Cameron should seize the internationalist mantle he renounced last week

As the PM's failure to attend the UN showed, Downing Street seems asleep on the job when it comes to elevating him into the statesman role he craves and the country needs.

In one of last week’s more painful transitions, broadcasters cut from the end of Ed Miliband’s speech to Labour Party conference to President Obama speaking to the United Nations. One of the Labour activists I was with winced and muttered "and next up, the Gettysburg Address". 

In reality, the contrast between the two did Labour no real harm, thanks to the Prime Minister’s inexplicable decision to renounce one of the key reputational benefits of incumbency by skipping the annual meeting of world leaders in New York. Picture the despair in Labour’s ranks if right-leaning papers had been able to draw the parallel between a Cameron flanked by the most powerful people on the planet and Ed Miliband surrounded by cheerleaders from Labour’s rank and file. The Tories had a chance to attack Ed Miliband as not just "a red", but an irrelevance, and I know which would have hurt the more.

The Labour leader’s key conference test was to look like a credible Prime Minister in waiting and it is one he passed thanks both to his ambitious sweep of popular policy promises and the curious leadership vacuum left by his opposite number.  The Conservative Party’s attack machinery has since been working round the clock on contrasting David Cameron and Ed Miliband, but Downing Street itself seems asleep on the job when it comes to elevating the Prime Minister into the statesman role he craves and the country needs.

One reason for that perhaps lies in the PM’s own confusion about what he wants to project about Britain on the world stage: he can’t seem to work out whether we’re broken or brilliant. After the London riots he lamented a society that was in parts "not only broken, but frankly sick", while at the G20 last month he described a nation which couldn’t have "a prouder history, a bigger heart or greater resilience". Labour used to accuse Cameron of "talking Britain down" but his passionate defence of our global influence in St Petersburg revealed his increasing confidence in asserting that Britain can still punch above its weight.

Under Cameron, traditional 'realist' Conservative foreign policy has been replaced with a strong streak of conscience, evident in his continued commitment to aid and his willingness to intervene in Libya and attempts to do so in Syria. To his great credit, that has not been an easy path for the PM, with disquiet on his backbenches, amog his grassroots and across the Conservative press. The trouble is that he is unwilling to follow through on the detail and the delivery – the two things which make a foreign policy really work.

His mishandling of the timing and whipping of the Syria vote has been exhaustively covered but it is far from a one off. I have written before about the Prime Minister’s relaxed approach to this part of his job and we see it again in his absence in New York last week. Not only did he sit out global negotiations to resolve the worst humanitarian catastrophe since Rwanda, he also missed discussions on his own report, completed as Co-Chair of the Secretary General’s High Level Panel on global development.

That too fits a pattern – he also managed to stand up his two fellow co-chairs at one of only three meetings they were supposed to have and insulted two presidents by sending Justine Greening, a minister who – even before she skipped the Syria division – was so regularly missing in action she was dubbed "the scarlet pimpernel of the Tory Party" by Conservative commentator Iain Dale.

It all adds up to a pretty depressing picture for those of us who wish the Prime Minister well in his efforts to make Britain a force for good in the world. Between Cameron’s unwillingness to do the hard yards and Labour’s dampening of expectations about Britain’s role and obligations, it is difficult to see how our global leadership is to be maintained.

Labour used last week to set out its stall for the next general election with a clear steer that they want a cost of living contest. That is the right overall frame, but the opposition can’t afford to leave foreign policy a completely blank sheet. Plenty of voters agree with the Prime Minister’s more optimistic analysis that this is a brilliant country with a unique set of levers at its disposal to make the world a better place. Millions more think that how a party secures Britain’s interests and influence is a defining question of fitness to govern and that neither the government nor opposition have yet given Britain enough to go on when making that choice.

If he wants to eclipse Miliband’s Brighton performance, Mr Cameron would be wise to spend a portion of his conference address today seizing the internationalist mantle he voluntarily renounced last week.

Kirsty McNeill is a former Downing Street adviser. She tweets @KirstyJMcNeill

David Cameron goes through the final details of his speech before delivering it at the Conservative conference in Manchester. Photograph: Getty Images.

Kirsty McNeill is a former Downing Street adviser. She tweets @KirstyJMcNeill

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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?