David Cameron, Nick Clegg and Ed Miliband stand together as Prince Charles launches a new youth campaign at Buckingham Palace on November 21, 2013. Photograph: Getty Images.
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In the era of hung politics, all three main parties are preparing for a leadership contest

With the general election result so uncertain, leadership contenders in the Tories, Labour and the Lib Dems are making themselves known.

In 13 months’ time, at least one and possibly two of the three main parties will be preparing to hold leadership contests. The days when a leader could survive election defeat, as Harold Wilson did in 1970 and Neil Kinnock did in 1987, are gone. In this populist age, rejection by the voters is terminal.

But such is the uncertainty surrounding the general election result, with all three parties enjoying a plausible hope of being in government after 2015, that no one can be sure where the axe will fall. While preparing for victory, the Conservatives, Labour and the Liberal Democrats have also been forced to start preparing for defeat.

It is among the Tories, reflecting Labour’s arithmetical advantage, that the conversation is liveliest. The recent briefing battle between Boris Johnson and George Osborne revealed the extent to which the party is preoccupied with the question of who will succeed David Cameron. Osborne, whose personal poll ratings are rising in line with the economy (he is now the most popular Conservative occupant of the Treasury since 1980), enjoys a loyal parliamentary following, a network of influential media supporters and a gifted staff that includes the former Policy Exchange director Neil O’Brien. The long-held assumption that his fortunes are bound to those of Cameron has been discarded. With greater subtlety than Johnson and Osborne, Theresa May is also refining her pitch for a post-election contest.

One common grumble among Labour and Conservative MPs is that it is Nick Clegg, owing to the likelihood of another hung parliament, who has the best chance of being in office after 2015. But that has not stopped his Liberal Democrat colleagues positioning themselves to succeed him. As well as the party president, Tim Farron, and the Energy Secretary, Ed Davey, this group now includes Danny Alexander. Indeed, I am told by sources that the Chief Secretary to the Treasury’s team was behind a recent story suggesting that Clegg’s position could be in danger if the party is wiped out in the European elections. “He looks like a faithful paladin of Clegg but he’s ambitious,” one says.

With Alexander now “certain”, in the words of one Lib Dem, to supplant Vince Cable as the party’s representative in the general election chancellors’ TV debate, he is well placed to run as the “continuity candidate” (assuming that he retains his seat in Scotland). If Alexander does stand, he will likely be challenged from the left by Farron and from the right by Jeremy Browne, whose new book, Race Plan, is a cri de coeur for free-market liberalism.

Until recently, talk of the possibility of a post-2015 leadership election was rare among Labour MPs. Compared to the Tories and the Lib Dems, the party remains a model of unity. Yet, as the polls have narrowed, the subject has been broached with increasing frequency.

One figure regarded as almost certain to stand in any contest is Andy Burnham. The shadow health secretary finished fourth in 2010 but has since established himself as the darling of party activists with his unrelenting defence of the NHS against Tory attacks. His recent criticism of HS2 in an interview with the New Statesman was viewed by Miliband’s allies as another attempt to differentiate himself from the leadership after his previous calls for zero-hours contracts to be banned and for billions in health funding to be transferred to local councils (a proposal that was vetoed by Miliband).

Burnham suffers from one significant disadvantage: he is a man. It is regarded as a point of shame among Labour MPs that they, unlike the Tories, have never had a female leader. The more the party derides David Cameron’s “woman problem”, the greater the need becomes to redress this omission. For this reason, Yvette Cooper is regarded as the favourite. But Cooper (who won the last ever shadow cabinet election) could face a formidable challenger from another man, Chuka Umunna, the ambitious shadow business secretary, whose election would grant Labour the distinction of having the first black or mixed-race leader. Either way, a Labour MP predicts: “The next leader of the party will not be a white man.”

One party leader who might be thought to be safe in his job is Nigel Farage. Ukip is on course to finish first or second in the European Parliament elections in late May and to post its best ever general election result in 2015. However, because of Farage’s pledge to resign if the party fails to win any MPs (one that wiser heads are urging him to retract), even Ukip is not immune from the current fashion for leadership speculation. Having only recently taken up his post as the party’s director of communications, the former Daily Express columnist Patrick O’Flynn is already being tipped to become Farage’s successor.

By this stage of the parliamentary cycle it is usually clear which party is destined for victory. In 2004, resigned to defeat against Tony Blair, Michael Howard was able to begin grooming David Cameron to succeed him. In 2009, the anticipated departure of Gordon Brown allowed Labour’s future leadership candidates ample time to prepare their manifestos. Today’s would-be contenders enjoy no such certainty. They must simultaneously prepare for government and for opposition. They must court the favour of the leader who will determine their fate in the former and the favour of the activists who will determine their fate in the latter. In this new era of hung politics, the room for error has never been greater.

Rafael Behr is away

George Eaton is political editor of the New Statesman.

This article first appeared in the 14 April 2014 issue of the New Statesman, Easter Double

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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?