Immigration and border control signs at Edinburgh Airport on February 10, 2014. Photograph: Getty Images.
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Labour can't promise to cut immigration, but it can promise a fairer deal

The party should be straight with voters about how different types of migration have different impacts on Britain.

Imagine aiming for the bull’s eye only to throw the dart into your own foot. That near enough tells the story of the government’s attempts to meet its ill-conceived net migration target. Today’s figures only go to confirm what we’ve known for some time now: David Cameron and Theresa May haven’t a hope of reaching their pledge to bring net migration down below the "tens of thousands" by the end of this parliament. Indeed, the latest annual net figure of 212,000 can be compared with average annual  totals of 171,000 during the 13 years of Labour rule. No wonder the prime minister seems to be trying to draw back from the target and that calls for him to drop it altogether  are growing among Conservative MPs.

On the face of it, the Tories’ big miss should present a palpable hit for Labour, and it’s not surprising that Yvette Cooper’s response today had that wickedly gleeful tone which politicians can’t resist when a policy goes badly wrong for their opposite number. Yet, as George Eaton has pointed out on these pages, it’s not clear that Labour can exploit Tory failure on immigration in the same way it could with some other issues. That’s partly because of its own record – which is still fresh in the memory of voters - but also because Labour’s alternative approach has yet to win over a sceptical public. Progress has been made, both in repudiating the past and in laying the groundwork for the future, but there’s clearly more to do.

George Eaton suggests Labour’s main dilemma is that it somehow has to convince the voters that it would be "better at reducing immigration" than the Tories. It’s certainly true the public want that end, but this is one instance when just promising people what they want isn’t even good politics, let alone policy. Short of apeing Ukip and pulling out of the EU altogether an overall reduction simply cannot be guaranteed, and in the process of trying vainly to get there, a lot of damage can be caused to the economy, vital sectors and the UK’s standing overseas – as we’ve seen in the last few years. 

Much better now is to be straight with the voters about how different types of migration have different impacts on Britain – and while the government should be bearing down harder on some negative migration flows, in other areas, policy might lead to beneficial migration rising. The criteria in both cases should be: what is the UK’s national interest?

For instance, IPPR has proposed maximising the number of foreign students we try to attract, as this type of migration contributes hugely to this country, economically, socially and diplomatically. On the other hand, in our Fair Deal report we argued that the entry route for low skilled migrants from outside the EU should not just remain closed, it should be removed altogether – for the reason that the UK doesn’t need such migrants. Different approaches should be taken in other areas too: such as stronger measures, including more investment, to bear down on illegal immigration, but an end to caps and quotas on investors, entrepreneurs, high skilled and exceptionally talented migrants who, with proper rules in place, can and do make a major economic contribution to Britain.

Of course, a differentiated approach does not allow a party to make a simple, single promise. But given what’s happened to the Tory pledge it should be clear that pledge card politics is not appropriate in this complex field.

That said, abandoning a single target does not mean reducing government accountability for migration flows. Indeed, such accountability should be considerably strengthened, with the responsible minister for each different migration route – economic, study, asylum and so on – reporting annually to parliament, setting out future strategy and broad trends, and accounting for the government’s performance in the previous year.  As a senior Liberal Democrat, Sir Andrew Stunnell MP, has pointed out we have two major annual parliamentary set pieces on the economy – the Budget and the Autumn Statement – but nothing even roughly equivalent for perhaps the next biggest issue of public concern – immigration.   

Beyond this new approach to managing and accounting for migration trends, the new focus in migration policy should be on ensuring that its benefits are more evenly distributed. A big reason why Labour lost support from among its core vote on immigration was that people were loftily told not to worry about high numbers because the economic indicators showed  they were  contributing to growth. That was true at the macro-economic level, but missed the obvious point that people don’t live their lives in this elevated dimension. They live in real communities and work in the real economy.

What Labour failed to appreciate fully enough was that there were groups of workers who were losing out, sometimes as a direct result of migrant competition, even as the overall economy grew. A main plank of a fair deal on migration must that it will be managed explicitly to deliver more benefits to settled people on lower or middle incomes. This doesn’t mean disadvantaging migrants, but it does mean being clearer that any government’s first responsibility is to its own citizenry, particularly the poorest.  

A final aspect is being more alert to and sympathetic about the social and cultural change that high levels of migration can bring to communities. Generally, the UK has not only come to cope with diversity, but to embrace it.  However, alongside celebrating diversity and accommodating minority cultures, we should not be shy, still less ashamed, of promoting our shared identity and asserting long held, and dearly cherished, values, norms and traditions. If that means, and it can do, putting a bit more of an onus on new arrivals to "fit in" to the country to which they’ve chosen to move, that really shouldn’t cause such angst among people of a progressive mind. 

As I mentioned above, none of this makes for pledge card politics. But IPPR research has shown that a "fairness" approach, as outlined above, does resonate with mainstream opinion. And only an honest, open ended conversation on migration has any chance of draining the poison from this issue and pointing towards a long-term accommodation with one of the great issues of our age.

Tim Finch is director of communications for IPPR

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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?