Eton's headmaster on abolishing private schools, Gove's reforms and free schools

Web-only extracts from Jason Cowley's interview with Eton headmaster Tony Little.

In this week's issue, NS editor Jason Cowley interviews Eton headmaster Tony Little and, with an eye to the growing clique of Old Etonians around David Cameron, asks "how the old ruling class became the new ruling class". You'll have to pick up the magazine to read the full piece (go on, subscribe), but here are some extracts, which didn't make the print version, which I thought might be of interest to Staggers readers. 

On abolishing private schools (or at least their charitable status)

I’m sure there are people who would wish to do exactly that [abolish private schools' charitable status]. I have no doubt. Outright abolition would be incredibly difficult, not least in terms of international law, freedom of choice is enshrined in the UN.

The charitable status issue is an interesting one. When this became lively a few years ago, and the charity commission started looking at it more closely, one of the interesting things was that schools like this, that haven’t sought to trumpet what they do...were suddenly being ‘outed’ about their charitable activity. However you want to cut it, this wasn’t something dreamt up in the past couple of years. We spend about £5m a year on bursaries. For over a quarter of a century we’ve run a summer school for state school students in preparation for university, about half of whom have ended up at Oxford and Cambridge. It’s not something we’ve thought to headline anywhere, it’s just something we’ve done. 

On whether public schools feel threatened by academies and free schools

I don’t feel threatened at all, we deliver a very distinct education and it is attractive to people around the world as well as in this country. We are in a different situation than an academically-focused day school. There is a huge difference between London and the rest of the country. I can see that if you are trying to run a high-quality academic day school and a free school opened down the road it could be challenging, but one of the great things about the independent sector is its resilience over the years. I have been a head for 25 years and we have had more than one downturn and this one is particularly savage. In the 1990s we had problems as well, with the high interest rates and the major recession. At the time I was the head of an independent school in Essex and there were quite a lot of parents at that time who were paying school fees out of own income or from their business, that was a very tough time. You have these waves of difficulties, but the independent sector as a whole has learned to adapt and move on. I am generally positive about the situation as long as the sector remains sensitive and responds to what is going on.

On the good and the bad in Gove's reforms

The good bit is rattling the cage, and rattling it mightily. We now have these pinpricks of light, of some outstanding practice. If I have to identify two positive changes in the travel of direction, the first is the Teach First scheme. We now have a quality of young people thinking of going into teaching, the like of which we haven’t had. It is the single best initiative that has happened in my professional lifetime.

...

The second thing is a by-product, which may not have been an intent, but it is palpable. It is the level of pragmatic conversation going on across the sector and between different people. When I started as a head 20 years ago, there was no conversation at all at local state schools, the drawbridge was up. Now, for example, I have a phone call from a chap I have never met before who is head of a converted academy in Hull and he’s seen something I’ve written about GCSEs, he’s got some ideas about GCSEs and ‘chat, chat, chat,’ would he like to come down to Eton? ‘Yes’. So we spent an afternoon talking about GCSE reform. That would have been inconceivable ten years ago. Certainly 20 years ago. 

...

The fact that I see no joined up plan [the downside of Gove's reforms]. Nationally – I’m talking about. That’s the worry to me...Huge amount of reform. Maybe too much. I think most of the people I work with can’t see the big picture we are aiming for. People can see merit in the individual things that are going on, but we don’t yet see the whole picture.

The boys of Eton College stand as headmaster Tony Little leaves morning assembly. Photograph: Getty Images.

George Eaton is 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?