There is a Conservative case for overseas aid. We should make it

Our aid commitment, properly targeted, is first and foremost about our own security and economic interests.

The UK is set to join a select group of countries this year by becoming the first member of the G8 group of rich nations to meet the 0.7% GDP aid goal set by the UN in the 1970s. George Osborne says "we should all take pride in this historic moment for the country”. Many Conservative MPs and constituency activists disagree. UKIP have successfully used the aid issue as illustrative of a wider critique of a disconnected political class foisting its metropolitan predilections on an electorate which needs a government that puts it first. 'Charity starts at home' is the cry. 'Why are we giving money to overseas countries when we're cutting here at home?' So is there a Conservative case for international aid at a time of austerity?  I believe so. We should make it.

As with so much of the Cameron modernisation project, the language and political framing of our aid commitment needed to be reframed when the financial crisis hit. It changed everything. I believe the scale and urgency of our economic challenge, and the need for us to  forge a more sustainable model of growth based on trade, rather than booms in the City, housing and public sector, makes the aid budget more, not less, important. But the political case for it has subtly changed. Rather than being a good thing simply because it demonstrates modern Conservatives are progressive, compassionate and internationalist, the best justification for a British electorate worried about their, and the country’s, economic future, is that our aid commitment, properly targeted, is first and foremost about our own security and economic interests.

The scale of the crisis we face means we have to regear our economy around the fastest emerging economies in the world. Our aid budget is key to our trade and our national security. Rather than sell the aid commitment as a demonstration of the moral compassion of modern conservatism, we should tell a harder truth. It's vital for our future security – political and economic.

In the new world (dis)order, it is widely accepted that the biggest security threat we face is now from global terrorist movements, rogue states and the regional conflicts they feed on. At the root of so many of these threats is a toxic mix of extreme economic poverty and corruption. The best long term security policy is that which tackles the root causes of instability - so that the Middle East, the Horn of Africa, Pakistan, the western Sahara and the other parts of the world which feed jihadist and other radicalised anti-western movements are starved of the oxygen of resentment.

Economically, we are in a global race. We can no longer merely rely on the sclerotic eurozone, laden with debt, structurally uncompetitive, and politically gridlocked, to drive our economy. Growth prospects in the Eurozone look fragile at best. As a trading nation we need to be regearing our trade around the fastest growing emerging markets around the world- the 'BRIC11+' nations identified by Jim O’Neill at Goldman Sachs as the markets whose growth is shaping the new world economy, and political order.  These economies are growing at around 8% per annum. That's doubling every ten years. If we want to grow our way out of debt and QE dependency we need to unlock this huge trade opportunity. But we are competing with every other mature nation who are doing the same.  We should think of our aid budget as an investment in the security, democracy and economic development on which we will depend in the years ahead.

Take the emerging African nations in sub-Saharan Africa, many of them Commonwealth nations with whom we have strong links, experiencing extraordinarily rapid development. Many of these countries will go through agricultural and industrial revolutions in the next 30 years that we went through in 300. Helping these countries to establish appropriate systems of governance based on free trade and the rule of law, and to embrace the new technologies in areas such as food, medicine and energy in which we lead and they need, we can help seed, feed and fuel the markets of tomorrow. And we can help create huge export markets for our scientists, lawyers, accountants, engineers, biomedical, cleantech and food and farming businesses.

This is not just aid. This is "aid and trade". By better integrating our aid and trade missions, as the US did with the Marshall Plan, we can create new markets for our goods and services while helping these emerging nations adapt to the global market place. The Marshall Plan was once described as the most "altruistic plan in history". In fact, it was hugely favourable to the US economy. Nowhere is our opportunity clearer than in the field of life sciences: the appliance of science to tackle the biggest challenges faced by mankind in the three big markets of food, medicine and energy. By 2050 the world’s population is set to double, and we need to double world food production using half as much land, water and energy. Britain is home to a disproportionate number of the world’s leading research centres in biomedicine, nutrition and cleantech. The global development challenge is our market opportunity.

Take Kenya, which I visited recently for the funeral of a young British conservationist in the frontline of the battle against poaching, pioneering new models of community conservation based on the mutual interest of local tribes, intensive farms and safari tourist lodges in the conservation of the landscape in N Kenya.  Kenya is one of the fastest growing economies in the world. Twenty years ago I hitchhiked from N Kenya to Cape Town and, of all the countries I visited, it had the worst prospects. A perfect storm of tribalism, corruption, Aids, poaching and out of control population growth threatened to make it a failed state. Today it is a rapidly emerging powerhouse in Sub Saharan Africa, and rapidly developing a free market economy and liberal democracy, as well as a middle class who have seen the future and do not want to go back. The UK is the single biggest trading partner with Kenya.  But the Chinese are moving in, offering aid and lucrative trade deals (and, by the way, a blind eye to the ivory trade and the Somali bandits who protect it.) The UK’s presence in Kenya, through well co-ordinated DfiD and FCO programmes, with a small military outpost, is an important part of why we remain a key player in the country and the region.

I do believe there is a strong moral obligation behind our commitment to our foreign aid budget. I agree with the Archbishop of York, Dr John Sentamu, who said that the UK has a moral obligation to help "eradicate the unnecessary suffering of others." This is particularly true of Africa, where we have a historic obligation to do all we can to alleviate suffering and provide the opportunities for development. But we should not be ashamed of linking our moral case for aid with the potential benefits to UK PLC, and it does not diminish our commitment if aid is provided in mutual self-interest.

David Cameron, Andrew Mitchell and Justine Greening are right. As was Lynda Chalker in the 80s who led the way in making the Conservative case for well targeted 'progressive aid'. Let’s focus our aid budget on the countries where we see we can have most positive impact for us both. Let’s link our aid to good government, anti-corruption, human rights and the best protector of our liberty and prosperity: trade.

George Freeman is the MP for Mid-Norfolk, Government Adviser on Life Sciences, and Chair of the All Party Group on Agricultural Science and Technology. 

The residents of Nairobi's Kibera slum tend to vegetable planted in sack-gardens. Photograph: Getty Images.

George Freeman is the MP for Mid-Norfolk and the chair of the Prime Minister's Policy Board. 

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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?