Power of two: Ed Miliband and David Cameron at the State Opening of Parliament in June. Photo: Getty
Show Hide image

Leader: The end of the “two-party” party

The Conservatives and Labour could once boast of membership of over two million. Today the figure for both is under 200,000. The decline has deleterious practical effects for them.

In 1951, 97 per cent of the electorate voted for one of the two main parties in Britain. By 2010, this had fallen to 65 per cent – and, according to a new poll published by the psephologist and Tory peer Michael Ashcroft, just 59 per cent of those who vote in May’s general election will opt for the Conservatives or Labour.

Rather than seeking to expand their electoral base, both main parties are defensively pursuing core vote strategies. As George Eaton writes on page 22, “Unable to inspire itself, Labour has never seemed further from inspiring the country.” Little better can be said of the Conservatives. Relentless tub-thumping on immigration, including the notorious “Go home” vans, demonisation of welfare recipients and “banging on” about Europe of the sort David Cameron once railed against have combined, in the argot, to retoxify the Conservative brand. The latest ruse from George Osborne was to send letters to taxpayers showing them how their money was spent. In and of itself, such transparency should be applauded but lumping unemployment benefit, in-work tax credits, disability living allowance and public-sector pensions under the banner of “welfare” was disingenuous.

The Conservatives and Labour could once boast of membership of over two million. Today the figure for both is under 200,000. The decline has two deleterious practical effects for them. First, it reduces their campaign funds. This is particularly problematic for Labour, which will be outspent by at least two to one in the election. It also matters for the Conservatives, increasing their dependence on hedge fund managers and leading to the drip-drip of donation stories that reinforce the perception of them as the party of the rich. The second consequence is a lack of activists on the ground, limiting the parties’ ability to mount powerful campaigns outside their heartlands. The collapse in membership could be disastrous for Labour in Scotland: the SNP now has more than 80,000 members, compared with less than 10,000 for Labour north of the border.

The Blair government’s decisions to devolve power to Scotland and Wales and introduce proportional representation in the European elections were a boon to challenger parties. But if these decisions accelerated the growth of insurgent parties, they are not singularly responsible for them. The spasm of “Cleggmania” at the last election and the rise of the SNP, Ukip and even the Green Party are manifestations of the long-run simmering loathing of the political class. Both the Conservatives and Labour have been acquiescent in this.

In many ways the decline of the two main parties is deeply unsatisfactory. It is not good that the Conservatives appear to have written off most of Scotland and much of the English north; the same is true for Labour south of London. Given the scale of the social and economic challenges that the UK faces, the prospect of no government (even a coalition) having a mandate after the next election is worrying. Britain remains lumbered with a voting system that is a two-party relic in a multiparty age.

It could be worse. In the US, on 4 November, the Democrats suffered a bruising result in the midterm elections, confirming that Barack Obama will govern for the last two years as a hugely diminished president. But if this was a protest vote, it was not clear what the US public was protesting against. In an exit poll, just 19 per cent of voters said that they approved of Congress, yet they opted to return the overwhelming majority of these congressmen to office. This owes nothing to satisfaction with them. It is the result of the financial, constitutional and administrative barriers to entry that the Democrats and Republicans put up to prevent the rise of challenger parties.

While Britain does not follow the proportional voting systems favoured by continental Europe, it does allow for a more pluralistic politics. The duopoly of Labour and the Conservatives cannot be maintained indefinitely unless they find new ways to engage with voters. If that is bad news for both main parties, it also means that the British electorate has never been more empowered. 

This article first appeared in the 06 November 2014 issue of the New Statesman, Running out of Time

Getty
Show Hide image

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?