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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Westminster is in thrall to the cult of Farage – but Clegg knows that most voters see through it

There are far more people who don’t vote Ukip than do, including many who despise pub-bore nationalism.

David Cameron has handled Ukip like an intimate rash. There was an itch he couldn’t help scratching but scratching only made it worse. Now he is trying to ignore it in the hope it will go away.

He certainly doesn’t want to talk about it. The Prime Minister aims to reach the general election in May 2015 without sharing a platform with Nigel Farage or even uttering his name. Downing Street hopes that Ukip’s popularity will peak at the local council and European Parliament elections this May, if not before. Meanwhile, Cameron’s strategy is to avoid gratuitously offending the party’s supporters.

For Ed Miliband, the relationship is more complex. His instincts are antithetical to those of Farage but their interests are tactically aligned. Currently, Ukip poaches more votes from ex-Conservatives than from disgruntled Labourites in vital marginal seats, so the longer the Farage phenomenon endures, the likelier it is that the Labour leader ends up in No 10.

To the extent that Labour has a strategy for dealing with Ukip voters, it is to sympathise with their rage while steering blame away from migrants and benefit claimants. A Labour government that guarantees jobs, higher wages and affordable homes is expected to neutralise resentment of foreigners for supposedly driving down pay and colonising council houses. That is a theory to explain when Farage might go away, not a campaign to see him off.

So there is a vacancy for someone who will confront the Ukip leader on his own terms. Nick Clegg has awarded himself that honour. The Liberal Democrat leader used a speech at his party’s spring conference on 9 March to express a brand of liberal patriotism celebrating a “modern, open, tolerant” Britain that tends to want to be part of Europe, as distinct from a fearful and reactionary blend of Little England nostalgia that wants out. Clegg will debate the merits of Britain’s EU membership with Farage live on television in April.

Lib Dem strategists are not expecting the party to be buoyed by some great surge of enthusiasm for Brussels. They note only that a liberal Europhile position currently polls better than Clegg (as do many things). Since the party shed much of its core support by forming a coalition with the Tories, it needs to recruit a new cohort of voters. Salvation depends on finding people who agree with Nick and just don’t know it yet.

This plan isn’t entirely delusional. Liberal dismay at the main parties’ craven response to Farage extends beyond the question of Europe. The Ukip leader has enjoyed privileged media status as a spicy character in an otherwise bland political drama and as the incarnation of public loathing of politicians. Fringe idiocy in Ukip’s ranks has not escaped ridicule but there is in Westminster a strain of self-hating deference to the party’s voters, as if their jaundiced view of modern Britain were more authentic than other political opinions. In reality, there are far more people who don’t vote Ukip than do, including many who despise pub-bore nationalism. Just as the Ukip leader wants to channel anti-establishment anger, Clegg wants to channel a cosmopolitan backlash against the cult of Farage.

It is worth a try. The Lib Dems have been supremely disciplined through successive local election ravages – but their patience is not infinite. Clegg has so far managed to avert despair with the argument that it is better to be harried in office than to be irrelevant in opposition. Since another hung parliament looks plausible after the next election, there is always hope of staying in power.

There are Labour and Tory MPs who assert with bitter confidence that Clegg, as a likely coalition kingmaker, has more reason than Miliband or Cameron to be sure of being in power after 2015. That calculation rests on the record of tenacious Lib Dem incumbents in fortified bastion seats bucking a national trend. It also presumes that, since the party has been bumping along the bottom for three years, the only way is up.

To sustain that story, Clegg needs to show some progress in May, although abject defeat would probably not provoke a leadership challenge. The party’s regicidal impulse, once so quick, has been numbed by the duty to look responsible in government. It would be roused only by a general election catastrophe.

It helps that expectations of Lib Dem performance are so low. Clegg’s office is happy to keep them that way. Senior aides present the debates with Farage in modest terms, as an opportunity to get a neglected pro-EU argument across, rather than some prizefight in which Europhobia might be dealt a knockout blow. At best, the Lib Dems hope to add a few points to their vote share over the coming months, dragging it into the mid-teens from single-digit ignominy and avoiding the eviction of every one of the party’s MEPs from Strasbourg.

Besides, Ukip support is about a lot more than Europe. Farage’s voters are recruited from across the political spectrum and animated by a complex of resentments, insecurities and prejudices. They nurture a feeling that politicians have conspired to turn Britain into a place that suits metropolitan elites. Clegg’s contention is that more people are happy with the current complexion of the country than Farage is letting on and that some of them are frustrated by what they see as tacit endorsement by Miliband and Cameron of the Ukip gripe.

The Lib Dems can’t realistically expect to convert that sentiment into enthusiasm for their party. They just need to borrow some votes in May to make a point. Or rather, by standing as the very opposite of Farage, they hope to bring some clarity to the enduring mystery in many voters’ minds of what might be the point of Nick Clegg.

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

This article first appeared in the 12 March 2014 issue of the New Statesman, 4 years of austerity

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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?