If Osborne wants growth, he must protect science and our universities

The huge cuts to laboratories and equipment have already undermined the UK's world class science base.

Britain’s long-term prospects for economic growth could be seriously damaged today if the Chancellor announces further cuts to the funding for scientific research in the Spending Review. Three years ago, he froze the overall budget for research projects and made huge reductions in the amount to be spent on laboratories and equipment, undermining the UK’s world class science base in universities. One of the implications of the attack on science funding for the UK’s competitiveness became obvious earlier this month when we were overtaken for the first time by China in a key international league table showing the proportion of national wealth that is invested in research and development. According to provisional figures from the OECD, total R&D spending by China in 2011 increased to 1.84 per cent of its gross domestic product, up from 1.76 per cent the year before, while UK expenditure fell from 1.80 to 1.77 per cent over the same period.

It is particularly ironic given that the government has this month hosted the annual summit of the G8 nations, which previously was a gathering of the world’s biggest economies. The UK now lies fifth among the G8, behind Japan, the United States, France and Germany, in terms of annual expenditure on research and development, and well below the average for the 28 Member States of the European Union.

Some may question whether it really matters that our competitors are investing more in R&D than us. After all, the input of funding does not guarantee the quality of output in terms of products and services that drive economic growth. But a review of data from 19 countries published by the OECD earlier this year concluded that productivity growth is linked to R&D and patenting.

The decrease in UK investment in research and development is partly due to the reduction in government funding, which fell slightly from 0.58 to 0.57 per cent of GDP between 2010 and 2011. But the relatively low level of the UK’s R&D spending is not only due to declining government support for science. The private sector in the UK also invests less than its counterparts in other countries. This is largely because of the dominance of businesses in the services sectors, which traditionally do not carry out very much in R&D. The latest breakdown shows that the financial and professional services sectors, including banking, insurance, accounting and management consultancy, provided 14.5 per cent of UK GDP in 2011, up from 13.5 per cent the previous year, a much higher proportion than in any other G8 country, including the United States.

The coalition has acknowledged that the UK’s future competiveness depends not just on our traditional strengths in areas such as financial services, but also requires the nurture and growth of new knowledge-based businesses and industries. The Coalition Agreement promised to "create a fairer and more balanced economy, where we are not so dependent on a narrow range of economic sectors". And its ‘Plan for Growth’, published in March 2011, laid out an ambition for the UK to not only remain the world’s biggest centre for financial services, but also to become a global leader in, for example, advanced manufacturing, life sciences, and low-carbon energy. Such sectors depend fundamentally for their success on research and innovation, and the government can create an environment that is conducive not just by offering the right financial incentives, such as tax credits for R&D, but also by ensuring a strong and healthy research base, particularly within universities.

Britain gave birth to the modern scientific revolution in the 17th century and its glittering list of international prize winners is evidence of our excellence in basic research. Most recently, Sir John Gurdon shared the 2012 Nobel Prize for Medicine or Physiology for his early outstanding work on the potential of stem cells, which provided the basis for today’s exciting pursuit of promising new treatments for many serious diseases and illnesses.

In a speech at the Royal Society last November, George Osborne acknowledged that "the sheer quality and range of scientific enquiry ... is one of our nation’s greatest achievements in which we can take real pride", and noted that "the quality of our scientific research base is one of the most significant factors encouraging international companies to bring high-value investment here". 

But the coalition is now sapping this strength, not just through underfunding, but also by its clumsy drive against immigration which is discouraging talented overseas researchers from coming to the UK to study and work.

With countries like China and other developing countries now emerging as economic powerhouses, and investing more in the development of their own knowledge-based economic sectors, UK universities can no longer expect to automatically attract the best and the brightest from around the world. So it is crucially important that the Spending Review boosts the UK’s future prospects for prosperity and growth by increasing research funding for our outstanding universities.

An original copy of The Origin of Species which forms part of 'The Royal Society: 350 Years of Science' exhibition is displayed in front of a portrait of Charles Darwin. Photograph: Getty Images.

Bob Ward is policy and communications director of the Grantham Research Institute on Climate Change and the Environment at London School of Economics and Political Science.

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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?