Markets and Liberty: Inside Thatcher's Treasury

Helen Goodman MP was a Treasury civil servant during the Thatcher years. Comparing her own experiences with the tributes of Conservative MPs, she wonders what lies behind the impulse to rewrite history.

 

I was a student when Mrs Thatcher was elected Prime Minister. I had voted Labour, but I do remember watching her arrive at No 10 on the telly and feeling a surge of hope – that at last we had a woman and some good must come of this.

Within two months my Dad who was working on a public sector construction was unemployed, an early victim of the cuts. He never worked again.

I was in my final year and had been offered a job at the Bank of England. Just after my finals I received a phone call – the job offer was being withdrawn! I will never forget the look on my father’s face when I told him. One family, two job losses in three months.

The reason my job was taken from me was that one of the government’s first moves was the lfting of Exchange Controls – the first of the big financial deregulations, which the Tories were praising in Parliament yesterday. The Bank had had 600 working on this. I quickly learned that with unemployment came stigma. I found myself living in a hostel for homeless women behind Victoria Station, being openly challenged – surely a job offer hadn’t been withdrawn – I had failed to get a job.

Later I learned that the Bank had withdrawn my job offer, but they’d kept on the other new graduate they’d recruited – a man. That hurt.

Well Mrs Thatcher certainly radicalised me – I joined the Labour Party and went to work for a Labour MP. This was the days before IPSA and allowances – all he could afford to pay me was £30 a week. So it was a short-term opportunity – but life changing. I retook the civil service exams and astonishingly was offered the Treasury.

When I arrived there in September 1980, officials were still reminiscing over Denis Healey and highly sceptical about Mrs Thatcher’s ideals. One afternoon, everyone working on public spending, about a quarter of the department, was called into the large marble columned meeting room overlooking Parliament Street – all wood panelling and busts of Charles James Fox. Mrs Thatcher had decided to introduce cash limits. This was the first time I was really aware of her as a force of nature. The senior official in charge had come straight from No 10. He told us he’d raised all the problems and difficulties but received this riposte “I know it’d difficult Mr L.... but don’t wallow in it.”

I was plunged in at the sharp end – my first job was on social security and I remember we had to take through emergency legislation raiding the National Insurance fund, set up by Lloyd George. My second posting was to the overseas aid desk.

Mrs Thatcher had skilfully managed to condense her philosophy into two key organising principles – markets and liberty. For officials – even the most junior like me – this was tremendously powerful, because you knew that if you pursued these two ideas you were doing the right thing. It was a clear framework and within it there was scope for initiative and flexibility. There was no need to constantly refer up for detailed instructions.

Of course, what it also did was to over-simplify every problem and ignore the costs and downsides of policy. For example in the 1970s a series of international commodity agreements covering crops and metals had been used to stabilise these markets. This had helped the producer countries to predict and stabilise their export earnings. It was difficult to know whether prices were always aligned with long-term value so Mrs Thatcher and Ronald Reagan swept them away. So now we have traders speculating in food stuffs and multi-national corporations suing the poorest countries on earth. I would submit that this is not an improvement.

I can clearly recall her on the TV arguing with the Archbishop of York, John Habgood. “You should be providing moral certainty”, she said. “But have you thought”, he politely inquired, “that moral certainty might be a sin?”.

In the 1980s the Treasury was reorganised. The nationalised industry division was closed down and we started to privatise everything.  This brought us into close proximity with the City. They were riding high on the Big Bang. I was shocked – for doing exactly the same work young men in the City were being paid five times my salary and they were allowed to speculate on the shares being sold. I recall there was some strategic leaking about this – I can’t imagine how that happened.

Listening to the tributes of Tory MPs yesterday two things struck me – first their emotions; a mixture of terror and admiration. This was authentic. I only met her once at a large meeting after midnight when we had to secure an agreement to an urgent tax change. The power had gone so we were lit by candles. She swept in – all whisky and jewels – like a latter-day Empress Catherine II all the clever young men seemed to crumple before her. Only Eddie George – Steady Eddie – whom she later made Governor of the Bank of England could tell her what was needed.

The second thing that struck me was their desire to present her now as a figure behind whom the nation could unite. When the first draft of her 1984 part conference speech was circulated the phrase “the enemy within” was meant to refer to the miners. She delivered it after the Brighton bombing – which gave it a very different interpretation. Quite apart from her political opponents the government she led was one of the most divided in history – far more divided than the famous Blair/Brown splits. In 1987 I was moved to the foreign exchange desk. Here I discovered that the Treasury was engaged in a full scale exercise in deceiving No 10 over the management of the pound, a central part of any government’s economic policy. Mrs Thatcher and her advisers wanted to let the pound float freely, but Nigel Lawson’s Treasury was pursuing a policy of shadowing the deutschmark. Ever week we were buying and selling hundreds of millions to stabilise the pound. It was my task to write a daily markets report for No 10 – this had to explain our intervention in the forex markets without revealing our policy objective. When I suggested that instead of this duplicitous approach, the Chancellor simply raise the matter at Cabinet – he would certainly have had Geoffrey Howe’s support – I was told that if I ever mentioned this again I would be sacked!

Perhaps some of the younger Tories simply don’t know what happened (by the time David Cameron turned up in the Treasury I didn’t even bother to get to know him I was so bored with this endless stream of self-assured young men) but it does seem that this attempt to re-write what happened has more to do with current desperation rather than historical accuracy.

Mrs Thatcher herself certainly had difficulty in adjusting to her loss of power. Sir Michael Richardson, her personal financial adviser told me that he had a big lunch for her when the Queen created her a Baroness. “Margaret, this must be your proudest day” he said. She replied “What is one day of pleasure in a life of gloom?”.

Margaret Thatcher and Geoffrey Howe in 1980. Photograph: Getty Images

Helen Goodman is Labour MP for Bishop Auckland and shadow media minister

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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?