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Only a radical government can end the Great British Rip-Off

The next Labour government will tackle vested interests, reduce income inequality and end the race to the bottom.

The ‘Great British Rip-Off’ is a series of events launched by Unions Together, the Trade Union Group and CLASS in Parliament tonight. Sadiq spoke alongside Frances O’Grady, Zoe Williams, Katy Clark MP and Matthew Pennycook.

In my constituency of Tooting in south London, as right across the capital and the country – the cost of living crisis is a lived experience for most people, with very real consequences away from the words of Westminster and Fleet Street. People work long and hard hours, but yet too often still struggle to make ends meet at the end of the month. Work should pay for everyone and it should pay enough for people to eat healthily and provide for their families with dignity – a real living wage. Yet for too many people, this just isn’t the case, with zero-hours contracts on the rise, exorbitant tube and train fares, rising energy bills and a housing crisis so acute that many people can’t afford their rent, let alone dream of buying a home.

Labour has said unequivocally that we will address the cost of living crisis. We will ban the exploitative working practices associated with many zero-hours contracts and take on the vested interests of the Big Six energy companies by freezing prices while we fix the broken energy market. These policies will make a real difference to millions of people. The next Labour government will also tackle the long-term causes of the cost of living crisis.

The issues I hear about every day from Londoners are the symptoms of deeper and longer trends, that have seen a decline in living standards and a sharp rise in income inequality. The IMF has highlighted that the decline of trade union power is associated with the dramatic increase in income inequality over the last 30 years. In the early 1980s, collective bargaining covered 70 per cent of the British workforce but that has now dropped below 30 per cent. This has reduced the ability of the trade union movement to deliver fairness, safe working conditions and support productivity in the workforce.

Incomes in London are more unequal than in any other region, with 16 per cent of the population in the poorest tenth nationally and 17 per cent in the richest tenth. Twenty eight per cent of Londoners now live in poverty and almost 60 per cent of them are from working families. The richest 10 per cent have 60 per cent of all assets, while the poorest 80 per cent of the population share just 20 per cent. As our economy finally begins to recover after wasted three years, we are unambiguous that the benefits of growth must be shared by everyone in our society, rather than just going to the wealthiest.

Ed Miliband has been clear that to do that, we must end the Tories' relentless race to the bottom and ensure that the benefits of growth are distributed more fairly. This re-balancing of our economy will be tough. But Labour are up to the challenge. It’s why this week we have laid out our plans for a 'Jobs Guarantee'; we will guarantee a job for all young people aged 16-24 who are out of work for more than a year, paid for by a tax on bankers' bonuses and by restricting pensions tax relief for those earning over £150,000. It’s why we will introduce a Mansion Tax on properties worth more than £2m and use the funds to introduce a 10p tax rate to help lower paid workers – putting right a mistake of the last Labour government. And it’s why we have committed to building 200,000 homes a year by the end of the next Parliament.

And we will do more to tackle the long-term causes of income inequality. That is why Ed Miliband has said that under a Labour government, all companies will have to have an employee on their remuneration committees, to give them a seat at the table when decisions about pay are being made. And that’s why the next Labour government will take action to strengthen the national minimum wage and promote the living wage.

The National Minimum Wage is the achievement of the last Labour government of which I am most proud. But this crucial protection for low-paid workers is being eroded. It is worth less in real-terms than it was when we left office in 2010 and not a single company has been named and shamed for non-payment under David Cameron. Labour will increase the fines for paying below the minimum wage to £50,000 and we have asked Alan Buckle, former deputy chairman of KPMG International, to look at how we could strengthen the policy and ensure that where sectors can afford to pay more, they do.

Government needs to do more to promote the Living Wage so we can raise the wages of the lowest-paid workers. All 32 Labour Council Groups in London have agreed to pay all staff and contractors at least the Living Wage if they win control at the local elections on 22 May. And on entering office, the next Labour government will launch a national campaign to agree Make Work Pay Contracts with British businesses. These contracts will mean that, in return for becoming accredited Living Wage employers within the first year of a Labour government, businesses will receive back 12 months’ worth of the resulting increased tax and National Insurance revenues received by the government.

We also need to get excessive executive pay under control  by increasing transparency. The next Labour government will simplify remuneration packages, make all companies publish the pay ratio between the highest paid executive and the companies median average and put an obligation on investors and pension fund managers to disclose how they vote on remuneration packages. In contrast, the Tories have consistently attacked and weakened employee rights and have prioritised policies that benefit the wealthiest, such as the tax cut for millionaires.

Tackling the deep-rooted and long-term causes of the cost of living crisis will not be easy. It will require a radical and transformative government with the political will to take on vested interests and challenge those who abuse their power – something David Cameron has proved incapable of as Prime Minister. Ed Miliband’s Labour Party has that will. We will do what it takes to tackle the cost of living crisis in this country, reduce income inequality and end the race to the bottom.

Sadiq Khan is MP for Tooting, shadow justice secretary and shadow minister for London.
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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?