationalistic alienation from the Westminster game, it seems doubtful that Cameron has the credentials to win it back for the Tories. He’ll have to find his poll surge elsewhere.

David Cameron speaks at a press conference at the EU headquarters on February 8, 2013 in Brussels. Photograph: Getty Images.

Rafael Behr is political columnist at the Guardian and former political editor of the New Statesman

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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?