David Cameron speaks at the British curry awards at Battersea Evolution on November 25, 2013. Photograph: Getty Images.
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Liberals are well served by the Conservative Party

With each week, the party is giving more power and responsibility to individuals to shape their own destiny - the essence of liberalism.

Which political party in Britain should you vote for if you are a liberal? Especially after the last week, it seems the Conservative Party is your best choice. The Conservative Chancellor announced a radical policy in the Budget that retirees will now have greater freedom on how they take their pension, liberated from being shackled to a pitiful annuity. Labour, bewildered, is still working out whether it supports this policy, whether it can trust people to manage their money properly.

The Conservatives also press ahead with the progressive raising of the personal tax allowance, which Lord Saatchi has campaigned for for over a decade, to lift millions of low-paid workers out of tax. And this Saturday, thousands of same-sex couples will be celebrating, as they now have the right to marry thanks to legislation introduced by this Conservative-led government.

These are just a handful of examples of the granting of greater power and responsibility to individuals and institutions to shape their own destiny, the essence of liberalism. In recent years, the Conservatives have advocated several liberal policies: a referendum on membership of the EU, giving headteachers more say on who they recruit and how much they pay, allowing nurseries the flexibility to prioritise quality over quantity of staff, and enabling a wider range of organisations – including private and voluntary ones - to tender for the delivery of services including in the NHS. But both the Liberal Democrats and Labour have opposed all of these.

This is not mere cross-dressing or some tectonic political shift. The Conservative Party has in fact had a long-term relationship with liberalism: economic, social and political. Lord Liverpool’s administration in the 1820s pursued ambitious economic liberal reforms: custom duties were relaxed, monopolies limited and restrictions on exports abandoned, an agenda that cumulated in the repeal of the Corn Laws under Sir Robert Peel in 1846. Slavery was abolished by the Tory William Wilberforce and Lord Shaftesbury introduced the Factory Acts, granting basic rights to workers in tough conditions. Under the premiership of Benjamin Disraeli, the vote was extended to millions of skilled working class men. In 1928, the Conservative prime minister Stanley Baldwin passed legislation that gave all women the vote.

For most of the 20th century, Conservatives became the champions of freedom as socialism advanced and the old Liberal Party declined. In fact, some factions from the latter gradually merged with the Conservatives. Until 1968, the National Liberal Party allied with Tories at a constituency level, with joint candidates such as Michael Heseltine. The Liberal Unionist Party, a break-away group that opposed Irish Home Rule, was first in a coalition with the Tories, then their leader Joseph Chamberlain finally agreed to join the Conservatives formally in 1912. Nick Clegg talks very rarely, and only briefly, about Chamberlain; touchy subject, seemingly.

Now, it is of course true that all three main political parties have liberals in their ranks and leadership team. British policymaking has been greatly enriched as a result of this sprawl. But political parties are coalitions themselves: liberals have to negotiate with others in their party who have different philosophical affiliations, and they may find themselves on the losing side in the internal battles over policy and vision. This seems to be happening too often in the Liberal Democrats and Labour at the moment.

Big challenges confront us: an ageing population, climate change and a race with emerging economies to produce highly skilled workforces. The pressures on the state will be unsustainably high, particularly when Britain has to remain a low-tax, competitive economy. We will need a strong dosage of economically liberal ideas to meet these challenges: for example, alternative ways of financing crucial public services such as education and healthcare, including greater contestability in commissioning, loans-based financing and social investment. The Tories to date have been most engaged and enthusiastic about these sort of ideas. Only they, at the moment, seem to have the appetite to pursue the economic liberal agenda we desperately need in the decades ahead.

Yes, liberals in the Conservative Party have to fight their own battles. And their liberalism must be tempered too by conservatism, a philosophy that rightly roots individuals in relationships and social custom. On some policy areas, liberal conservatives have lost: on immigration, for instance, where the party pursues a UKIP-lite message, all caps and clampdowns, endangering national and cultural enrichment.

Liberals are well served by the Conservative Party. For the moment. The liberal parliamentarians, policymakers and activists within it must keep fighting. For a brighter future for the Conservatives lies not in being a refuge for those angry and disappointed with change, but as a home for hopeful younger generations who increasingly identify as liberals.

Ryan Shorthouse is the Director of Bright Blue, a think tank for liberal conservativism 

Ryan Shorthouse is the Director of Bright Blue, a think tank for liberal conservativism 

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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?