Liberal Democrat MP Lorley Burt walks on stage wearing a Nigel Farage mask at the party's spring conference in York. Photograph: Getty Images.
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Clegg and Farage need to reach beyond their bases

The average British voter is not convinced by the case for the EU, nor persuaded that we would be better off out.

Both Nick Clegg and Nigel Farage should be able to profit from their two-legged encounter, which kicks off this evening, but the event will also highlight the challenges which both parties face in winning this argument with the British public as a whole. For Ukip, the event is a sign of their growing mainstream political status. Challenges to debate tend to be issued by underdogs but, as with Gordon Brown issuing a challenge to opposition leader David Cameron in 2010, the office-holder can be the underdog.

The Deputy Prime Minister challenging a party leader with no Commons seats at all reflects the political reality that the Liberal Democrats are the underdogs in the European elections. In 2009, the Lib Dems came fourth and Ukip second, even when both parties were in opposition. In 2014, Ukip is confident its bid to top the poll can succeed, while a realistic Lib Dem ambition will be to secure enough support to hold off a Green challenge for fourth place. 

Clegg challenged Farage to these debates about Europe, but this means that he has challenged Ukip to a debate about immigration too. Nigel Farage will certainly want to make this a debate about immigration. The Ukip leader believes that the public care more about immigration than Europe. He is right about that - especially when it comes to those considering voting for his party.

For both Clegg and Farage, the debate offers an opportunity to play to their respective bases of support - on both issues. The question is whether either can reach beyond that. About one in four people will always prefer Clegg's unambiguously pro-European "party of in" stance to the UKIP bid to exit the club. These voters are comfortable with current levels of immigration too, and often struggle to see why anybody should worry about the benefits that it brings. About one in four people are convinced that Nigel Farage is right that Britain has no choice but to leave, and are determined to see immigration at the lowest possible level. Most of this group would want to close the borders if they could.

But that leaves most people open to persuasion, neither committed to Team Nick or Team Nigel. The average British voter is not convinced by the case for the EU, nor persuaded that we would be better off out. In a referendum tomorrow, the vote would be pretty evenly split. While almost half of voters say they know for sure how they will vote in a referendum, most say they could change their minds. When asked about Britain's long-term position, only 28 per cent want to leave the club. Meanwhile, 55 per cent say they would like to stay in the EU, though most of this group would like to see David Cameron successfully negotiate to reduce Brussels' powers. Seventeen per cent don't know. Beyond the "pro" and "anti" European tribes, the British public is open-minded and up for grabs.

Clegg's challenge is to make the liberal argument make sense beyond those groups - particularly graduates, younger voters and Londoners - who begin strongly disposed to his side of the argument. Perhaps less noticed is that Ukip face a similar challenge, or a reverse mirror image of that facing pro-European liberals. Though Ukip's self-image is one of offering a populist common sense challenge to the political elite, authoritative new research, by the academics Rob Ford and Matthew Goodwin, shows that they are not a "catch-all" populist party, but rather the party with the most distinctive sociological profile of all. The Ukip vote is older, more male, more working-class and more likely to have left school at 16. The party's messages resonate with these "left behind" voters - but have much more trouble connecting with Britons born after 1966.

Tactically, it could be argued that neither Clegg nor Farage needs to reach out much when it comes to a pre-European elections face-off.  After all, only one-third of the electorate will participate in May's vote. Preaching to the already-converted can be enough in a low participation, low stakes and low salience election. 

But, strategically, both men should realise that this is not enough if they want to engage and try to win the bigger, contested arguments about the national interest: whether Britain is better off in or out; whether the EU can be reformed to better reflect our interests and values, or whether that is a quixotic quest; whether the British could decide that EU free movement is a two-way street worth keeping, or at least a price worth paying. 

These issues will not be settled by this initial skirmish at the European election hustings, nor by the European elections themselves. Both Clegg and Farage are interested in winning the public argument about Britain's future: they each need to try to reach out to the unpersuaded majority too.

Sunder Katwala is director of British Future and former general secretary of the Fabian Society.

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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?