Labour recognises that it can't build a One Nation country alone

We understand that governments, on their own, cannot fix everything. Families and communities, businesses and trade unions, civic society, and elected leaders at every level must play their part.

Most of those gathered to hear Ed Miliband’s speech at the Labour Party conference in 2012 recognised that under his leadership the party had become an effective and united opposition. They also knew that fresh scandals over top pay, consumer rip-offs and banking sharp practices had vindicated his call for a more responsible capitalism, and that his analysis of the problems facing the squeezed middle and the need for deep reforms in the economy had struck a chord with millions of voters.

But it is only fair to say that some of those present last year in Manchester had doubts about how Ed could draw all this together into an overarching political project.

Those doubts were swiftly dispelled by an extraordinary speech, delivered without notes. Ed Miliband rose to the challenge, as he had done in the past. The theme of his speech, a closely guarded secret until he stood up, was a vision for rebuilding Britain as One Nation: "A country where everyone has a stake; a country where prosperity is fairly shared; where we have a shared destiny, a sense of shared endeavour and a common life that we lead together."

This was not just an audacious land-grab of a phrase once associated with a more compassionate era of Conservative government. Nor was he describing some impossible dream. Instead, the speech addressed, full on, the challenges facing Britain today. 

"Here is the genius of One Nation", he told the Conference:

"It doesn’t just tell us the country we can be. It tells us how we must rebuild. We won the war because we were One Nation. We built the peace because Labour governments and Conservative understood we needed to be One Nation. Every time Britain has faced its gravest challenge, we have only come through the storm because we were One Nation … To overcome the challenges we face, we must rediscover that spirit. That spirit the British people never forgot. That spirit of One Nation."

Since that speech, Ed Miliband and the shadow cabinet have been setting out what this means for our economy, our society, and our politics: a recovery made by and for the many, not the few; a society in which everyone has the opportunity, and the responsibility, to take part; and a party and a democracy that is open to everyone, not the preserve of closed circles or a narrow elite.

The building blocks of One Nation include not only new policies but also a radical process of party reform. Labour is renewing itself as a movement and helping to give a voice to people from every part of Britain and every walk of life. These changes will underpin the next Labour government, so that we can work with citizens, communities, businesses and civil society to meet together the challenges we face together.

Labour has already set out a series of radical new proposals that show how a One Nation government could begin rebuilding Britain, together with the people of our country: policies to get our banks working for our businesses, and our businesses fulfilling their responsibilities to their customers and employees; policies to ensure our public services give young people a fair chance to play their part and our elderly population the dignity and care they deserve; policies for the redesign of our tax and social security system so that everyone pays their fair share and responsibility goes all the way from the bottom to the top; policies to reform and renew our politics so that we can begin to reverse the disaffection and hopelessness that discourages too many from taking part. And of course the Labour Party will have more to say about all this and more before the next election.

The One Nation book we have edited is not about policy, or a blueprint for political reform. Instead, it shows how our policy programme and our campaign for the chance to implement it in government are anchored in people’s everyday lives, experiences, aspirations and struggles. Our values are vividly present in so many of the personal stories and local histories that make up our country. The brilliant, resilient and resourceful people and communities of Britain are ready and eager to play their part in rebuilding our country as One Nation.

But there is also a humility in the vision of One Nation. We understand that governments, on their own, cannot fix everything. This humility, though born in opposition, will continue when we are in government. We know that Labour will not be able to deliver the change Britain needs unless we make it a common endeavour – unless we work with families and communities, businesses and trade unions, civic society and elected leaders at every level. The fundamental renewal of Labour’s values, organisation, and approach to politics and social change, is the most important and transformative part of Ed Miliband’s project.

This is an extract from the introduction to the new book One Nation: Power, Hope, Community

Rachel Reeves is shadow chief secretary to the Treasury and MP for Leeds West

Owen Smith is shadow Welsh secretary and MP for Pontypridd

Workmen fix a Labour Party Conference banner to a fence outside the conference centre on September 21, 2013 in Brighton. Photograph: Getty Images.

Rachel Reeves is shadow chief secretary to the Treasury and MP for Leeds West

Owen Smith is shadow Welsh secretary and MP for Pontypridd

Getty
Show Hide image

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?