Labour councils are the light at the end of this long, dark economic tunnel

The party's councils are filling the vacuum left by government inaction.

Councils up and down the land are facing their greatest financial crisis for generations. The coalition cuts are brutal and local communities and services are suffering enormously as a consequence. The poorest areas are being hit the hardest and the most vulnerable are suffering the most - such is Tory-led Britain.

As in any storm, councils can stay still and be swept away or get stuck in and survive. Those who innovate will go from strength to strength, while those who counsel despair will sink into a slough of despondency and take their communities with them.

And Labour councils are finding new ways to express and act on their values: fairness, mutual support and social justice.  A new report – One Nation Localism – shows exactly how. Innovating and taking action where they can, they are helping people in real ways despite these tough times. In a sense, this provides hope that an Ed Miliband-led "one nation" government will be able to pursue social justice even though the economic and fiscal climate left behind by a failed Tory and Liberal Democrat administration will be ferocious. It also shows that social justice relies on local innovation and action.

Local government funding is already being cut by a third and austerity is set to continue until at least 2018. In the pervading doom and gloom, it feels hard to be optimistic – where will the good news come from? And how can Labour present an alternative approach that shows you can deliver on your values even when money is tight?
  
There is no greater challenge than creating jobs and opportunity, as government inaction leaves an enormous vacuum – which Labour councils are filling. Just take Newham council’s new workplace scheme which has helped 5,000 people into work last year- many of them long-term unemployed. After the government disbanded Labour’s Future Jobs Fund, Nottingham council established their own to support young people in the city into employment. In areas as far and wide as Knowsley, Darlington and Plymouth the councils are working with local businesses to create apprenticeships and work opportunities to match out-of-work residents to.
 
The housing crisis continues but Labour councils are doing all they can to alleviate it in the short term and overcome it in the long term. Islington and Manchester are pioneering new models of investment in conjunction with council pension funds, to boost the supply of new affordable homes. Many more people are being forced to rent given the affordable homes crisis – and councils like Blackpool, Oxford and Newham are developing approaches to licensing to tackle rogue landlords and increase quality.
 
The need to overcome inequality and tackle poverty is of course at the heart of Labour councils,who see this as their core purpose. Up and down the country, in Liverpool, Newcastle, Blackpool, Sheffield , Leicester and Islington, Labour councils have set up Fairness Commissions to identify the challenges in their area and provide a framework to guide their decisions so they maximise their impact on narrowing inequality gaps. In Islington, for example, this has led to the council becoming a living wage employer and reducing its internal pay differential. In Liverpool a new approach to procurement looks to employ firms which can demonstrate clear benefits to local jobs and skills.

Twenty one Labour-led authorities have committed to a Co-operative Council approach, developing new ways of running public services to shift power and control out of town halls and into the hands of citizens. In Oldham, this means the council is finding new ways to work on the side of residents and seeking to remove barriers for them – whether by devolving significant power and funding to six districts within the borough with more direct community oversight or through a new Energy Co-operative that enables households to save up to £150 a year on their energy bills.
 
Taken separately, these initiatives show that given determination, councils can work to meet the needs of their residents against the odds – even though the overall national context still takes an enormous toll on people’s lives. Taken together, they chart a new agenda for Labour which recognises that even in a tight financial environment it is possible to take decisions in a fairer way. By adapting innovation to local circumstance, the one nation vision of a society bound together can be achieved without it becoming a ‘one size fits all’. In fact, is clear that greater social justice relies on different responses in different communities. Through localism, Labour’s values have become a practical reality.

One set of values, one nation, but many approaches – this is the mantra of a Labour localism. Hope is scarce resource in Tory-led Britain, but Labour in local government is digging its heals in to at least provide people with some hope despite the gloom. 

Cllr David Sparks is leader of the LGA Labour Group and leader of Dudley Metropolitan Borough Council.  One Nation Localism is available here

Cllr David Sparks is leader of the LGA Labour Group and leader of Dudley Metropolitan Borough Council

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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?