Ukip leader Nigel Farage. Source: Getty
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Labour can’t stand Farage but they don’t want him to fail

Miliband’s reliance on Ukip taking votes from the Tories puts the opposition in an uncomfortable moral position.

The benefits for both Nick Clegg and Nigel Farage of debating Britain’s membership of the European Union on TV and radio tonight are clear. Each hopes to raise his profile and remind everyone that England has more than two parties worth considering in elections. (In Scotland and Wales that has been obvious for a while.)

Although they will be taking antagonistic positions they are not exactly rivals. The two leaders are fishing in fairly distinct pools of electors. Clegg is not  in the business of reaching out to anti-immigration, anti-politics nay-sayers and Farage is even less interested in charming the liberal Europhile vote. As I wrote in my column recently, the Lib Dem leader’s chief aim is to rebut the charges that he doesn’t believe in anything and serves no obvious purpose. (Otherwise known as the “if the Lib Dems didn’t exist, would you have to invent them?” question.) Standing up as the anti-Farage – the only leader prepared to call Ukip out rather than cringing in fear – is not a bad way to claw back some self-respect for a party that has taken a sustained beating in recent years.

As one senior Lib Dem recently pointed out to me, since the party is sure to be mauled in local elections and European parliamentary elections in May, there is some virtue in facing the barrage from a position of clear principle. Better, in other words, to be duffed up for believing in something and sticking to it than for being David Cameron’s anonymous lapdog.

From Farage’s point of view, anything that establishes Ukip as a mainstream threat to the Westminster status quo is a win. But there are obvious risks. His appeal so far has been built on relatively short performances and bursts of publicity – the one-minute Question Time rant; the photo-shoot in the pub. It isn’t yet clear that he can sustain a credible argument over a length of time and he has recently displayed a tendency to get tetchy and impatient when challenged. I suspect part of Clegg’s strategy will be to flush out Nasty Nigel – the angry red-faced man railing in fear and rage at the modern world. The big advantage that the Ukip leader has is that he is on the more popular side of the argument. If it was easy to make EU membership obviously attractive to British audiences, one of the very many pro-European politicians in power over the past generation might have done it.

For that reason, pro-Europeans will be cheering Clegg on tonight. Well, most pro-Europeans. An interesting question is what the Labour party will be hoping happens in the prize fight. On the issues, the overwhelming majority of opposition MPs, including Ed Miliband, are much closer to the Lib Dem position than the Ukip one. Besides, a party of the left should by instinct want to see a reactionary nationalist insurgency defeated. Ideally, Labour would be taking that fight to Farage directly but Miliband already has his work cut out taking the fight to Cameron.  And since Ukip is making life difficult for the Tories, taking their voters in crucial marginal seats, the opposition has an interest in Farage’s bubble not bursting.

By contrast, Cameron advertises himself as a Eurosceptic but he has committed himself to campaigning for an “in” vote in a referendum (albeit on the assumption that the vote follows a successful renegotiation of membership terms). His interests are clearly aligned with Clegg’s tonight. If the Lib Dem leader proves to be an effective foil to Farage, it gets easier to see how the tide might be turned against Ukip, which means voters coming back to the Tories in time for a 2015 general election. And, better still, if Clegg achieves any kind of recovery on the back of a solidly liberal pro-EU platform, it will be at Labour’s expense.

The line from both Labour and Tories is that tonight’s debate is a side-show for also-ran parties. A Downing Street spokesman yesterday said that Cameron was unlikely to have time even to watch the argument. No doubt Miliband also wants us to think that he is also too busy. And in reality most of the nation will find something better to do than sit through an hour of qualified majority voting weights and Strasbourg attendance records. But the leaders of the two big parties will, of course, be paying attention, not least because they will be looking for clues and insight into how a 2015 general election debate might play out. Cameron will be secretly rooting for Clegg. His party might not like that but the electoral logic is clear. Tories need Farage to fail. By extension, Labour need Clegg to stay beaten and Conservatives to stay frightened of Ukip. It is not a comfortable position for the opposition, wanting Farage’s arguments to be defeated at some stage but not wanting the man himself to stumble yet; not when he might still help clear a route for Miliband to get to Downing Street.

Rafael Behr is political columnist at the Guardian and former political editor of the New Statesman

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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?