Ed Miliband and David Cameron during the service to celebrate the 60th anniversary of the coronation of Queen Elizabeth II at Westminster Abbey, on June 4, 2013. Photograph: Getty Images.
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Labour will show that people really do have a choice in 2015

Unlike David Cameron, we understand that our future success as a country is built on the talents of all.

As we enter the last summer before the general election, it is clear our country is at a crossroads. The Tories and Lib Dems complacently claim they’ve fixed the economy, but things are still really tough for hardworking families. Growth is finally returning to our economy, but it is not feeding through to working people’s living standards - that's why Labour is campaigning this summer for big changes in Britain. 

On Friday, Labour launched our summer campaign – "The Choice: the Labour future, the Tory threat" – with a speech from Ed Miliband in which he outlined the fresh leadership he will bring to Britain as Prime Minister. He said: 

"The leadership this country needs is one that has big ideas to change things, with the sense of principle needed to stick to those beliefs and ideas even when it is hard, and with the decency and empathy to reach out to people from all backgrounds, all walks of life."

In the weeks ahead, Labour will set out the changes we need so we can build an economy where we earn our way to higher living standards and shared prosperity. We know that Tory government after 2015 would continue to stand up for just a privileged few, thinking everything is fixed and continuing with a cost-of-living crisis, even whilst there is growth.

Labour understands that our future success as a country is built on the talents of all. In contrast, David Cameron believes the only people who create wealth are those at the top and that this will somehow "trickle down" to everybody else.  We want to ensure that families and young people can get on and do well - whilst under David Cameron, opportunities are declining and the next generation will do worse than the last.

Labour will make big long-term changes so that hardworking people are better off. We’ll make sure that 200,000 new homes are built every year by 2020, creating up to 230,000 construction jobs, and deliver a fairer deal for families who rent by banning rip-off letting fees and making long-term tenancies with predictable rents the norm. We’ll make work pay for working parents by giving them 25 hours free childcare for three and four year olds, paid for by an increase in the bank levy.  And we’ll improve school standards by guaranteeing that all teachers must be qualified, and transforming vocational education for the 50 per cent of young people who don’t go to university with gold-standard technical qualifications at 18.     

Labour will also take immediate action to deal with David Cameron’s cost-of-living crisis. We will freeze gas and electricity bills until 2017, as we reform the broken energy market to stop families and businesses being ripped off.  We will get the next generation into work, with expanded apprenticeships and a compulsory jobs guarantee for young people unemployed for a year or more – with a real paid job they’ll have to take or lose their benefits.  And we’ll introduce a lower 10p starting rate of tax to help make work pay and cut taxes for 24 million working people on middle and lower incomes – funded by a mansion tax on homes worth over £2 million. The list goes on. 

In coming weeks the shadow cabinet will be making speeches across the country outlining this choice.

Next week, Ed Balls will warn that David Cameron is standing up for a privileged few while hardworking families suffer a cost-of-living crisis. Andy Burnham will highlight the fall in NHS standards under the Tories and warn about further rises in waiting lists. Yvette Cooper will highlight the stark differences on policing. She will caution that if the Tories are allowed to continue their erosion of community policing it will soon be unrecognisable.

Others in the shadow cabinet will also be campaigning in August to highlight this government’s record of failure over the past four years, the danger posed by five more years of David Cameron and Labour’s positive vision for a Britain that works for all working people, not just a privileged few.

This marks a stepping up of Labour’s campaigning activity and what will be a relentless focus on the choice the country faces in just nine months’ time. We will be campaigning on "The Choice" on the doorstep and on digital media. And we'll be doing this across the whole country and especially in the key seats. 

The backdrop for this has been a week in which David Cameron has been defending a £160,000 tennis match with a Russian donor rather than tackling the cost-of-living crisis. He seems oblivious to the fact that his government’s cost-of-living crisis means hardworking people are £1,600 a year worse off than they were in 2010. Some people say us politicians are all the same. Labour is determined to show that in 2015, people really do have a Choice to make. 

Michael Dugher is shadow minister for the Cabinet Office, vice-chair of the Labour Party, and MP for Barnsley East.

Michael Dugher is Labour MP for Barnsley East and the former Shadow Secretary of State for Culture, Media and Sport.

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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?